Wednesday, September 17, 2008

Washington Mutual is on the auction bloc

It appears that the financial crisis is taking another casualty--this time it is Washington Mutual. From the New York Times:

Washington Mutual, the struggling savings and loan, has been working on several efforts to save itself, including a potential sale, people briefed on the matter said Wednesday.

Goldman Sachs, which Washington Mutual has hired, started the process several days ago, these people said. Among the potential bidders that Goldman has talked to are Wells Fargo, JPMorgan Chase and HSBC. But no buyers may materialize. That could force the government to place Washington Mutual into conservatorship, like IndyMac, or find a bridge-bank solution, which was extended to thrifts in the new housing regulations.

Citigroup is also considering an offer, but would likely be able to buy Washington Mutual only if it emerged from a receivership, according to a person close to the situation. JPMorgan is maintaining its posture that it will not bid unless it receives government support, according to another person briefed on the matter.

The unsurprising announcement comes as the bank, which has suffered badly from losses on mortgages it had made, continues to stumble. Shares in Washington Mutual fell nearly 10 percent on Wednesday to $2.09; they have plunged 94 percent over the last 12 months. This week alone, investors have been frightened by Standard & Poor’s cutting of the bank’s debt rating to junk.

Here is the one-year stock chart for Washington Mutual:

Now in August, 2007, Washington Mutual warned that the subprime mortgage crisis was threatening its operations. According to the August 10, 2007 Raw Story:

US bank Washington Mutual warned that the subprime mortgage sector crisis is threatening its operations, in a document filed late Thursday with the Securities and Exchange Commission.

Due to the conditions roiling the subprime sector, "the companys liquidity may be affected by an inability to access the capital markets or by unforeseen demands on cash.

"This situation may arise due to circumstances beyond the companys control, such as a general market disruption," the bank said.

Washington Mutual said that during the first half of the year and continuing into the third quarter of 2007, there has been "significant volatility in the subprime secondary mortgage market which has spread into markets for all other nonconforming residential mortgages."

"While these market conditions persist, the companys ability to raise liquidity through the sale of mortgage loans in the secondary market will be adversely affected," it said.

So as early as August, 2007, WaMu was starting to see the effects of the subprime mortgage collapse eating into their ability to raise cash to cover their exposure into the subprime market, or to maintain their other operations. And look at this sentence--This situation may arise due to circumstances beyond the companys control, such as a general market disruption. I'd say that Lehman Brother's bankruptcy, Merrill Lynch's purchase by Bank of America, and the Fed's bailout of American Income Group certainly qualifies as a "general market disruption." WaMu's executives knew that if the crap hit the fan, the company was going to be in deep trouble. This September 10, 2008 New York Times story reports that Washington Mutual has "roughly $180 billion of mortgage-related loans, which could result in $9 billion to $14 billion in losses this year." BusinessWeek is reporting that WaMu has $239 billion in real estate loans, with $53 billion in adjustable-rate loans in which payments are optional, and losses are as high as 35 percent. Washington Mutual was on very shaky ground between the middle of 2007, and all through 2008. WaMu did get a $7 billion capital infusion by TPM, a private equity firm, however TPM is now saying they will "waive its right to be compensated if the bank sold more shares to raise capital." So even TPM's cash infusion could not help keep WaMu afloat.

Is there anyone willing to buy Washington Mutual? The New York Times story gives the possible suitors of Wells Fargo, JPMorgan Chase and HSBC. Washington Mutual has around $143 billion in deposits, which is certainly an attractive incentive for any bank to take control of. However, there is the $53 billion in adjustable-rate mortgages, with the loss-rate of a possible 35 percent. And who knows what else is in WaMu's $180 billion of mortgage-related loans. Any financial institution that is open to buy WaMu will be demanding that WaMu's subprime and adjustable-rate mortgage portfolios be removed from the sale, or at least have WaMu's sale price reduced to compensate for the potential losses resulting to the subprime mortgage collapse. And if WaMu's losses, due to the subprime mess, could be anywhere at $9 billion to 14 billion this year, or even BusinessWeek's citing WaMu losses at $28 billion this year, nobody knows the extent of WaMu's exposure in the subprime loans, or the write-down of those loans. I doubt that Washington Mutual could even be sold at auction, not unless it goes for an extremely cheap price.

Washington Mutual bankruptcy anyone?

Update: Now that the Dow has dropped 450 points on the news of the U.S. buyout of American Income Group, will the Dow drop another 100 or 200 points on the news of Washington Mutual's auction? Or even this recent merger between Wachovia and Morgan Stanley? Will the fear continue to grip Wall Street? Or will there be enough bargain hunters tomorrow, snatching up stocks to increase the Dow into positive territory?

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