Thursday, 11 September 2008

WaMu Dead Man Walking

Whilst a lot of focus in the last few days has been on Lehman Brothers (LEH) and the new wave of socialism gripping the United Satates, Washington Mutual (WM) has been quietly making a march toward bankruptcy.

Back in July of this year when IndyMac Bankcorp went belly up, I asked the question "Who's Next?" At that time I suggested Washington Mutual would be the most likely candidate. The stockmarket now seems to think the same. WM stock tumbled -28% yesterday after a -22% fall the previous day.

On Monday Wahington Mutual's CEO resigned and the company entered into an agreement with the Office of Thrift Supervision (OTS):

WaMu replaces CEO, signs agreement with regulator

WaMu also announced that it has entered into a Memorandum of Understanding (MOU) with the Office of Thrift Supervision (OTS) concerning aspects of the bank's operations, principally in several areas of its risk management and compliance functions, including its Bank Secrecy Act compliance program. In addition, WaMu has committed to provide the OTS an updated, multi-year business plan and forecast for its earnings, asset quality, capital and business segment performance. The business plan will not require the company to raise capital, increase liquidity or make changes to the products and services it provides to customers.

So what does that actually mean? Well basically Washington Mutual is in such a state that they can't be trusted to run their business by themselves. It's kind of like telling an 18 year old he can't be trusted to stay home by himself and therefore needs a baby sitter.

Dick Bove of Ladenburg Thalmann & Co. Inc. chimed in late Monday and summarised the situation well;

"The problem is very simple. They made a lot of bad loans and they are absorbing high levels of loan losses. The solution for their problem is to find some mechanism for reducing the bad loans. That can't be done by a new CEO."

How many bad loans did they make? From the same WSJ article we find:

WaMu has $53 billion in option adjustable-rate mortgages ... Of the $53 billion in option ARMs, $14 billion of these are to the riskiest segment in mortgage lending, subprime borrowers.

WaMu also has $62 billion in home-equity loans ...

Mr. Bove predicts that WaMu will lose $40 billion over the next three years on its loan portfolio. If the economy weakens further and losses are even higher, he said, "the future of the company is questionable."

Then on Tuesday, the ever behind the curve ratings agencies cut WaMu's outlook to negative.

I've been talking about the problems at WM for more than a year. For a recap check out:

WM Loan Losses to reach $2.2 Billion in 2007
WM ups loan loss reserves again
WM to Bleed Red Ink in 2008
WaMu's Great Dilution
Nothing but Red Ink for Wamu

Unlike Bove I don't think the company's future is questionable, it's beyond question, this company is a dead man walking.