Friday, 26 September 2008

WaMu Goes Belly Up Who Would Have Thought?

Back in July went IndyMac went bankrupt, I asked the question "Who's Next?" At that time I put forward Washington Mutual as the most likely candidate. More recently I argued that WaMu's future was "beyond question" and labelled them as a "Dead Man Walking" . Lo and behold, today the FDIC and the Office of Thrift Supervision (OTS) put WaMu out of it's misery by facilitating a sale of JP Morgan.

On September 25, 2008, the banking operations of Washington Mutual, Inc - Washington Mutual Bank, Henderson, NV and Washington Mutual Bank, FSB, Park City, UT (Washington Mutual Bank) were sold in a transaction facilitated by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC).

In brief, The details of the deal are as follows;

JPMorgan Buys WaMu Deposits; Regulators Seize

JPMorgan Chase & Co. became the biggest U.S. bank by deposits, acquiring Washington Mutual Inc.'s branch network for $1.9 billion after the thrift was seized in the largest U.S. bank failure in history.

Customers of WaMu withdrew $16.7 billion from accounts since Sept. 16, leaving the Seattle-based bank ``unsound,'' the Office of Thrift Supervision said late yesterday. WaMu's branches will open today and depositors will have full access to all their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on a conference call.

So they paid $1.9 billion but what about the assumptions underlying WaMu's toxic mortgage assets?

JPMorgan is taking on $176 billion in mortgage-related assets and writing down the value of it and other portfolios by about $31 billion, the company said. The bank will make a one- time payment of $1.9 billion to the FDIC as part of the deal.

Not mentioned in the Bloomberg story is that JP Morgan said they have been very aggressive in their assumptions. To arrive at the numbers quoted above they have assumed a further -8% fall in US home prices and a 7% unemployment rate.

JP Morgan can call it aggressive if they like, but the fact is US home prices could fall a lot more than another -8% as a lot of pundits, like Nouriel Roubini and Meredith Whitney expect. In addition, given current economic conditions a 7% unemployment rate is not a stretch and could easily prove too conservative.

So who's next big bank to fail? Keep your eye on Wachovia (WB)