September 24, 2008 – 5:35 am

2008-09-24FDIC Friday Starts Early:

WaMu has now officially been put out of its misery.

The Office of Thrift Supervision seized Washington Mutual today and named the Federal Deposit Insurance Corporation receiver, making the 13th official FDIC bank closure of 2008 the largest in history. J.P. Morgan has been named as the acquiring institution. All of Washington Mutual’s banking operations will resume seamlessly and none of their depositors accounts are at risk according to the FDIC press release.

JPMorgan Chase acquired the banking operations of Washington Mutual Bank in a transaction facilitated by the Federal Deposit Insurance Corporation. All depositors are fully protected and there will be no cost to the Deposit Insurance Fund.

“For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks,” said FDIC Chairman Sheila C. Bair. “For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning.”

The FDIC apparently avoids being exposed to WaMu’s liabilities because they have been stuffed into the WaMu holding company — JP Morgan only bought the bank (and apparently linked assets, with a $31B writedown out of the gate). So it looks like equity and preferred debt holders will get smashed.  Edward Harrison has more details.

According to Bloomberg:

WaMu had about 2,300 branches and $182 billion of customer deposits at the end of June. Its $310 billion of assets dwarf those of Continental Illinois Corp., previously the largest failed bank, which had $40 billion ($83 billion in 2008 dollars) when it was taken over in 1984.

JP Morgan’s takeover price (for the branches and deposits) of $1.9B, were it applied to WaMu as a whole company, would imply a share price of about $1.10, which would be about half of its recent lows. However, given that everything but the liabilities has been stripped from the company, we expect the stock to go to zero.

Looks like the short-selling ban did little to help WaMu.

2008-09-24Another Day:

Another day, another another litany of disasters for Washington Mutual. The bank has gone from flopping like a fish on the dock to rotting like one in an alleyway, but it still hasn’t been bought or seized. Of those two possibilities only one seems to be a probability. <>

2008-09-08Giving It up:

Washington Mutual finally rolled over on its CEO, showing him the door as the Office of Thrift Supervision stepped in.

2008-07-27 Death Watch:

Washington Mutual is on death watch following the $3B bomb dropped in fiscal second quarter. Despite the bank’s denial, the credit and options markets are just waiting for the implosion. Too bad for WaMu that those markets are the ones that get paid to be right. In addition, Wa Mu set aside $5.91B for loan losses and said net charge-offs totaled $2.17B, while it still carried $9.7B in Level 3 waste on the balance sheet. Let’s add it all up:

  1. Tally for Write-Downs/Charge-Offs: $3.8 B + $2.17 B = $5.97 B
  2. Tally for cash raised: = $7B
  3. Current level of Level III assets at $9.7 B
  4. Current level of loan loss reserves at $5.91B

Misery Index = $5.97 B + $7B + $9.7 B + $5.9 B = $28.57 B

That makes one big ouch.

2008-07-22 Psychosis:

Washington Mutual reported a bruising second quarter after the market closed today. Sideswiped with a $3.33B loss and total net charge-offs of $2.2B, the bank slinked into a psychotic dilema. Denial or not, the $2.2B written down to zero gets added to our running tally.

$1.6B + $2.2B = $3.8B. In addition, they raised $7B in capital during the quarter.

2008-07-14 Denial:

It has been ably demonstrated by Northern Rock, Bear Stearns, CountryWide, Lehman Brothers, Merrill Lynch, Fannie Mae and Freddie Mac that denials of liquidity problems are a sure sign of liquidity problems. Now WaMu is about prove it for themselves.

2008-06-02 Good Riddance:

With losses piling up exponentially and the bank’s board covering up, shareholders have finally forced the removal of Washington Mutual CEO Kerry Killinger. The move is more symbolic than anything, but it does quell rebellion at least for now.

2008-05-19 – Off Balance:

Banks are not writing down their write-downs and getting away with it. Instead they are writing them down in the balance sheet, and there is a distinction.

WaMu was hiding $800M on the balance sheet, but we will balance things out for them by adding $800M to their existing $8.3B, bringing them up to a new total of $9.1B.

2008-05-07 – Alt-A Growling:

Washington Mutual doesn’t have a lot holding it up and now an onslaught of deteriorating Alt-A mortgages threaten to take it down further.

2008-04-11 – Knock Down:

Washington Mutual is down again and, like a fighter knocked down too many times already, the next one could be the last:

“Our new product-by-product analysis of its mortgage portfolio suggests between $17 billion and $23 billion of embedded losses in WaMu’s current book of business, of which only $3 billion have been absorbed so far,” the Goldman analysts write.

Click the link above for more. Obviously, we have been harping on these things for a while. Maybe Goldman analysts read this site.

2008-04-08 – The Fall of the House of WaMu:

Washington Mutual is collapsing in on itself like ”The House of Usher”. This time its not just a chandelierit’s an entire wing:

After the toppling of Washington Mutual subprime, Washington Mutual Correspondent and Washington Mutual’s Long Beach Mortgage, now comes the fall of Washington Mutual Wholesale. The news also comes on the heals of a rumored buyout for $5 billion…

2008-03-10:

It appears reality is catching up to WaMu. Turns out you can’t spend neg-am “earnings” to pay expenses in the real world, and loan loss expenses are only increasing. Pity for them (and current shareholders).

2008-02-23:

Mish takes us on a magical mystery tour of a recent (mid-2007) WaMu mortgage pool in this post. It is certainly enlightening. He finds an interesting anomaly: there are more loans showing up as foreclosures than can be explained by pre-foreclosure delinquencies. He suggests that this might mean a significant number of people are simply walking away.

We think this is likely. Further, we take his analysis a step farther, and combine REOs with the foreclosure number. From Dec 2007 to Jan 2008, then, there is an increase in these two piles of 6.11% (relative to the total mortgage pool). Dec 2007 had only 3.79% of loans 90-day delinquent, meaning 2.32% of the loans in the pool, in one month, came from out of nowhere or earlier stages of delinquency (probably walk-aways).

In one month.

Other interesting factoids in this pool include:

  • That it is post-subprime-collapse (mid-2007), even though all the talking heads have been saying the problems are mostly localized to late-2006 vintages of mortgages from before the break down of the secondary market.
  • That it’s not subprime.
  • That the average credit score is about 705. Mish alludes that something might be wrong with FICO; we’d suggest something was wrong with debt burdens, and something is wrong with the direction people’s incomes are going.
  • That 15% of this pool is already in or past foreclosure (REO), yet as Mish points out, 92.6% of the pool was rated AAA.
  • It seems you can see people move through the levels of delinquency in waves. In the January snapshot, 90 and 60-day delinquencies are down, but 30-days are up. It is as if a burst of loan re-working has been going on, but is struggling against an increasing incoming pipeline of bad loans.

This is what non-subprime looks like. And WaMu has tens of billions of the same stuff (or worse).

2008-02-04:

WaMu, the US’s largest Savings & Loan, swung to a loss in Q-4 2007, largely due to a $1.6B mortgage portfolio write-down, and concomitant increases in loan-loss reserves. The overall loss for the quarter was $1.87B. More details on the pain are available from here:

Return on average common equity for the quarter was a decline of 32.64%, compared to a growth of 16.03% last year. Net interest margin grew to 2.85% from 2.58%. Nonperforming assets/total assets grew in the quarter to 2.17% from $0.80%. Book value per common share for both periods was $24.55 and $28.21, respectively. Provision for loan losses increased to $1.534 billion from $344 million. Net charge-offs surged to $747 million from $136 million.

WaMu shares have been buoyed by speculation that someone (like JP Morgan) might buy them. However, that bank has troubles of its own, and has already stated expressly they will not make acquisitions in 2008. Ah, but permabulls can dream, can’t they? [Ed. answer: Not in our house they can’t!]

We think WaMu is just getting warmed up on write-downs. They have a huge — absolutely gigantic — mortgage portfolio, packed with subprime and pay option ARM loans:

The Seattle-based bank also said in December it would shutter its subprime lending business and control expenses with layoffs and a dividend cut. WaMu reported Thursday that subprime mortgages accounted for $18.6 billion, or 7 percent, of its $244.4 billion loan portfolio.

In fact, we think due to the latter, they will eventually have to write off significant portions of income already booked in past quarters. From Bloomberg (Oct. 17, 2007):

To see why even $1.3 billion in provisions looks light, consider Washington Mutual’s $57.86 billion of so-called option- ARM loans, which make up 24 percent of Washington Mutual’s loan portfolio. These adjustable-rate mortgages were popular during the housing bubble, because they give customers the option of postponing interest payments, which the lender then adds to their principal balances.

As of Sept. 30, the unpaid principal balance on Washington Mutual’s option ARMs exceeded the loans’ original principal amount by $1.5 billion, meaning the customers owed $1.5 billion more in principal than what they originally borrowed. By comparison, that figure was $681 million a year earlier, when Washington Mutual had $67.14 billion, or 16 percent more, option ARMs on its books.

Look to the end of 2005, and the trend becomes even starker. Back then, Washington Mutual had even more option ARMs on its balance sheet, at $71.2 billion. Yet the unpaid principal balance exceeded the original principal amount by only $160 million — and that was up from a mere $11 million at the end of 2004.

Deferring Pain

The deferred interest from option ARMs also boosts Washington Mutual’s earnings, part of a process known as negative amortization, or “neg-am.” That’s because option-ARM lenders recognize interest income when customers postpone their interest payments, even though the lenders got no cash.

For the nine months ended Sept. 30, Washington Mutual recognized $1.05 billion in earnings as a result of neg-am within its option-ARM portfolio. That represented 7.2 percent of Washington Mutual’s $14.61 billion of total interest income year-to-date. By comparison, neg-am contributed 1.8 percent of Washington Mutual’s interest income for all of 2005 and just 0.2 percent for 2004.

What’s going on here? Either the borrowers postponing their interest payments are doing so as a matter of choice, by and large, or they can’t afford to pay them. Common sense suggests it’s the latter — and that there’s serious doubt Washington Mutual ever will collect the $1.5 billion of postponed interest that its option-ARM customers have added to their original principal balances.

Indeed. We figure a buyout is just about the only reason to be bullish on WaMu in the near- to intermediate-term. But if that were to happen, short-sellers would certainly have someone else to be bearish on (reminds us of BofA and Countrywide).

Regardless, and in words inspired by a recent film, it appears “there will be blood”.

  1. 3 Responses to “Washington Mutual”

  2. I’m in Southern California.

    Who do I bank with?

    Thank you for your help and time.

    By R. Martin on Mar 3, 2008

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  2. Apr 20, 2008: Bank-Implode! » Wounded WaMu
  3. Jan 13, 2009: Effluvium from Sonya’s Brain » Blog Archive » Foul on the Passion Play…15-Yard Penalty, 4th Down.

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