WM (WaMu) fails; JPM buys the pieces; WM shareholders and debtors wiped out
WM (WaMu) failed tonight and was seized by federal regulators. WM had appx $187BN in deposits, after the recent run might have had $140BN (?).
FDIC has $45BN in its insurance fund for failed bank deposits, plus a $30BN credit line with the Fed. Since $140BN > $75BN, you can see the danger.
We dodged that bullet, since JPM stepped up to buy WM's deposits, assets, and branches. In return, JPM will pay $1.9BN into the FDIC's insurance fund.
It looks like a great deal for JPM, even if WM's assets are written down very substantially. JPM's management is making the most of this downturn, they are going to come out of this as the largest bank in the US and probably the world. JPM is one of the few private buyers who has the capital and strength to do a deal like this.
Note JPM does not acquire WM's debt. Those debtholders are probably wiped out. I don't know what implications that will have. WM's shareholders are wiped out too.
It is very interesting to see the markdowns that JPM will make on WM's mortgage portfolio. That portfolio is $176BN, appx $50BN option ARMs, $50BN HELOCs, $15BN subprime, and $50BN other mortgages (presumably conforming). If I am reading the slides right, it will mark those loans down to appx 79 cents on the dollar, including marks that WM already took.
I think JPM knows how to value mortgages, and its assumptions for house prices declines are very severe. JPM assumes peak-to-trough price declines nationally of -25% to -37%, in California of -44% to -58% (severity depends on depth of recession). Yet even these severe assumptions do not result in the valuations of 60-65 cents that senior subprime and Alt-A mortgages are currently quoted for or 20-30 cents that distressed sellers like MER have gotten recently.
This supports the view that the "market" prices for a lot of mortgages and MBS have become unreasonably low. I did some work on this, and think that 70-85 cents looks like fair value for subprime overall, with significantly higher fair values for Alt-A and prime.
If the govt indeed buys several hundred billion dollars of mortgages for 70-80 cents, I suspect it will end up doing okay. As always, devil is in the details.
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