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CRISIS AND PANIC 

liquid during the crisis, dealers worried that they might be saddled with unwanted
exposure. As a result, they began charging more to sell contracts (raising their ask
price), and the spread rose. In addition, they offered less to buy contracts (lowered
their bid price), because they feared involvement with uncreditworthy counterpar-
ties. The increase in the spread in these contracts meant that the cost to a firm of
hedging its exposure to the potential default of a loan or of another firm also in-
creased. The cost of risk management rose just when the risks themselves had risen.
Meanwhile, outstanding credit derivatives contracted by  between December
, when they reached their height of . trillion in notional amount, and the
latest figures as of June , when they had fallen to . trillion. 
In sum, the sharp contraction in the OTC derivatives market in the fall of 
greatly diminished the ability of institutions to enter or unwind their contracts or to
effectively hedge their business risks at a time when uncertainty in the financial sys-
tem made risk management a top priority.

WASHINGTON MUTUAL: “IT’S YOURS”
In the eight days after Lehman’s bankruptcy, depositors pulled . billion out of
Washington Mutual, which now faced imminent collapse. WaMu had been the subject
of concern for some time because of its poor mortgage-underwriting standards and its
exposures to payment-option adjustable-rate mortgages (ARMs). Moody’s had down-
graded WaMu’s senior unsecured debt to Baa, the lowest-tier investment-grade rat-
ing, in July, and then to junk status on September , citing “WAMU’s reduced
financial flexibility, deteriorating asset quality, and expected franchise erosion.” 
The Office of Thrift Supervision (OTS) determined that the thrift likely could not

“pay its obligations and meet its operating liquidity needs.” The government seized
the bank on Thursday, September , , appointing the Federal Deposit Insurance
Corporation as receiver; many unsecured creditors suffered losses. With assets of 
billion as of June , , WaMu thus became the largest insured depository institu-
tion in U.S. history to fail—bigger than IndyMac, bigger than any bank or thrift failure
in the s and s. JP Morgan paid . billion to acquire WaMu’s banking oper-
ations from the FDIC on the same day; on the next day, WaMu’s parent company (now
minus the thrift) filed for Chapter  bankruptcy protection.
FDIC officials told the FCIC that they had known in advance of WaMu’s troubles and
thus had time to arrange the transaction with JP Morgan. JP Morgan CEO Jamie Dimon
said that his bank was already examining WaMu’s assets for purchase when FDIC Chair-
man Sheila Bair called him and asked, “Would you be prepared to bid on WaMu?” “I
said yes we would,” Dimon told the FCIC. “She called me up literally the next day and
said—‘It’s yours.’ . . . I thought there was another bidder, by the way, the whole time,
otherwise I would have bid a dollar—not [. billion], but we wanted to win.” 
The FDIC insurance fund came out of the WaMu bankruptcy whole. So did the
uninsured depositors, and (of course) the insured depositors. But the FDIC never
contemplated using FDIC funds to protect unsecured creditors, which it could have
done by invoking the “systemic risk exception” under the FDIC Improvement Act of