Washblog

Fannie/Freddie Bailout / WaMu May Close Its Doors. [Updated Again!]

[Front paged: NM}

And Jim Cramer is out today saying that Washington Mutual SHOULD close. Emphasis mine, but...wow. I was not expecting THAT. I'm not sure I agree, but as many of you will have read, WaMu yesterday fired CEO Kerry Killinger. It's a surprise and it could mean wild, weird things.

Update [2008-9-9 13:40:44 by dlaw]:And, as suspected, WaMu has signed a "Memorandum of Understanding" with the Office of Thrift Supervision (OTS).

Update [2008-9-11 22:43:59 by dlaw]: Moody's, the ratings service has cut Washington Mutual senior unsecured debt rating to "junk" - down two of the service's ratings grades from "Baaa3" to "Ba2 with negative outlook". The impact of this re-rating is unclear, but if it has the effect of reducing the value of the assets WaMu holds as capital, there could be trouble. I find the severity of this downgrade very surprising.

I have not pinpointed the problem as yet, but I am beginning to think that the $7 billion WaMu raides from private equity firm TPG was somehow, in effect, more like $5 billion. In round numbers, this might mean that Washington Mutual could withstand $20 billion LESS in loan losses than commonly supposed.

But this is me *really* reading a lot into those tea leaves. To go on reading 'em, I am even beginning to suspect that the situation precipitating the downgrade is somehow connected to WaMu's ownership of preferred shares in Fannie and Freddie, although I'm sure the situation is complex. Maybe they transferred them to TPG or something. I'm speculating, but I dare say we'll all find out.

Allow me one final speculation here. Much in the news was the fact that the Credit Default Swaps (CDS) - a derivative designed to protect against default - for Washington Mutual debt soared in price even above those for Lehman Brothers. CDS are like an insurance premium, except they are traded - which probably makes less sense to you than if I just wrote "CDS". Anyway, what *would* make a lot of sense is if the TPG private equity group had taken a very large position in that market and the market was now trying to cope with a lot of position unwinding - either by TPG or its counterparties - as people started to pay big money just to get the heck away from TPG and WaMu. That would explain what seems like an outsized reaction to the numbers as reported so far.

Still, I want to encourage Progressives not to get turned off and scared by this Fannie Mae/Freddie Mac story. This is still the greatest discrediting of laizzez-faire in three generations. Progress - true progress - will come of this. It changes the game, folks. It's so big we don't understand it yet.

I know I keep using Cramer, but it's really because he has been one of the few saying things boldly and simply. I do actually read other people, but he's a good man to quote for a blog post.

To the meat of the story, again I can't yet exactly pinpoint the as-yet-unreported fatal flaw in Washington Mutual's financials, as I was able to with IndyMac, but I feel sure it's there.

[Sorry for the little self-back-pat there, but when you send your conclusions to a bank analyst for a major financial news outlet and he says "wow, I should have caught that," it's nice. BTW, Wikipedia entry on the fatal flaw regarding brokered deposits? I wrote it.]

In my mind, there's little question that WaMu would need more capital if it was going to stay afloat. There is also something fishy about this "liquidity fund" that WaMu keeps touting. They kept touting Kerry Killinger, too.

Maybe the problem is simple: too many bad loans.

But whatever is buried in WaMu's financial numbers, we have to believe that it's no coincidence Washington Mutual fired CEO Killinger on the same day Barney Frank saved the world. Clearly, the pressure on Secretary Paulson to let Barney Frank save the world had to have increased vastly when he found that America's biggest savings and loan was being made to sign a memorandum indicating it was on the road to receivership.

As Cramer predicted in the video, firing Killinger did, in fact, mean that Washington Mutual had signed a "Memorandum of Understanding" (MOU) with its regulator, the OTS. This is basically an agreement in lieu of, or often preceding, a takeover of a failing institution. As the interlocutor points out in the TheStreet.Com video I cite (any way to embed those?) a bank's signing an MOU, is generally considered "horrific" news. In general, these agreements require a management change so that the regulator knows the company is serious about acknowledging that they have screwed up REAL bad and they are on the road to receivership.

It also gets management out of the way in the event the regulator has to take over the institution or sell it to another institution.

Given the laissez-faire insanity of this Administration, I must now suggest that people lucky enough to have more that $100K of deposits at WaMu go to the FDIC website to get information about their accounts. Throughout the financial crisis one pattern has been clear: by the time these morons act, the damage has already been done. The FDIC still has plenty of money to protect WaMu depositors below the $100K limit - okay, not quite enough, but they're good for it - so let's not cause a bank run. But if you are lucky enough to have a lot of cash at WaMu, be prudent and plan.

But the shocking conclusion of all this is the notion Cramer states publically (but others may think privately) that it would be a good thing if WaMu shut its doors - shocking because it's so reasonable.

With all their bad loans and bad securities, WaMu is in terrible trouble. Normally, the best thing for everyone would be if WaMu raised a bunch more money, destroying the shareholders but preserving the flow of credit and money to the communities the bank serves. But here, the idea is that not one but two really bad things have happened:

  1. Washington Mutual is so bad that it really cannot right the ship.

  2. In trying to survive, WaMu would become a vicious, foreclosure MACHINE, whacking people out of their homes in a desperate attempt to save itself in the short term, rather than working with borrowers for the long term.

It's an argument that is reasonable, compelling and surprising to hear for its honesty.

These are extreme times brought to us by the control of our government by radical, reckless extremists.

Wow, that 2006 election sure came in handy.

Keep the faith that this is a time of great positive change and everyone here has been an outsized part of it.

Update [2008-9-10 17:41:44 by dlaw]: WALL STREET BLAMES REGULATION FOR WAMU

Here's how it's done, folks. Here's how you make lemonade out of a financial lemon. Now this is some strategic messaging. From Bloomberg:

Sept. 10 (Bloomberg) -- Washington Mutual Inc., the largest U.S. savings & loan, failed to interest suitors in a purchase this year because new accounting rules for devalued loans are driving away buyers, two bankers involved in the talks said. The stock fell 30 percent to an 18-year low. At least three potential acquirers gave ended negotiations to buy either Seattle-based WaMu or Cleveland's National City Corp., the bankers said. One sticking point, they say: a rule change that will force acquirers to compute a target's assets at market prices instead of deriving values from measures including the purchase price.
This is what is known as: "opportunistic bullshit". The Right is just so consistent. Find a problem - any problem - and they already know the cause - regulation. How do I know it's b.s.? Three words buried in the middle of the article.
The Financial Accounting Standards Board's change, EFFECTIVE IN DECEMBER, may delay consolidation in an industry saddled with more than $500 billion in writedowns and credit losses.
Emphasis mine, but "December????" Are you kidding me? You mean way back, four months before WaMu got $7 billion from private equity firm TPG and wasn't even considering selling the whole bank? You mean back before a whole bunch of failing banks have been bought? That "December"? Yeah, that's what I thought you meant, you liars.

And WaMu's suitors are all logically foreign banks, so how are the rules in the rest of the world? Is Financial Accounting Standards Board (FASB) so far ahead of the curve in regulating banks that it has frightened off all the foreigners? Well, if we look at the absolute last line of the article we see this quote from a FASB official:

``We had calls broadly for common standards in this area because it caused significant headaches,'' Bielstein said. ``An element of the international standards leapfrogged ours and that's where we were playing catch-up.''
So let me translate the Bloomberg article for you from Wall Street to human:
"We totally wanted to buy WaMu, but, like, they were totally bogus about doing the deal and so we were like 'wow....' and they were like 'what?' and so we gave 'em $7 billion and they're like 'oh great' and we're like 'yeah, whatever' and it would totally have been different if there was no such thing as government. I'm 25 and totally run $300 billion at TPG. Can you dudes at Bloomberg, like, write that? Oh yeah, we totally were gonna buy Nat City, too, but everything is totally bogus, 'cuz of the government."

This kind of talk only suggest to *me* that WaMu is very likely done.

Gregoire needs to get on this, NOW.

< On Making A Statement, Or, The Revolution Will Be Downloaded | Discovered! : The Secret Obama-Palin Letters. >

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It's FP'ed already. Dang it, more paperwork to do this weekend.

by m3047 on Tue Sep 09, 2008 at 11:26:28 PM PST

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Standard and Poors downgraded Washington Mutual's credit ratings outlook (which direction they are likely to go next) to "negative" from "stable".

I think we should start discussing here how this might play into the political campaign - or ultimately play into Washington state politics.

I don't see this as completely negative. This is a place where the power of the public sector will be called into action and I think it's a time for Progressives to be forward-thinking and creative.

Thoughts?

by dlaw on Wed Sep 10, 2008 at 02:06:58 AM PST

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...this ain't no surprise, folks.

our man cramer has been calling for this action since at least last thanksgiving (by my recollection, could have been even longer).

but here's what you did not discuss: the "appraiser scandal"...and this may also have played a role in what is happening--not just legally, but financially...in the form of potential lawsuits from all affected parties.

furthermore, the comapny is the "originator" of tons of loans that are not yet in foreclosure...but are in default.

loan originators are responsible for maintaining the "income stream" from those loans to the buyers of the loans until default. i don't have the data handy, but this may also be affecting the situation.

by fake consultant on Wed Sep 10, 2008 at 08:23:29 AM PST

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