WM (WaMu) fails; JPM buys the pieces; WM shareholders and debtors wiped out

[jyl]

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.

[tabs]

Walked into WAMU on Monday to do some banking and asked if they were BK yet. The manager assured me they were OK. I said that they were as good as gone as I walked out.

[Chocaholic]

I'm sure you left them quaking in their boots. Thank you Tabs Greenspan.

[The Gaijin]

Put the old guys back in charge!

[NICKG]

so they get the assets and the value for 1.89 billion..and we get to assume the debit..hooray for that! what bs...my tax money at work..i want to buy some assets and not have to pay for the debts too..to hell with corprate welfare..let them go under

[HardDrive]

LOL! I love the fact that they made fun of the 'old' way of doing things in their ads.

Yeah, those old guys with their stupid ideas about 'solvency' certainly are pesky. Delicious irony.

Originally Posted by The Gaijin

Put the old guys back in charge!

[BlueSkyJaunte]

Just out of curiosity, how does this crap happen overnight? I don't get it. One day the bank is claiming everything is OK, the next it's been busted up, taken over by Fed regulators, and their shareholders are broke.

I smell fraud on an epic scale.

[Aerkuld]

Originally Posted by BlueSkyJaunte

Just out of curiosity, how does this crap happen overnight? I don't get it. One day the bank is claiming everything is OK, the next it's been busted up, taken over by Fed regulators, and their shareholders are broke.

I smell fraud on an epic scale.

Not fraud, just lies.

I think as an engineer I am naturally cynical, but I have come to the conclusion that I can't believe anything I'm told.

[jyl]

Originally Posted by BlueSkyJaunte

Just out of curiosity, how does this crap happen overnight? I don't get it. One day the bank is claiming everything is OK, the next it's been busted up, taken over by Fed regulators, and their shareholders are broke.

I smell fraud on an epic scale.

Obviously it didn't happen overnight. You just haven't been watching. WM stock started falling in Jul 07. Was barely $1 before failure. My friends with money at WM all pulled their accounts weeks ago.

[Rick Lee]

I doubt an employee you come across in a retail branch is gonna tell you what's going on in the company, even on the off chance he has a clue.

[Oh Haha]

Our mortgage is with WAMU.

In simple terms, what might the impact on us be?

I don't suppose they wipe the loan off, do they?

[Rick Lee]

Originally Posted by Oh Haha

Our mortgage is with WAMU.

In simple terms, what might the impact on us be?

I don't suppose they wipe the loan off, do they?

No chance. Won't affect a single payment for you other than you might have to mail it to a new address.

[tabs]

Originally Posted by Rick Lee

I doubt an employee you come across in a retail branch is gonna tell you what's going on in the company, even on the off chance he has a clue.

Do ya think that I don't know that? Trained monkeys is all ya get at the Branch level....and most of them are not even house broken....

Most people ya talk to at the brokerage and insurance companys aren't even trained monkeys who know ***** from shinola.

Guess what most people are idiots when it comes to this stuff.