Washington Mutual: "It's A Wonderful Life!" Here In Washington - At Least It Was Until July 22nd

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After being terribly alarmed by the numbers earlier in the year, I have been tremendously impressed by the way  troubled banks have been able to sell HUGE amounts of stock - screwing present shareholders but possibly saving the financial system for all the decent people. ;-)

Unfortunately, I have to say "possibly" because of two agencies, two banks and the last three lines of one article.

The agencies are called Fannie and Freddie. One of the banks is called Indymac and the other is WaMu. What follows are the last three lines of that article, and a tale of a life that was wonderful and now,...maybe,...not. Ask not for whom the bell tolls because it's not an angel named "Clarence".

Last but not least, WaMu has been at the forefront of the entire mortgage crisis. We were skewered for saying so last August.

WaMu's two thrift charters had $354 billion in total assets as of March 31. This was 25% of total assets under the OTS' supervision, if we exclude Countrywide.

All eyes will be on WaMu on July 22, when it announces second-quarter earnings results.

What does it all mean?

Once upon a time just before the Great Depression in a town called Bedford Falls, a fellow named George Bailey (no relation) was a banker at the Bailey Building & Loan, as his father had been. A lot of people think the fictional town was Bedford Falls, New York but the town of dreams was actually a little-known but attractive hamlet near Tacoma - Bedford Falls, Washingon

We all saw how when the Depression came the people rushed in to get their deposits and there was a mean guy and a nice old lady and George kissed her and they got through with a single dollar left. And we all know that George's drunk Uncle Billy lost the deposit envelope at the evil miser Potter's bank and George threw himself in the river and then all George's friends backed him up with their cash so Potter didn't ruin the whole town.

But what the movie didn't show - in the interest of time - was why George had to be so worried about that one, small envelope of deposits. You see, during the Depression people lost their jobs and defaulted on the mortgages they owed to George Bailey. But evil bankers like Potter were too fearful and greedy to loan money to the people who had jobs so those people might buy the houses that the Bailey B&L held as collateral. Nobody could buy houses. The real estate market plummeted and stalled with empty houses and homeless people

George Bailey wanted desperately to lend to the good people of Bedford Falls so they could rebuild the town and save America from Fear Itself. But he could not recoup any of his losses. He no money to lend and less and less income. Things had gotten so desperate that when a single envelope of cash went missing, the Bailey Building & Loan was sunk.

And at the Oval Office, President Roosevelt and the Brain Trust were up late wondering what to do about it. Bankers at Building & Loans in little towns across America (predecessor of our Savings & Loans) were throwing themselves into rivers and there were not enough character actors and film directors available to fish them all out.

One member of the Brain Trust said: "What if we make a lot of angels by ringing bells?" and they slapped him.

A second member of the Brain Trust said "What if we create a market in "used" mortgages?" and they slapped him.

But then President Roosevelt said they should hear the second fellow out and slap the first fellow again.

The Second Brain Trustee said: "See, what we'll do is we'll back up some of George Bailey's better loans. George will offer to transfer ownership of those loans to another bank in exchange for an amount of cash about equal to the amount he lent out. If another banker - like Potter - will do the deal, we the government will guarantee the payments on those loans. With government guarantees, I think we can create a market in quality "used" mortgages and save this darn economy."

President Roosevelt regarded the excited, upstart economist coolly. He leaned back in his chair, exhaled a smooth, aristocratic stream of smoke and rolled the ivory cigarette holder into the corner of his mouth.

"Go on," he said.

"And if Potter won't buy those loans himself WE'LL buy `em and sell 'em to some other rich miser! We'll create a secondary market for mortgages. See, that way, George Bailey won't have to foreclose the bad mortgages, he can sell the good mortgages and get new cash to lend out that way."

The President started to say: "So, really, we have nothing to fear but-"

"I'm sorry to interrupt, Mr. President, but I'm rolling here. If we back these mortgages - guarantee 'em, buy 'em, whatever we have to do - even evil, greedy, fearful miserly bankers like Potter won't be able to resist the prospect of a government-guaranteed return. Cash will flow from evil misers like Potter who refuse to lend to nice guys like George Bailey who will lend. Then the Cab Driver and the Cop can buy houses and America can be saved!"

And that's exactly what happened.

The President told the first Brain Truster - the one they had slapped silly - to go get them some scotch, some soda and a Secretary of the Treasury. It was going to be a long night.  The government had to create the agencies that would later become Fannie Mae and Freddie Mac and do it fast. Then the government swooped in just like George Bailey's wonderful friends and backed his loans.

And just like they'd planned, George was able to sell those "used" mortgages and use the money to write new mortgages. The terrible weight was off his shoulders and things started brighten up at the Bailey Building & Loan and all over Bedford Falls. Pretty soon George got a new desk, fixed his banister and even had a couple more kids with Donna Reed. The Cab Driver and the Cop bought trim little starter homes, got married to understanding women and went off to kill Hitler.

That is the real story about how Bedford Falls was saved and it should kinda make you hate hearing the conservative press badmouth Fannie and Freddie like they always do. For purely ideological reasons, conservatives always want to revile rather than reform and reinforce these central, New Deal pillars of the American economy

And not only did the government create the modern mortgage system with these agencies and help increase the rate of home ownership enormously, but the "used" mortgage business turned out to be pretty sweet for all involved. Selling "used" mortgages is not a thing we really think about, and yet from its humble beginnings it became arguably the LARGEST FINANCIAL MARKET IN THE WORLD. Yes, you read that right.

From across the street, Potter even saw George Bailey occasionally put his feet up on his new desk and smoke a cigar.

In about 2002, Potter - it was Potter the Third by this time but just as evil and greedy - was still making good money in mortgages. But of course it was never enough. You wouldn't think that the business of selling decent mortgages to the government with nice, free guarantees could be improved, but financiers like Potter III craved to "improve" the used mortgage business nonetheless.

One day, looking over his portfolio of businesses, Potter noticed that some of the used car lots he had a stake in were making particularly good profit. So he looked into why.

Now as we all know when you buy a used car there are two important numbers. One is the "Blue Book" value and the other is the Odometer Mileage. On a used car, the "Blue Book" is an indicator of what you might sell the car for if you decide you don't like it a week after you drive it off the lot and the Odometer Mileage is an indicator of how likely the car is to keep runnin'.

Potter the Third found that these very profitable used car lots were using a new, "Bluer Book" with higher values in it. And they were also SELLING A LOT OF CARS WITH "BROKEN" ODOMETERS.

Now what would you say was happening there?

And you would be right.

And this gave Potter III a wonderful, terrible idea about a thing called "Alt-A".

All you need to know about "Alt-A" mortgages is that although they are made to people with purportedly good credit, Fannie and Freddie do not buy them nor do they guarantee them. These mortgages are "Alt" because the bankers who sell these mortgages cannot meet Fannie and Freddie's very reasonable standards.

And from about 2002 onwards a rapidly, rapidly increasing number of mortgages were "Alt" because they - ehem - "lacked" documentation.

All of a sudden the banks like the main S&L owned by the Potter Holding Company - "IndyPottermac" of California  - and the huge mortgage broker they owned - "CountryPotterWide" - and their Wall Street investment bank "Bear, Potter and Stearns" - were all selling mortgages with some interesting features.

Like Blue Book and Odometer Mileage on a used car, there are two really important numbers on a "used" mortgage - Appraised Value and Borrower Income. Appraised Value is the indicator of what you can sell the collateral (house) for if the borrower doesn't pay. Borrower Income, of course, indicates how likely the mortgage is to keep payin'.

Now suppose I told you that between 2002 and 2007 the Potter banks started selling a bunch of mortgages with Appraised Values that rose even faster than a rising market - like inflated Blue Books. And then supposed I told you that around the same time the Potter bankssuddenly decided to STOP RECORDING THE BORROWER INCOME on more and more of their loans. In other words, the Potter banks started selling many, many MORTGAGES WITH "BROKEN" ODOMETERS.

What would you say was happening there?

And you would be right.

The Center for Responsible Lending seems to have confirmed about Indymac what I long suspected about this whole mess: banks like Indymac were apparently breaking the odometers themselves or simply demanding that they be broken in advance.

We've all heard about "liar loans". The Potters of the banking industry have been quick to tell us how - as naïve, innocent financiers  - like them were suddenly taken advantage of by thousands and thousands and thousands of deceptive borrowers - hypnotized or something, it seems.

And then there's the truth.

Rather than "liar loans" - as the banks described them - these were "Lemon Loans". They were used mortgages with Inflated Blue Books and "Broken" Odometers sold for a fast buck. Some of them barely got off the lot before the engines stopped cold. The "liars" were, of course, the people who sold these lousy lemons and put hundreds of billions of dollars in their pockets - the banks.

What's true of Indymac is almost certainly true of the rest of the Potter financial empire, wouldn't you say? But of whom else might it be true?

Let's recall those last three lines:

Last but not least, WaMu has been at the forefront of the entire mortgage crisis. We were skewered for saying so last August.

WaMu's two thrift charters had $354 billion in total assets as of March 31. This was 25% of total assets under the OTS' supervision, if we exclude Countrywide.

All eyes will be on WaMu on July 22, when it announces second-quarter earnings results.

The title of the article I reference here is "Indymac Wreck Could Lead to S&L Pile-Up" but the first thing to do is NOT to pull the money out of your WaMu account. Given what the FDIC says about Indymac you're safe - unless you're lucky enough to have a WHOOOLE lot of cash in the bank itself. In which case, screw you, you greedy, capitalist bastard.

No, I'm just kidding.

And if you have a whole mess of WaMu stock - well, you may be a greedy, capitalist bastard, but the management of WaMu has screwed you pretty well already. Time to talk to your investment counselor.

If you have a WaMu mortgage, this may even work for you because government money seems likely to get VERY involved here.

If you work for WaMu itself.........

The good news here, as I say, is that the government is probably going to get very involved - reaffirming, repairing and even expanding a whole lot of New Deal policies.

The bad news?

Well, I guess we have to see whether the bank headquartered here in Seattle should have changed its name to "PotterMu" rather than "WaMu".

We'll see on July 22nd, I guess.

Update [2008-7-22 16:40:39 by dlaw]: Holy S##t!!! WaMu has just reported a HORRIFYING number. The loss was SIX TIMES WORSE than Wall Street's consensus estimate. From MarketWatch:

WaMu reported a net loss of $3.33 billion, or $6.58 a share, late Tuesday. That compares to net income of $830 million, or 92 cents a share, a year earlier. The nation's largest thrift said it boosted loan loss reserves by $3.74 billion to $8.46 billion during the latest quarter. The company also said that the remaining cumulative losses in its residential mortgage portfolios will be towards the upper end of the range it disclosed in April. Excluding one-time items, the lender said earnings per share would have been $3.34 in the second quarter. WaMu was expected to lose $1.05 a share, according to the average estimate of 12 analysts in a Thomson Reuters survey.
More Yikes! stuff, from AP:
-- On the heels of reporting a $3 billion quarterly loss, Washington Mutual Inc. is said to have yet another problem on its hands: an exodus of its unsecured creditors, according to an analyst report Thursday. In a note to investors, Gimme Credit analyst Kathleen Shanley pointed to evidence that suggests many of the Seattle-based bank's unsecured creditors have been pulling funds from the bank. An unsecured creditor lends money without obtaining specified assets as collateral. This means the creditor has nothing to fall back on if the borrower defaults on the loan. Federal Reserve funds purchased and commercial paper declined to $75 million as of June 30, Shanley said, down from $2 billion at year-end and $3.4 billion a year ago. Securities sold under agreements to repurchase are down to $214 million, from $9.4 billion in the prior-year period. Other borrowings, she said, are $30.6 billion versus $39 billion in December.
I thought I told you unsecured creditors not to all take your money out of WaMu! Okay, I see your point.
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Dave Gibney Pullman

by gibney on Tue Jul 15, 2008 at 01:53:13 PM PST

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I can't say whether the economics is accurate - knowing your track record, probably so - but I LOVE the creativity! Pic of the used car dealer, priceless!

by dinazina on Wed Jul 16, 2008 at 07:57:45 AM PST

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has gotten a couple hundred visitors in the last couple of days.

That's here.

People can find it via Google because the "WAMU" in the title brings it high up on searches. I added in a link to this story as an update at the top.

Dlaw, thanks for this story -- I get this.  Yeah, the pictures help... :)

by noemie maxwell on Wed Jul 16, 2008 at 09:04:48 AM PST

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  • Thanks Noemie! by dlaw, 07/22/2008 12:14:43 PM PST (none / 0)
    • Awww.. by noemie maxwell, 07/23/2008 11:11:30 AM PST (none / 0)

First, Wamu's loss ex one-time charge was "only" THREE times Wall Street's consensus estimate.

Wow, what a relief.

WaMu has been able to maintain its capital ratios, although I'm a little curious how a bank can raise $7 billion dollars in equity and see only a very small increase in its risk-based capital, but this is all over my head a little.

by dlaw on Tue Jul 22, 2008 at 02:17:26 PM PST

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...good old Moody's indicated it might soon have something unpleasant to say about WaMu.

The Wall Street Journal story on this was simply bizarre. This is supposed to be the financial "paper of record" and they parroted the company's positive spin.

This is a strange world we're entering.

by dlaw on Tue Jul 22, 2008 at 04:37:13 PM PST

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