Revisiting WaMu

JP Morgan, having lopped $29.4 billion off the value of WaMu’s loans when it took over the troubled lender, now reckons it’s going to get the lion’s share of that money back:

When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

WaMu failed in the middle of the sleepless craziness following the Lehman collapse, and in hindsight might well have been at least as much of a factor in the scary gapping-out of Libor as Lehman was. It’s worth remembering that these are the only two US financial institutions where senior lenders took a haircut — and in both cases the senior lenders were pretty much wiped out. In other bank failures, even the junior lenders generally emerged unscathed.

It increasingly seems as though a panicked FDIC thrust WaMu into the arms of Jamie Dimon, who could — and did — ask for pretty much anything he liked, including the right not to have to pay back any of WaMu’s creditors. The result was that the bank wholesale-funding market went straight into crisis: one sui generis default (Lehman) might have been navigable, but when you have two in as many weeks, it’s pretty clear which way the wind is blowing.

We’ve had endless rehashings of the weekends leading to the Bear Stearns and Lehman Brothers failures, but I’ve seen much less on the subject of WaMu (WM), which is equally if not more fascinating and just as systemically important. The news out of JP Morgan that it massively undervalued WaMu’s loan books certainly seems to indicate that the likes of John Hempton have a point when they say that Sheila Bair got this particular decision spectacularly wrong, and in doing so put the entire US retail banking system on a much more fragile footing than was necessary.

Bair also took a relatively consumer-friendly bank (WaMu) and forced it to adopt the practices of a relatively consumer-unfriendly bank (Chase) — with predictable results: Chase is now telling former WaMu customers that even if they have directed the bank not to let their accounts go overdrawn, the bank can still push the account into overdrawn territory anyway, and, of course, “will assess an Insufficient Funds Fee” for doing so.

It’s clear that the big winner here is JP Morgan, but the rest of us — taxpayers, WaMu account holders, WaMu creditors — increasingly look like very big losers.

Disclosure: No positions

Comments

[Tom Armistead:]

The link to John Hempton's article is a good one. WaMu was well capitalized by its regulator's testimony on the day it was placed in receivership.

JP Morgan is guilty of grand theft and larceny, aided and abetted by so called regulators. If their regulator would have gone to where the TV cameras were, in front of a WaMu office, and simply announced that they were well-capitalized, the bank would have survived. Instead it was fed to Jamie Dimon.

WaMu projected that they could earn their way through their trouble based on pre-tax pre-provision earnings. These same earnings will now grace the income statements of JP Morgan.

A possible solution - 48 states could secede from the Union, leaving California, Florida and the District of Columbia together with all the current crop of regulators to deal with the mess they made.

May 26 03:34 PM

[JPPennypacker:]

Sounds like Mr. Dimon likes to vulture invest for pennies on the dollar. I think Citi tried to do the same thing with Wachovia before WFC stepped in and made a slightly more reasonable offer. If these takeovers are accretive to earnings I'm not sure I follow the logic in involving taxpayers in this mess.

May 26 04:50 PM

[Fighting Yoda:]

We are in the newest for of Capitalism - privatize the profits, socialize the losses. If there are losses tax payer will bear them, profits JPM will keep.


On May 26 04:50 PM JPPennypacker wrote:

> Sounds like Mr. Dimon likes to vulture invest for pennies on the
> dollar. I think Citi tried to do the same thing with Wachovia before
> WFC stepped in and made a slightly more reasonable offer. If these
> takeovers are accretive to earnings I'm not sure I follow the logic
> in involving taxpayers in this mess.

May 26 09:58 PM

[Kinabalu:]

"Sheila Bair got this particular decision spectacularly wrong, and in doing so put the entire US retail banking system on a much more fragile footing than was necessary."

The FDICs error in this one was to negotiate clandestinely with JP Morgan while WM was negotiating publicly with them. JPM had made an offer six months earlier for WM and was WMs best chance to make a deal. Why would JPM pay anything for WM when the FDIC was offering to give the Bank to them for free?

There are still some foolish people who believe the FDIC did a good thing by getting rid of WaMu without having to pay anything.

May 27 12:17 PM

[gwinner:]

Don't forget the role that Charles Schumer played in all this. It was his comments that caused the run on a well-capitalized WAMU. He's experienced and smart enough to know what his words might do, so they had to be intentional.

Yet another example of "government stimulus".

May 27 07:32 PM

[satyr:]

I agree completely. This was a backroom deal and JPM was given a gift by Sheila Bair. There are various lawsuits pending, both against FDIC and JPM. Unfortunately, it seems unlikely that justice will be served.

May 27 08:00 PM

[LKofScotland:]

like all XXX films the consumers need the money shot. so it is with banking. while Lehman and Bear Stearns get all the news stories the real story which is about banking is being reported here. Lehman and Bear had it coming good riddance. WaMu on the other hand--now we're plumbing the depths of our financial nuclear reactor. Couldn't agree more that Sheila Bair is certainly not a "nuclear engineer" in the financial sense. Then again what underpaid regulator ever is? This is the real story of Wall Street's collapse and how the Street recovers and reclaims its place as the "people who actually run the country." In the meantime the war machine keeps turning. Uncle Sam has needs that have to be met you know...A little Stephen King "needful things" are in order are they not?

May 28 05:52 AM

[poorjoe:]

does anyone out there care about WAMU shareholders? How does a government which claimed they would bailout the banks take a "reasonably" sound national bank and sellout thousands of shareholders leaving them virtually penniless. Is robbing thousands upon thousands of people of their assets the governments idea of how to " jumpstart" our economy ??? Why doesn't the FDIC pay back the shareholders for this massive highway robbery ???

Jun 02 01:54 PM

[jimmy46:]

We've been given fair warning that the quality of JPM earnings the next few years will be inflated by bogus accounting.

Remember it

Jun 03 02:05 PM

[Fishr:]

On Jun 02 01:54 PM poorjoe wrote:

> does anyone out there care about WAMU shareholders? How does a government
> which claimed they would bailout the banks take a "reasonably" sound
> national bank and sellout thousands of shareholders leaving them
> virtually penniless. Is robbing thousands upon thousands of people
> of their assets the governments idea of how to " jumpstart" our economy
> ??? Why doesn't the FDIC pay back the shareholders for this massive
> highway robbery ???


Me thinks the reason this happened, is because JPMorgan, being up to its hips in derivative market debt, needed a shotgun wedding to occur; with a bride who had good cash flow, or a bride who's father had good cash flow. Dont think it was government. Think it was NY banking associates, bending the will of Washington, to serve their interests and in this instance, it was bend Washington's law, to assist them with masking over substantial losses, related to the self-regulating initiatives, NY banks have been involved with, dealing with this exclusive and highly leveraged market.

There is some wretchedness, behind the affair, to be sure. But any taint is not the government, it is coming from the banking association, pushing behind the bawdy shoulder of uncle sam, and moving, in a reach around fashion, half concealed, half blatantly obvious.

As for Sheila, I think she was probably tricked and deceived at some point, and again, behind her, is your old friend JP Morgan with the big mustache, smelling of cigars and his hands are course from all the reaching around he been doing lately, to mask over schadenfreude behavior, plus mask league of executives in charge of the derivatives market.

Me thinks the guy who started this website, comes from the very core of the derivatives market, by his profile, may now approve of the masking initiatives that are in the works; and pattern of lawless behavior. Not sure about that though, maybe he does not approve of the pattern of lawless behavior, as it is hard to respect no matter where you came from.

Jun 10 07:02 PM

[Lisa's Husband:]

It may take some time, but the truth will be buried by a proper buyout/settlement offer.
WaMu won a Rule 2001 investigation allowing them to look into the crooked dealings of Sheila Bair (FDIC) and James Dimon (JPMC).
Those parties cannot, IMHO, allow their dealings in the demise of WaMu see the light of day.

Nov 12 12:16 PM