Footnote to History

Having chronicled the decline and fall of Washington Mutual, I have been reading recent books about the great financial meltdown to see what perspective outsiders bring to the sad saga.

Using the favored technique of reading books in the other Washington—start with the index and count the number of mentions of the subject you’re interested in—I find that WaMu barely registers as a footnote to history.

Former Treasury Secretary Henry Paulson, in his tome On the Brink, takes time out from ceaseless discussions of Bear Stearns, Lehman Brothers, AIG, Merrill Lynch, Goldman Sachs and Fannie and Freddie and the other members of the club to concede that just maybe perhaps the WaMu debacle could have been handled a teensy bit better.

“Unfortunately, the WaMu solution wasn’t perfect, although it was handled smoothly using the normal FDIC process,” Paulson writes. “JPMorgan’s purchase cost taxpayers nothing and no depositors lost money. But the deal gave senior WaMu debt holders about 55 cents on the dollar, roughly equal to what the securities had been trading for.

“In retrospect, I see that, in the middle of a panic, this was a mistake. WaMu, the sixth-biggest bank in the country, was systemically important. Crushing the owners of preferred and subordinated debt and clipping senior debt holders only unsettled the debt holders in other institutions, adding to the market’s insecurity about government action. Banks were even less willing to lend to one another. In the future, I concluded, we were going to need to go beyond the standard FDIC resolution process for a failing bank.”

In other words: Oops. Hope you former WaMoolians feel better about that.

The point of this exercise is not to rehash what was or should have been done with or to WaMu, but to confirm a lingering suspicion that, when it comes to finance, the West Coast just doesn’t matter much.

Or, to contradict Paulson, the West Coast’s financial institutions aren’t “systemically important.”

The West hasn’t had major national banking players, aside from Wells Fargo, for years. Security Pacific and First Interstate disappeared in mergers, Bank of America’s headquarters moved east, and the big West Coast thrifts were bought or failed.

This matters because, aside from having big banks that generate jobs and economic activity (WaMu had the potential to be a big deal in consumer banking), they also are more inclined to lend in a market they know, at a size that makes a difference.

The West Coast doesn’t fare much better with Wall Street, a potential financing source for the more speculative companies that have been at the center of West Coast economic vitality.

G. Steven Burrill, chief executive of a San Francisco-based investment banking firm serving the biotech industry, recently told the Life Science Innovation Northwest Conference in Seattle that the sector has “essentially been marginalized by the investment community… The investment community by and large really doesn’t understand what we’re doing.”

But Burrill also said there “still is plenty of capital in the world for things we want to do,” even if it’s more expensive and inefficient to get than before.

So where is it coming from, if not from commercial banking or Wall Street?

As it turns out, the West Coast has developed something of a parallel banking system—venture capital, private-equity pools, angel investors, all examples of the region working its way around the restrictions and barriers to the funding needed to produce new technologies and companies.

If one were to look for a promising area for innovation in the coming decade, finance might be it. That means true innovation in the means and vehicles for gathering and investing money, not simply devising the ever more complex and riskier financial instruments that contributed to the Wall Street/banking calamity.

That may not have the sex appeal of the next consumer-electronics gizmo, the next laboratory-engineered drug or the next social media site. It might, though, be far more important. For the sake of the West Coast’s economic future, far better to be writing our own book than to merit no more than a parenthetical mention in someone else’s.

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