From Liquidity Crisis to Credit Crunch
Observations of Washington Mutual Vice Chair William A. Longbrake
In December 2007, William Longbrake the Vice Chair of Washington Mutual
Incorporated offered his perspectives on the developing situation in the Capital Markets.
An attentive crowd of professionals, academics, and students listened intently to his
observations. Dr. Longbrake has spent over 20 years at Washington Mutual servings as
the bank’s CFO Chief Enterprise Risk Officer. In 2001, he was named the CFO of the
Year in the Driving Revenue Growth category by CFO Magazine. Dr. Longbrake
described the components of a credit cycle, as well as the aspects that may amplify its
effects. From there he focused on the current liquidity crisis and the potential risks that
may cause a credit crunch.
The ingredients of a credit cycle were enumerated in the following areas.
Collective action as Dr. Longbrake described leads to a degradation of standards with
each new entrant into the market. The availability of cheap money and leverage is also
vital to the progression of a credit cycle as witnessed by the boom in hedge funds.
Furthermore, changes in technology, market structure, law and regulation all have a
significant effect of the duration and extent of the credit cycle. The five steps that a cycle
goes through are: 1. Up cycle where supply begins to lag demand; 2. Financial
Accelerator effect in which rising prices bring further demand; 3. Tipping point at which
the rise in price begins to decrease demand; 4. Supply begins to exceed demand; 5.
Financial accelerator exacerbates the falling prices and continues to decrease demand.
These five steps are prevalent in most cycles the difference lies in how accentuated the
In applying the aforementioned model to the Residential Housing Cycle, Dr.
Longbrake mentions several particular drivers. It generally takes a house 2 years to go
from the conception to the actualization stage, therefore the lag between demand and