WaMu Endgame

Surprise: WaMu is looking for a buyer.  From the New York Times:

Goldman Sachs, which Washington Mutual has hired, started the process several days ago, these people said. Among the potential bidders that Goldman has talked to are Wells Fargo, JPMorgan Chase and HSBC. But no buyers may materialize. That could force the government to place Washington Mutual into conservatorship, like IndyMac, or find a bridge-bank solution, which was extended to thrifts in the new housing regulations.

Citigroup is also considering an offer, but would likely be able to buy Washington Mutual only if it emerged from a receivership, according to a person close to the situation. JPMorgan is maintaining its posture that it will not bid unless it receives government support, according to another person briefed on the matter.

I’m not so sure that any bank is in shape to purchase WaMu in its current form. Perhaps it could be broken up into smaller pieces. Its deposit base is probably worth more than anything else on its books right now.

I’m sad. I can remember walking into Washington Mutual Savings in Downtown Everett on the corner of Colby and Pacific with my dad to open up a passbook savings account.  I’ve had an account there just about my whole life.  My daughter’s school savings accounts are there.  I know many people who work at WaMu.  I worked at WaMu as a bank teller many years ago under a very smart, savvy woman named Margaret Bradley who was a very fine role model for a young woman like me in the early 1980s.  Washington Mutual was “The Friend of the Family.”  I bought that old commercial line and repeated it for years.

I know. It’s just a bank.  I’ll get over it. 

There are many WaMu employees that live and work here in the Seattle area who had much of their retirement investments within WaMu’s stock options.  Whatever the outcome, this can’t bode well for our employment numbers here in the greater Seattle area.  I’m under the FDIC limit and will keep my accounts open, and will not be moving them to a new bank. I’ll be seeing this through with them. 

This makes me wonder if it will be easier for homeowners to get their short sales and loan modifications approved. 

Wall St Journal: TPG Move Opens Doors for WaMu

Bloomberg: WaMu’s Biggest Shareholder Waives Compensation Pact

Calculated Risk: WaMu For Sale

Seattle Times: With Stock Sinking, WaMu Appears Headed for Sale

Seattle PI: WaMu Puts Itself up For Sale

234 thoughts on “WaMu Endgame

  1. Unfortunately, I don’t think there will be any kind of face saving buy-out since the over-all WaMu portfolio is in such lousy condition. There might well be interest in WaMus retail banking assets, as Jillayne suggests, but not if they come encumbered with the toxic loan portfolio.

    One way or the other the government will have to step in to work this out. Either the FDIC takes WaMu over, or the government provides some sort of funding or guarantees for a potential purchaser.

    The days of WaMu as we know it are over…

  2. Hi Noah,

    Are you referring to performing loans in general or loans/HELOCs in default where a homeowner may be in the middle of trying to negotiate a short sale or loan modification?

    For performing loans, it’s status quo.

  3. I’m getting a visual of all of these financial skyscrapers toppling over like dominos in slow motion…

    But there is nothing funny in it.

    There’s been a lot of good people hurt in all of this.

  4. Noah wrote: “What are the opportunities (if any) now for homeowners who have mortgages and/or HELOCs with WaMu? Any required/recommended actions?”

    Any WaMu borrowers will be fine. Whether the FDIC seizes the S&L or someone buys it, someone will still want you to keep making payments on the loans. You will be notified about any changes for making payments.

    Any untapped HELOC credit lines stand a good chance of being cancelled altogether. Thus, if you really NEED that money from your HELOC, you should withdraw it all now, because you may not be able to later.

  5. Noah:

    There might be some good deals on used office furniture.

    Whoo. Hoo. Boy.

    Sometimes black comedy is the only thing that gets me through days like these…

    Sniglet’s advice was good.

    Not sure what I’d advise if you are in progress with a loan application or loan modification, except have a plan B ready.

  6. First wamu purchased Great Western Bank, a Savings and Loan Company. Then they bought H.F. Ahmanson & Co., and Long Beach Financial.
    All in the span of a few years Washington Mutual took on staggering debt.
    Today, without missing a beat, without any consideration, WaMu is looking for a buyer to take over that debt and then some.
    Why? Why would anyone take on the WaMu mess?
    This is clearly a business decision to expand beyond the ability to manage. This was a choice or series of choices. In other words with this much risk and exposure it was irresponsible to have toxic loans, make toxic loans, or hope those loans would bail the company out of debt.
    BTW when you say toxic loans I think preditory lending. I think con men, swindlers, bad loans, and good people being hurt. I’m thinking National Crisis with the tax payers footing the bill. I’m thinking up front fees, per centage points allocated to servicing, and loans that will never mature because they have to be refied before they amortize.

  7. Sniglet, b, Roger, David,

    What’s your guess as to the oucome?

    b says it’s going to be an FDIC takeover, yes?

    If so, then what does that mean for the FDIC insurance fund; I thought there simply was not enough money in that fund to cover a WaMu takeover.

  8. Jillayne –

    treasury is going to give them the money. hence the headlines on drudge yesterday, fdic going hat in hand to ma government. they need to gear up for WM this weekend (I think). MS is also dead, probably tomorrow.

  9. MS (Morgan Stanley) being dead really makes no sense, since they just reported earnings which were quite good, and they have assets. Right now the market, and run on MS and GS is pretty much irrational fear driven and not based on fundamentals.

    This is of course why I consider the stock market to be akin to gambling…

  10. gene –

    MS reported cooked earnings, most of it from a one time deal. check out their level 3 assets. the standard investment bank model is now officially dead, its only time before MS and GS go away or get taken over.

  11. Best quote of the day (so far): “No Market For Old Men”


    ‘The worst of the nation’s housing debacle is yet to come, Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW Group Inc., told clients on a conference call yesterday. According to MarketWatch, which reported on Gundlach’s remarks, the influential CIO told investors Wednesday that the current credit environment was “no market for old men

  12. Peer Sigma Research the next merger rumor is Morgan Stanley with Wachovia. We will see more banks go down in the next couple of weeks…. Watch out for the weekends. That’s when the really big action seems to happen.

    For all the billions we taxpayers are spending bailing out companies who made poor choices, it seems to me we could have spent that money helping out the small guy. This would have keep foreclosure signs springing up like measles in our neighborhoods.

  13. Real Estate value remains pretty much constant. Real Estate prices went way beyond value. Money lent based on pricing rather than core value is the problem.
    Value is rental income, saleability in the market place, or future use. Zoning changes accounting for future use being the most recognizable, lending would not be dependent on that.
    Essentially lenders based loans on pricing that was driven, in my opinion, by lenders claiming lower interest rates made payments lower.
    I have never gotten what the correlation was between payments and value.
    The point is that value remains the same, and now consumers are paying for secured loans above and beyond that value. I have no problem with that. If I shake out all of the money I can from a property and a lender is foolish enough to give it to me, why not take it?
    Now the question is the collection of that alleged debt. The lender gave me money and I have to pay it back. Do I pay it back according to terms that were extremely questionable to begin with? It’s my property, or better yet, it’s my home.
    Lenders are in trouble for making bad business decisions based on pricing rather than value. The question is if they should collect, or truly write it off as bad business.
    I just don’t see the problems. Lenders should be going to the people they lent the money to. They have a right to collect a debt. So where is the problem? Liquidity? Are lenders just not making enough money today? Is the fast and easy money not coming?
    Lenders need to concentrate on the loans they made. Lenders need to finish the business they started. Why are lenders, huge, multi billion dollar corporations asking for easy credit, why are they being given easy credit, when they obviously can’t handle the business they have?

  14. david wrote: “The question is if they should collect, or truly write it off as bad business. I just don’t see the problems”

    The problem is that if lenders decide to actually just write off most of the loans on their books (or make substantial principal reductions), most of them will be insolvent.

    It’s all well and good in theory to just tell these institutions (and their investors) that they will just have to take their lumps due to their bad decisions and go out of business.

    However, policy makers are having palpatations at the prospect of huge portions of our financial system just going dark, and a total freezing of credit that would likely result. This is leading them to provide bail-outs, even though the firms they are helping made their own beds.

    It’s a bit like deciding to pay for your neighbour’s medical care even though he was sick due to his own stupidity (e.g. a failure to get vaccinated) because you don’t want the disease to spread.

    I am NOT saying that the bail-outs are a good idea (far from it), but I can understand the rationale.

  15. I don’t want to see WAMU go under, but it’s been years and years since they’ve been a decent bank to do business with. As they got bigger they became less and less personal and more and more rigid. I gave up on them years ago as a bank to have a significant relationship with (e.g. a place you’d go to deposit checks, write numerous checks, etc.)

  16. What I don’t understand is why the banks, if not writing off debt, don’t go back to the borrowers and restructure. More credit will only prolong the problem.
    Just like people using credit cards to pay bills, or mortgages, why would circulating more dollars pay down the debt?
    The investors made the loans, they made profits, now they need to collect the principle balances.

  17. David wrote: “What I don’t understand is why the banks, if not writing off debt, don’t go back to the borrowers and restructure. More credit will only prolong the problem.”

    What exactly do you mean by “going back to borrowers”?

    The banks can’t just go to the people who borrowed money from them (e.g. mortgage holders) and re-structure the loans by reducing the principal. This would make the banks insolvent overnight (i.e. because they would have to take write-downs that would lower their capital to asset ratios).

  18. They are already taking write downs. They are already in short sale, foreclosure, bankruptcy, and credit consolidation situations with consumers.
    You may not like it but they can restructure consumer debt with the consumer. They can agree to freeze credit for a pay off plan. It’s thier business, they should be liable.
    Banks created products and sold them, they should be responsible for making those products work.

  19. David wrote: “You may not like it but they can restructure consumer debt with the consumer”

    It’s not a matter of whether “I like” it or not, the simple fact is that some lenders are in such dire straights that they can’t afford to do restructuring of consumer debt without facing insolvency. A foreclosure is far preferable to a work-out because the lender can still keep the foreclosed property on the books at a higher than market price (i.e. this is a big reason why many REOs sit on the market forever).

    I believe that some lenders who are in particularly bad shape simply cannot afford to do a lot of work-outs with borrowers (i.e. because that would mean going out of business).

  20. Sniglet wrote:

    “The banks can’t just go to the people who borrowed money from them (e.g. mortgage holders) and re-structure the loans by reducing the principal. This would make the banks insolvent overnight (i.e. because they would have to take write-downs that would lower their capital to asset ratios).”

    First off, if the loans are underlying a bond then it can’t be modified. Second, if it’s on balance sheet and is modified then it probably had to be modified because it was ready to default anyways. So it could be written down, but not actually written off. Which would you rather have?

    Now, if the modified loan still defaults, well then, tough luck.

  21. They are out of business.

    That’s what people don’t like. People want to believe. There must be a fix in here.
    That fix has run it’s course. Consumer credit card debt has been refinanced into home mortgages, and second mortgages. Credit card interest rates are up to 30%.
    Bankruptcy laws were tightened before it all went sideways. Forty year mortgages started, s are popular in Europe, but the credit kind of dried up before that fix was in.
    Now a new group is going to borrow money to make the purchase of “toxic loans?” Some where, some time, some one is going to go back to the consumer to kick start the whole process over again. The consumer is the engine. So why not now, when it makes sense? Why wait five to ten years? How does waiting make it better?

  22. q-diddy wrote: “First off, if the loans are underlying a bond then it can’t be modified. Second, if it’s on balance sheet and is modified then it probably had to be modified because it was ready to default anyways. So it could be written down, but not actually written off. Which would you rather have? ”

    First off, we are talking about loans that are officially on a lender’s books, so one way or another they have the power to make decisions about modifications. If the loan is part of a bond owned by outside investors, then this doesn’t impact a given lender’s books at all, regardless of what happens.

    I agree that loans that are modified likely would have defaulted without this treatment. However, from a struggling bank’s perspective a default and foreclosure are better solutions that modifications because they don’t require write-downs in the books. You can still keep the value of a foreclosed home (called an REO) at the full price of the original loan. The lender only has to make a write-down on the loan value if they actually sell the home for less than the price of the original mortgage.

    In a perfect world it is more cost effective to do work-outs with existing borrowers rather than have them default. However, in our wacky modern world of fantasy book-keeping it is better to pick the option that allows the lender to keep unrealistic values for the loans on their books.

  23. Sniglet-

    “The lender only has to make a write-down on the loan value if they actually sell the home for less than the price of the original mortgage”

    Which is likely, that’s why banks are still motivated to modify.

  24. Q-diddy wrote: “Which is likely, that’s why banks are still motivated to modify.”

    Huh? You agree with my assessment that banks don’t want to write down loan values, yet you say this is why they are motivated to modify loans? The exact opposite is true. When a loan is modified the bank MUST make a write-down in their books. However, when they simply foreclose and refuse to sell the REO, the bank doesn’t have to make any write down. Obviously, many banks prefer the second option.

  25. Sniglet-

    What good is it for the bank to hold on to something that doesn’t generate cash flow?

    It’s better to take a write down of $1 to 50cent then foreclose at 25cents.

  26. Q-diddy wrote: “What good is it for the bank to hold on to something that doesn’t generate cash flow?”

    The good of holding an asset with no cash flow is the fact that you don’t have to take a write-down on your books. As soon as they modify the loan they have to take a write-down, but they can keep a non-performing loan (or the house after they foreclose on it) on the books at the original value indefinitely.

    As I’ve said before, many lenders are in such dire straights that they will be insolvent and forced into conservatorship if they take any more write-downs.

  27. Sniglet-

    “but they can keep a non-performing loan (or the house after they foreclose on it) on the books at the original value indefinitely.”

    Are you sure about this?

  28. Q-diddy wrote: “Are you sure about this? [i.e. the ability of lenders to keep non-performing assets on books at high values indefinitely]”

    Yes. This is absolutely true. Of course, the lender does have to report the number of non-performing loans they have on the books, as well as the volume of REOs. However, they don’t have to mark down the value of these assets until they either modify the loan or sell the foreclosed home.

    Savvy investors can tell the lenders are fudging things when they see the volume of non-performing loans and REOs grow (and the stock prices of these lenders shows that), but by not taking the official write-down on the books they don’t go into technical insolvency which would trigger an FDIC take-over.

  29. By the way, lenders have lots of ways to avoid acknowledging bad loans, or losses. One popular method of late is to simply redefine what they deam as delinquency. Many banks have doubled or tripled the time-frame of non-payment they require before declaring a loan to be delinquent.

    There are many other fun tricks for enterprising accountants wanting to keep the true scale of their problems hidden.

  30. david losh wrote: “Sorry that makes no sense. Business is business.
    According to what you’re saying here we should just let the banks go.
    If it’s fantasy, it’s over.”

    You are correct. It makes no “sense” for a bank to choose to make a bad financial decision to keep a non-performing loan on the books at an unrealistic price rather than work out a deal with the borrower to actually get some sort of re-payment. But we are far beyond logic at this point. We are into a game of survival.

    This game of accounting trickery wouldn’t pass muster if the regulators were willing to call the bluff of our banks and close them down. Unfortunately, the government is exceedingly loathe to close down masses of banks and take on masses more of obligations onto the tax-payer shoulders. The FDIC clearly doesn’t have enough capital to handle the mass of bank closures that are necessary. Thus, the regulators pretend not to notice that the books of many banks stink to high heaven.

    Perhaps the new scheme of an RTC2, that is being floated around, will finally do the job of taking all the non-performing loans off of bank balance sheets, allowing them to start doing business in a “logical” way again, once they are no longer skirting with insolvency.

    Then it is the tax-payers who can sit on these non-performing assets indefinitely, until such time that prices rise enough that the bureacrats can sell them at a “profit”. It’s just one massive shell game. The government will claim that the tax-payers aren’t taking a loss, despite the fact the government will pay above market prices for delinquent loans, because they will simply hold the assets until such time as they have appreciated enough to make a profit. What a crock… That’s as bad as the banks pretending these foreclosed homes are still worth the value of the orginal mortgage.

    At some point SOMEONE will just have to eat the losses and admit that the value simply isn’t there. Like I said before, the banks won’t do that since that would drive them into insolvency, so I guess it is the tax-payers who will have to do it. But even then the government refuses to ADMIT there will be losses until many years down the road.

    This is a disaster… We will have masses of vancant government owned homes hanging over the real-estate market for years, keeping downward pressure on prices. Who will want to buy a home knowing RTC2 could flood the market with cheap properties at any time and drive down prices?

    Let’s just hope that all those foreclosed homes in RTC2 moth-balls don’t become so destroyed by squatters and vandals that they need to be torn down 10 years from now anyway. Maybe those suggestions of just blowing up excess inventory weren’t so crazy after all.

  31. @ David Losh
    “People want to believe. There must be a fix in here.”

    The fix is that there is no fix.

    The fix is……time.

    It’s simply going to take many years to work all the bad loans out of the system.

    The mortgage lending industry will re-emerge stronger and hopefully healthier than during the bubble run up years which we now have learned was un-sustainable.

  32. Okay Q-diddy and Sniglet, this is what I’m hearing on the street. The banks are modifying loans.

    If a bank is scrambling hard to meet and end-of-the quarter goal, it’s motivated to say yes to loan mods, short sales, and the new sort-of loan we’ll call a “short refi.”

    Banks are motivated to move on short sales, short refis, and loan mods when the homeowner is getting dangerously close to foreclosure and….there is a bonafide offer (on a short sale) and for a loan mod or refi, if the homeowner can provide evidence that they are able to make the modified payments.

    If a loan is in a pool, loss mitigation has to stop and get approval from the investors to modify the loan or approve the short sale.

    If the bank has already been taken over by the FDIC (hello, that would mean IndyMac) they have systems in place to process loan mods and short sales.

    In fact, Indymac and other banks, in doing their consumer outreach programs, are (IMHO) going to start hearing from homeowners who DON’T NEED a loan mod but decide they WANT one.

    We must realize that there now a huge number of homeowners in default and homeowners seeking help from their loan servicers; way more than what any company’s systems can handle.

    We must also remember that over 40% of loan mods are re-defaulting which circles us back to the assumption that this entire mess will take years to unwind as we work the bad loans out of the system.

    More banks will fail as too many residential and soon commercial loan loan losses are realized.

    This is not a surprise to anyone who reads this blog or Seattle Bubble.

  33. Jillayne wrote: “The banks are modifying loans. over 40% of loan mods are re-defaulting”

    Just what type of “modifications” are the lenders doing? From what I’ve heard it is mainly adjusting interest rates or payment schedules. There seems to be precious little principal reduction occuring. This would seem to make sense seeing the high failure rate of the modified loans.

    This still seems to fit with my theory that many lenders are doing everything they possibly can to avoid taking write downs, even if those actions will lead to further defaults down the road.

  34. Hi Sniglet,

    You’re right. They’re taking ARM loans and allowing the homeowner to continue to pay at the teaser rate for, say 3 years. They’re taking a fixed subprime loan and lowering the payment for three years, then at year four it begins to gradually go higher.

    The only principal balance reductions I’m hearing about are coming when a homeowner is working with a pit bull non-profit housing agency and/or working with an attorney who has found egregious predatory lending at origination.

    If we’re going to be dealing with a new Resolution Trust 2 in the future, why should any banks do loan mods at all? Why not just funnel them all off to RT2 in order to save oneself and let RT2 do all the work.

  35. “Washington Mutual can’t be allowed to fail because it owes $58 billion to the Federal Home Loan Bank System, Dick Bove from Ladenburg Thalmann & Co. told CNBC. “If Washington Mutual goes under then the Federal Home Loan Bank in San Francisco and probably the one in Seattle will lose $58 billion,

  36. Sniglet wrote-

    “Yes. This is absolutely true. Of course, the lender does have to report the number of non-performing loans they have on the books, as well as the volume of REOs. However, they don’t have to mark down the value of these assets until they either modify the loan or sell the foreclosed home.”

    Is there a cost to this? How will this affect provisioning?

  37. Q-diddy wrote: “Is there a cost to this? How will this affect provisioning?”

    I am not sure what you mean. A bank would have to put whatever costs they are incuring for keeping foreclosed properties (e.g. yard maintenance, property taxes, etc) on the books. They would also need to include legal and processing fees for foreclosing on properties. But other than that, I can’t think of any other costs they need to book.

    There is certainly no “cost” to just letting a delinquent borrower stay in the home indefinitely, so this is the most preferable option. Just extend the time frame for declaring delinquency to 120 days. Banks can also do “light” modifications, as Jillayne mentioned, where they allow the borrower to make low payments for an extended period without really reducing the principal (and actually getting to the heart of the matter). This is a great way to make it look like a loan is fine, when the reality is that the borrower will NEVER be able to make the full payments when the prolonged teaser period is finished.

  38. Jillayne-

    The FDIC has the power to do pretty much whatever it wants, but if it decides to liquidate, the FHLBs will most likely be made whole due to the seniority of the debt and the collateral.

    The FDIC will sell the collateral and use the proceeds to pay back FHLBs.

  39. Sniglet-

    Accounting 101:

    Higher Non Performing Loans = Higher Provisioning Expenses = Less Earnings.

    As to whether a bank chooses to do “LIGHT” or “HEAVY” modifications, it depends on the value they think they can extract.

  40. Q-diddy wrote: “Higher Non Performing Loans = Higher Provisioning Expenses = Less Earnings.”

    Sure, a growing number of non-performing loans will hurt earnings. But this is insignificant when the banks is primarily concerned about avoiding insolvency. A struggling bank will will sacrifice earnings for the sake of avoiding write-downs any day of the week.

    As far as doing “LIGHT” or “HEAVY” mods go, I think the primary consideration there is how big a hit will they have to take in write-downs. It’s wonderful if they can drag out a struggling borrower for another year or two before they go delinquent while avoiding a write-down.

    Again, all these write-down avoidance actions have nothing to do with maximizing earnings or profitability (in fact, they likely hurt profits and earnings), but that isn’t the point. The whole objective is to avoid taking write-downs at ALL costs, even if that means throwing future earnings out the window.

  41. I would love for somebody to explain to me the write down situation, and sitting on properties, versus modifying a loan for LESS profit.

    i.e. Changing an interesting rate, fixing an interest rate for a longer term etc.

    How is taking over a house financially superior than the payment being made over a longer period or for a little less money. On the books for investors I get it, but how good is it for investors when the bank is holding onto 1000’s of people houses.

    I get the “it’s business”, “it’s not personal it’s business” arguments. What about the people who choose to foreclose for strictly “business” reasons. Nobody should take it personal, it’s just business.

    It is tough to not blame people for walking if legitimate mods WON’T be made, as these banks take billions from our government/taxpayers…but wont help those very same taxpayers…and if they had, they may not be in this mess.


  42. John,

    The problem is that it takes time to sort out the legitimate loan mods from people who are asking for loan mods or short sales and don’t need them.

    Legitimate from the perspective of a homeowner
    legitimate from the perspective of the lender, its regulator, and any investors.

  43. John wrote: “I would love for somebody to explain to me the write down situation, and sitting on properties, versus modifying a loan for LESS profit.”

    When a bank sits on a foreclosed property they don’t have to make ANY write-down. They can just leave the full value of the mortgage as the price of the foreclosed home in their books. They will only have to make a write-down if the sell the home for less than what was owed in the mortgage. This is why struggling banks are reluctant to sell REOs for market rates.

    Modifying loans are trickier. If the principal is reduced on a loan, then the bank would be forced to make an IMMEDIATE write-down of some significance. However, if the bank just re-jiggers the payment schedule, or extends the teaser rate, they might not have to record much (if any) write-down.

    What a struggling lender wants to avoid at ALL costs is doing anything that basically admits they will never recover the full value of the mortgage. Any event which will cause a recognition that the mortgage will not be fully recovered is to be avoided at ALL costs, even if doing so will hurt future earnings.

  44. John wrote: “It is tough to not blame people for walking if legitimate mods WON’T be made”

    Well, for some struggling lenders a legitimate, or significant, mod CAN’T be made, whether it makes business sense or not. If the bank is already on the edge of statutory reserve/asset ratio limits accepting any more write-downs will put them into technical insolvency.

    Such a struggling bank only has two choices: 1) do the modification and go into FDIC recievership 2) don’t do the modification and stay in business for a little while longer.

    That said, borrowers still have a lot of power to try and stay in their home since struggling banks do NOT want to have to foreclose. It may not be possible to get the principal reduced, but many lenders are willing to accept all kinds of changes to payment schedules and such. For example, you could get the lender to agree to let you make very low payments for 2 years, after which time they would ratchet up massively.

    Hey, if you can get a cheap place to stay for another 2 years then go for it. It beats walking away today and then finding an equivalent place to rent that costs more. Some lenders will also just do nothing if you stop making payments, allowing you to live in the home “rent-free”, as it were. They don’t want to foreclose, and they don’t want to do a mod, so you can just stay there as long as you like. They might bother you with annoying payment notices, but who cares. Sure, they would like some money from you, but they won’t kick you out either since they don’t want to foreclose.

  45. Sniglet-

    You don’t get it!

    Higher NPL = Higher Provisioning

    Where do you think the cash for provisioning will come from? Thin air!? At least you got the Capital ratios part correct and guess what higher provisioning does? That’s right, reduces your Capital!

    And just because 40% of loan mods still end up defaulting the other 60% hasn’t.

    If you’re gonna spew information based on what you READ at least get it right!

  46. Jillayne wrote:

    “Question: How much does the FDIC have in their insurance fund…..enough to be able to immediately write a check to the FHLB?”

    Probably not enough given they still have 100-200 banks on the troubled bank list they have to deal with.

    That’s why they won’t just write a check. They’ll sell the assets that are pledge to the FHLB from WaMu and use the proceeds of the sale to pay back the ~$58BN in Advances. Even at 60cents on the dollar I’m sure the FHLB will get most if not all of it back. Assuming the FDIC liquidates.

  47. Rhonda wrote:

    “Have you been watching the news? Check out the RTC Paulson plan…what historic times. I cannot imagine how this will impact our treasury.”

    Anything to bring back some confidence in the market is good news to me.

  48. OK, Sniglet, you’ve caught my interest by being persistent. You missed my point about WaMu renting out REOs rather than sending them to auction. What I know is that some lenders have bargain shopped properties by holding them in the Asset Management Division. They don’t have to sit vacant.
    Anyway for a while those REOs were gaining appreciated value, so the books were looking good. Rental income plus appreciation of assets.
    August 2007 to August 2008 an 11% decline in value to one home owner is one thing. The value of the lenders REO portfolio went down 11%. What has occurred to me this week is that as there may, or may not be, more rentals entering the rental market it would make a decline in portfolio value plus declining rental income.
    Now if the government does perform magic it will only prolong the process. This is more than a Savings and Loan bail out. This isn’t about home loans. This is about the financial markets asking consumers to pay more. It’s all about the consumer paying more than retail prices by buying on credit.
    That debt is in every department.
    When we started importing massive amounts of Chinese goods, the prices were the same, or more, than what we paid for made in the USA. Why? If those goods were so cheap why are we paying so much for them? Why is Wal Mart hugely profitable?
    CitiGroup is a lot of lending vehicles, credit cards being, in my opinion, the biggest. It was when the Insurance industry started showing signs of weakness that made me suspicious. They are nothing but an income generator.
    They’re losing money by investing. What they invest in at this point makes no difference. Without credit the consumer has less to spend. Wages have stayed about the same, so in my opinion, credit has been keeping the consumer spending.
    It’s over.
    When the consumer paid off credit card debt with second mortgages or refis of the family home they spent more. Those cards are maxed, or the lender has cut them off. So the well is dry.
    No more consumer, no more plasma tvs, houses, washers, dryers, you get the idea.

  49. Q-Diddy, with how the stock market rallied–can you imagine what it will do tomorrow if they don’t work something out in time.

    I caught my neighbor speeding off to WaMU tonight before 5 to take her cash out.

  50. Jillayne:

    “Well unfortunately the SEC is planning to temporarily ban short selling stocks…This doesn’t sound like a confidence-booster.”

    I’m not so sure about your statement. The Hedge funds have been creating a lot of headline news/risks for banks and other financial institution with NAKED shorts. Is it responsible to cause panic and fear?

  51. Rhonda-

    “I caught my neighbor speeding off to WaMU tonight before 5 to take her cash out.”

    Unfortunately, there is nothing WaMu can do about this. People who don’t know better are rightfully fearful and WaMu will only cause more fear by reassuring the FDIC insurance and all the Liquidity, Capital, blah, blah, blah it has.

    I just hope the people in the branches are focusing on the relationships they have built up through the years and put on a happy face and act unaffected whether the customer is closing the account or not. Conducting business as usual is the best sign of confidence and the only way they can reduce panic and fear.

  52. Hi Q-Diddy,

    Do you believe the majority of people who read that comment would be panicky and fearful? I’m certain that the majority would not.

    My responsibility is to offer news, insight and analysis. I don’t think that WSJ story invokes confidence on what’s going on in the market right now.

    If you believe the temporary ban would invoke panic, tell us how so. Thanks.

  53. QDiddy, I’m not sure whether or not she actually did pull her funds. I did pull some of mine to split my accounts (to a credit union) …worse case, if the FDIC had to step in, I don’t want to deal with it. My account is still there, I’ve been a WaMU banking client for quite some time…my teen’s account is there.

  54. Jillayne-

    If it doesn’t create panic and fear great, but I think the reason the “for sale” rumors are flying around is because the OTS is worried about a bank run.

  55. Jillayne-

    I believe you have good intentions and I wasn’t directing my comments towards you. What I’m talking about are the reporters that are standing in front of a WaMu or Indymac before they were taken over. What about the reports that we see on the news everyday?

    It’s a delicate situation, where do we draw the line before it becomes self-fulfilling? Or do we say screw it, they got themselves in this mess they just have to deal with it.

  56. Yes, WaMu, among others, did get themselves in the mess and they should deal with it. Why? Because the very loans they were offering were the very products that were going to put them on the block. And, any laid off staff (past and forthcoming) should be pissed off at the credit risk managers and executive staff of the company. If WaMu, among many others (Freddie and Fannie) , had not made foolish and RECKLESS decisions and underwriting guidelines we would not be where we are. And I wouldn’t get resume’s from former WaMu employees.

    Could short sellers be a scapegoat?

  57. Tim-

    I suppose you are right, a bank run could be the equalizer to Thrifts just like counterparty risk is to the Investment Banks.

    It’s sad to think that a bank of WaMu’s size may not be around in Seattle. They were the only bank in Washington that had a big enough balance sheet to actually influence Wall Street.

    I feel terrible for the employees that have dedicated themselves to WaMu and their customers. A handful of highly paid people screwed it up for 40,000 plus employees. It just doesn’t feel right.

  58. “Because the very loans they were offering…”

    From what I can see from the trenches, a lot of their “worst” loans were bought when they bought Long Beach, etc… and not ones placed by them during the intitial processing phase. They were bought at the closing table or after the fact.

  59. I bet Jane Wells from CNBC (who has been reporting infront of WaMU’s corporate office in Seattle) is very disappointed that WaMU is doing better today…she would love to see broken, distraught people carrying out boxes.

  60. WaMU was one of the first banks that I can remember offering Pick-a-Payment mortgages. Yes, World (Wachovia) and Home Savings of America had them too.

    After this morning’s actions from the Treasury, Fed and SEC, they may just make it. Whoo hoo.

  61. I actually bought some WM yesterday. I think a few weeks from now the talk will be about it trading back in double digits or at least being acquired at that level. Funny how posts like this one can actually be useful contrarian indicators. The one for me was the headline in the PI online detailing bank runs on Wamu. Another good bank stock to check out that will also probably rise significantly short term is RBS, Royal Bank of Scotland.

  62. Rhonda:

    It’s not easy researching the history of Option Arms!

    Googling produces some amusement, as there are still websites out there promoting it, yet as far as I can tell, they are no longer available.

    World Savings/Golden West, now Wachovia, was the first to truly mass market it, and many lenders jumped on the money making bandwagon, WAMU and Countrywide probably the most successfully.

    Here’s a list, by no means comprehensive, of the major players who sold and serviced them.

    Downey Savings
    Bank of America

    From the broker side, there were a slew of warehouse lenders that originated and funded them, but largely repackaged and sold them to the major players (American Broker’s Conduit comes to mind as a warehouse lender).

    Here’s a few major retail banks, and Mortgage Banks that did NOT sell or service Option Arms (at least not that I know of).

    US Bank
    Wells Fargo
    Key Bank
    Washington Federal Savings
    Provident Funding

    Credit Unions did not do Option Arms. Most small regional banks did not do Option Arms (I think they were fairly complex to service).

    The pressure on the CEOs of banks to offer Option Arms must have been intense, from shareholders eager for increased profits and rising stock prices. However, it is pretty clear now that the Option Arm was a bank killer, so those that refused are looking like visionary geniuses, instead of the stubborn mules they were portrayed as back then.

    Curiously, BOA just MAY end up being the largest holder of Option Arms, with their aquisition of CW (and the possible demise of others). I don’t think BOA originated all that many, as they arrived at the Option ARM party quite late, and poorly dressed.

    I also think that Option ARMS will be trotted out as the next villian in the unfolding drama (word of the year for 2008?), yet in the end we will end up quoting POGO:

    “We have met the enemy, and he is us.”

    Oh, I just found another Walt Kelly quote apropos for the news of the day…

    “We are confronted with insurmountable opportunities!”

  63. I could see how a consumer might get fooled into thinking an option arm was a good idea, but I really have a hard time understanding how someone working at the upper levels of a bank could think they were a good idea.

    I heard once that tall men (e.g. over 6’2″) were more likely to be promoted. Apparently at some banks that was the only criteria. 😀

  64. Well, I don’t necessarily have a problem with interest only in that for the first 5 years so little principal is paid off on a 30 year that it isn’t that big of a deal from the bank’s side. But option arm contemplates possible negative amortization.

    That said, I’m not so against negative amortization that I’d write poorly drafted legislation that arguably wiped out the ability to do reverse mortgages! (The reference is to the Washington State Legislature.)

  65. What about year 6? Years 7, 8, 9, and so forth? Sure we can make the argument that “most people sell by the 7th year.” However I’m not so sure that rule holds true anymore.

    If a homeowner has been paying on an amortized loan for the first five years, then by year six he/she starts to make some small progress toward paying off that mortgage.

    Call me conservative, but I would never recommend an interest only loan (fixed for the first five years or whatever the radio ads say).

    30 year fixed.
    15 year fixed.

    Watch those interest only loans go bye-bye very soon.

    What bank could/SHOULD be making ANY interest only loan in today’s declining market?

    Oh wait.

    All banks. Because we’ve now bailed them out.

  66. Well, first, let me say I’ve never had anything but a 30 or 15 year fixed. The fixed part of that is I remember the interest rates of the 80s. And on car loans I tend to pay them off ahead of schedule. But I could see why someone might rationally choose an interest only if they knew for a fact they were only going to be somewhere 5-10 years. It’s not a completely irrational decision.

    I just have a hard time seeing getting into a transaction with the idea you might need negative amortization in the future. If you think that, buy something less expensive, or don’t buy at all!

  67. Moodys has lowered their rating on WaMu:

    “NEW YORK – Moody’s Investors Service on Monday downgraded the financial strength rating of Washington Mutual Inc.’s main bank subsidiary to “E,” its lowest rating, saying the thrift’s capital is insufficient to absorb its mortgage losses.

    Moody’s (nyse: MCO – news – people ) also cut its rating on WaMu’s preferred stock further into junk status to “Ca” from “B2.””


  68. Jillayne-

    First off, nobody in the financial world cares about the E rating. Second, the problem with WaMu right now is liquidity not Capital.

    Moody’s has their head up their you know what.

  69. Excerpt.

    “While the exact structure of the transaction wasn’t immediately known, J.P. Morgan is expected to acquire Washington Mutual’s deposits and branches, as well as other operations, the Journal reported.”

    Ummm, wasn’t the problem the loans, not the freakin’ deposits and branches?

    Who takes the toxic loans?

  70. Jillayne, I’m just catching your comment 83 regarding interest only mortgages. There is nothing wrong with them as long as they’re being used properly and the borrower understands how they work. We have a 7 year interest only ARM (if the 30 year IO was available at the time, we would have done that) which suits us. They do not work for everybody.

  71. Roger wrote-

    “Who takes the toxic loans?”

    Actually, JPM takes them on, but then will prob be able to sell it to the Fed at a later date or the Fed will create some other structure to purchase the loans.

    It’s official, WaMu is gone thanks to the OTS and the FDIC.

  72. OK, let me ask a dumb question.

    If WAMU has a total around $350B in (inflated) assets, and something like $50B in deposits, something like $170B in loans, how does JP get to snap it up for only $2B?

    Is that the deal of the century?

    Why wouldn’t a competitor pay more?

  73. Sure, deposits are liabilities, but aren’t they part of the basis that they get to make more loans on?

    Isn’t the commercial real estate they own assets?

    Are all of the accounts receiveable they have going to default?

    I’m just trying to get a general handle on this.

    For us locally, I see the buyout as preferable to implosion, though I bet we lose a lot of high paying jobs. I heard someone on CNBC predict that another 110 banks are going to fail, WITH the bailout.

    There also seemed to be general consensus among the talking heads, that even with the bailout, we are due for a severe recession.

  74. I don’t follow bank bailouts, but yes the deposits are assets that they can loan on. They’re probably subject to great risk of going away too, as people either panic late or just don’t like Chase.

    I’m not sure how much real estate they own (or whether it’s encumbered), but a lot of their branches might be leased???

  75. Hi Kary,

    This is from the Seattle Times:

    “WaMu investors, for the most part, are out in the cold.

    The $1.9 billion that JPMorgan paid for WaMu’s operations will go into a fund overseen by the FDIC for WaMu’s creditors. The only investors likely to get anything will be holders of WaMu’s senior unsecured debt. With $7 billion of that outstanding, those investors are looking at a payout of around 27 cents on the dollar.

    Stockholders will get nothing, as will holders of more than $11 billion in WaMu subordinated debt and preferred stock. That includes private-equity fund TPG, which along with big institutional shareholders pumped $7.2 billion into WaMu five months ago.

    WaMu’s ordinary shareholders already had seen nearly the entire value of their stakes wiped out by the relentless stock slide. In what turned out to be its last trading day Thursday, the stock closed at just $1.69, down 57 cents; a year ago, they stood at $35.40.”


  76. From the Federal Home Loan Bank’s website:

    “Seattle – On September 25, 2008, in a transaction facilitated by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation, JPMorgan Chase acquired substantially all of the assets, all of the deposits, and certain liabilities of Washington Mutual Bank of Henderson, Nevada. The transaction included the transfer of Federal Home Loan Bank of Seattle member Washington Mutual Bank, FSB of Park City, Utah, a wholly-owned subsidiary of Washington Mutual Bank.

    As a result of the transaction, approximately $16 billion of Federal Home Loan Bank of Seattle advances outstanding to Washington Mutual, FSB are now outstanding to JPMorgan Chase. The Federal Home Loan Bank of Seattle remains fully collateralized on these advances.”


  77. Kary and Roger-

    WaMu’s problem was liquidity not capital. That’s why the FDIC stepped in. They couldn’t cover all the deposit base and WaMu was getting low on it’s line from the FHLB and Fed Discount Window. The FDIC was not going to wait until the last penny was on the table.

  78. Kary wrote:

    “I don’t follow bank bailouts, but yes the deposits are assets that they can loan on.”

    Correction, deposits are LIABILITIES they can make loans on.

    About 4-5 years ago I argued at my asset liability management group that a bank should rely mostly on it’s core deposit (non commercial) base to make loans (create assets) instead of relying too heavily on leverage (capital markets). I think the regulators, banks and most Americans have figured that out now.

  79. Q-Diddy, I was only asking about the capital infusion to compare the price that they got a few months ago (for what’s now basically nothing) to what Chase is paying today.

    BTW, the P-I reported over 15 billion in withdrawals in less than 2 weeks. I assume that’s net withdrawals.

  80. Kary-

    They got a great price, $1.9BN for $140BN of deposits not including the loans. Let’s just assume they generate1% of fees on the deposits….that’s $1.4BN alone. I also see them recovering $5-6BN of that writedown.

    I don’t know the final withdrawals number, but I know it was ~$10BN last week alone.

  81. Kary-

    I’m sure WaMu has a breakdown, but just think of it this way…mom and pop deposit (core deposits less than $100K) runoffs have historically been minimal. Commercial deposits (deposits greater than $100k) are usually the first to go. I suspect the later was the bulk of the run-off. I beleive WaMu had ~$40BN in commercial deposits at the end of Q3.

    There maybe a paradigm shift in thinking though as even core depositers may be questioning the safety of banks and the FDIC. One of the changes I see happening is people will be smarter about where they put their money and there will be mechanisms created to ensure they can transfer their deposits faster and more economical.

  82. Maybe if WAMU had done this 6 months ago…

    Wachovia Launches Option-ARM Project – September 25, 2008
    By MortgageDaily.com staff

    Story Highlights

    Wachovia Corp. is outsourcing the refinancing of its option adjustable-rate mortgages into government (FHA) and conforming (Fannie Mae & Freddie Mac) loans.
    Wachovia hopes to restructure about 135,000 option ARMs in California.
    In some cases, Wachovia may carry a new second mortgage for the amount above the maximum FHA or conforming limit.
    The struggling Charlotte, N.C.-based bank reportedthat it charged of around $0.5 billion in option-ARMs during the second quarter. The loan-loss reserve build for option-ARMs was $3.3 billion.
    California is phase one in a pilot program for the next 60 days, If the pilot period is deemed successful, the project is anticipated to run for one to two additional years.
    Eligible borrowers must be current on their loans and occupy the properties being refinanced.

    Wachovia unilaterally dropped all prepay penalties in June of this year. Very decent of them.

  83. Roger-

    Maybe it could have helped alleviate some concerns from the capital story, but I don’t think the shareholders, speculators, rating agencies and regulators were convinced a work out program would have materially helped.

    Remember, WaMu was “well capitalized” as of Thursday, but just because a bank is “well capitalized” from a regulatory requirement perspective, it doesn’t mean it’s protected from a massive bank run and this was what happened. There’s still quite a bit of confusion between liquidity and capital I imagine.

  84. Q-

    Do tell!

    I think I have used them interchangeably (not in banking lingo, however).

    In the banking case, doesn’t liquidity mean the ability to borrow when necessary (either from depositors, selling stock, the government or private equity)?

    So WAMU was done in by institutional depositors pulling their rather large deposits? Clearly, nobody wanted to lend to them anymore (look what happened to that TPG group).

  85. Roger-

    It’s easy to mix the 2, but what you need to seperate is Capital requirements and ability to pay obligation. Capital is cash the bank has free and clear or doesn’t owe anyone, while liquidity is the banks ability to pay obligations.

    WaMu needs only to hold capital = to 6% of assets, but it can’t have that number drop any lower than that to be considered well capitalized.

    “In the banking case, doesn’t liquidity mean the ability to borrow when necessary (either from depositors, selling stock, the government or private equity)?”

    Any of these will add extra cash, but issuing stock will piss of current shareholders because it will dilute their value (less desirable)

    “So WAMU was done in by institutional depositors pulling their rather large deposits?”

    Yes, they had sufficient capital to cover losses arising from the assets they own and maintain the 6% requirement (capital ratio), but they didn’t have enough cash to pay back the liabilities (run-offs)

    Hope that helped

  86. Between all the option arms they promoted and the subprime loans they issued with Long Beach Mortgage anyone can see why. I saw this coming 2 years ago. The only sad part was that I didn’t short there stock.

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