The WaMu Mess: No Surprise Here

For sheer evaporation of shareholder value, it’s hard to top what the holders of Washington Mutual (WM) have had to endure. Over the last 12 months, their stock has fallen by 90%. Over the past five years, it has fallen 35%--annually.

Yet incredibly, the crew that has presided over this destruction, led by CEO Kerry Killinger, is still in place. How much more devastation will this management wreak before the board finally acts?

From the beginning, WaMu’s business model has been fundamentally flawed. The company is essentially a conglomeration of thrifts acquired through the years, then integrated with varying degrees of success. WaMu has long touted its expertise in mortgage lending. Yet over time, it paid the highest prices to produce the worst credit—all delivered with abominable service.

Then there was the company’s vaunted retail push of the early 2000s. Do you recall?  WaMu opened hundreds of branches, many in entirely new markets where it had nothing in the way of a franchise or competitive edge. You know what happened next. In Chicago, for instance, the company went from zero to 147 branches in three years—and ended up with market share there of all of 0.3%. Over the past three years, WaMu’s average deposits per branch have actually declined. If there’s a market where the company has gained deposit share over that time, I haven’t heard of it.

The entire enterprise, meanwhile, has largely been funded by limited high-cost deposits, wholesale borrowing, and massive government borrowings via the Federal Home Loan Bank.

(Most recently, the company announced over the weekend that it’s added $10 billion in “capital.” Well, not exactly. All it’s really done is borrow another $10 billion from U.S. taxpayers via the FHLB. FHLB loans to WaMu now come to something like $60 billion, or more than 20% of the company’s liabilities. WaMu’s FHLB spigot counts as new capital? More like new debt, I’d say, courtesy of you and me.)

So where are we now? A company with thin capital, few core deposits, and a demonstrated ability to underwrite and service mortgages very, very badly. Even TPG, supposedly smart money, has been burned. Its massive investment at $8.50 per share is now worth just $4.00 per share.

Enough is enough. The board needs to make some changes—and those changes should start at the top.

Comments

[globalHOBBIT:]

What's even more amazing is that some fund knew all this and STILL just gave Wamu, rather taken a 6% position in this company. I'd stay those people are really the stupid ones. Misery loves company. I have a bridge for sale if these people are interested!

2008 Aug 01 07:08 AM

[APHoffa:]

Stop cryn' and start buyn'! This is a good opportunity to pick up shares and dump them on a short pop. I've made money on this stock over past 2 weeks. As far as I'm concerned, their doors are still open, and they are the largest savings and loan in country. "The British are coming, the British are coming". No..the British came! Someone has an appetite blood. To the tune of a 6% stake in the thrift! It's a $5 stock, take a chance and buy it cheap.

2008 Aug 01 08:21 AM

[DM32:]

I have written twice to the Board in the last six months expressing exactly the same sentiments as Mr. Hill. Of course, I received the standard response: blah, blah, blah, etc. While they have made what I would call cosmetic personell changes, the real change must be made at the CEO level and not just taking the Chairman title away -- just another cosmetic change. This Board truly has its head where the sun don't shine. The only thing that could posess a Board to act this way, i.e. do nothing in the face of such miserable performance, is that Mr. Killinger must be in posession of the negatives or in more modern terms, the flash cards that hold the pictures!!

2008 Aug 01 08:33 AM

[kels:]

Shut up and buy or lose your arsssss!!!!

2008 Aug 01 09:15 AM

[LoadedBanker:]

Talk about the pot calling the kettle black. Vern, you do remember being tossed out of Commerce on your ear to avoid prosecution right? To see you write about a flawed business model is just amazing. Let's see, pay millions in self-dealing transactions from the company coffers to your real estate company and your wife's design firm, pay off people to get muni deposits, keep this churn and "growth" going to increase your personal wealth and hide franchise performance, and YOU call someone else's business model flawed?!?! Go away. Seriously.

2008 Aug 01 10:11 AM

[STR:]

many people like user155010 are missing out on the financial boom? . bank of america is up 70% in the last 3 weeks.

2008 Aug 01 10:14 AM

[User 208427:]

if you don't like wm, short it, put it, and get taken to the cleaners. Watch while others make money.

Where is the authors' disclosure?

2008 Aug 01 12:37 PM

[cabanker:]

Just so I'm clear; is this the same Vernon Hill from Commerce Bank who had his wife, son in law and other relatives on the payroll as contractors in the Bank's real estate development program? I'd love to see the P & L on those $5 million+ branches. I'm assuming break even will come before the turn of the next century......

2008 Aug 01 12:40 PM

[George Jurg...:]

My rough estimate is WAMU has quarterly provisions of $3B in Q3 and Q4 08 and ends the year with tangible book of about $9 a share and a still sizeable LLR. Allowing for some continuing though moderating losses into next year, stock should trade under year end book, in the 70-80% range for a target around $6.5. Sure, there are risks of a bank run, FDIC seizure, less Federal Home Loan Bank funding, and somewhat higher right offs, and the economy worsening. But the risk picture should clarify greatly as the year rolls around. Getting OREO off the books (limiting related expenses), and greater FHA intervention helping troubled homeowners, as indicated by growing sales volume in CA and the recent bailout bill signed into law, will also improve visibility. Stock is a decent value in the $5 range and a warrant on recovery into late 2009 and beyond.

2008 Aug 01 12:41 PM

[jack matalka:]

Vern you failed to state that the 60b in loans is 20b less than a year ago. They been paying it down. If you want to be credible try some supported facts. You see we the investors are a lot smarter than what you and the shorts think. Yes we took it on the chin since last October. But we are in it for the long term. WM has a head ache right now. But head aches sort of go away with time.
So if you are shorting as I suspect along with 274m as of 10 Jul 08
I feel for you. Thats all you get from me. You should have not painted yourself into the corner. The only thing you can do is buy back double what you shorted. Then wait it out.

2008 Aug 01 02:05 PM

[notsosmart:]

waiting on boards to act is a joke. they havent represented the stockholder in years. they are only interested in maintaining their own position.i doubt if the word "stockholder" is ever mentioned(maybe as a joke so they can have a good laugh).its all become a scam & joke.sad

2008 Aug 01 04:10 PM

[James Davis:]

Put your money where your mouth is.

I'm gonna give you the play of a lifetime, and you can send me my share when you collect.

Wamu bond, matures in Jan of 09. Thats right 09, not 2029.

YTM ....... a cool, hedge fund busting, rib tickling, life changing, 40%.

Sweet.

2008 Aug 01 11:38 PM

[truthinvesting:]

Risk reward here is actually favorable.

2008 Aug 03 09:10 PM

[String:]

Hey Vernon,
I have a question.
If the, soon to be fleesed, non Fdic Insured depositors
along with the long term stockholders went to vvv home, hauled him out, shot him, strung him up in his from yard, and pinned a note to his lapel which read. "The next banker who leaves with his wealth will meet with the same fate." Do ya think it would change a single one of the charismatic bastards? No? How bout if we "do" two or three of the unethical pricks. Would that get their attension?

2008 Aug 03 11:06 PM

[roguedawg:]

CEO Killinger must go. His yearly base salary is $14,000,000.
Examlpe of a S@L guy trying to be a real banker. He failed!!!

2008 Aug 04 12:02 PM

[User 238058:]

I've bought about 60 shares of WM, I think I made a bad decision, someone say something to make me feel better!!

2008 Aug 04 03:16 PM

[Pfloyd234:]

You probably will make some money with a short bounce. But in the long term I think WM is done for.

2008 Aug 05 01:45 PM

[paulodog:]

I agree that a change in management and business model could be beneficial for WaMu, but I still think they are a great buy at their current undervalued price!

2008 Aug 05 07:01 PM

[MMir:]

Vernon Hill giving advice on a bank?, Commenting on the deficiencies of another CEO? Has the world gone mad??? This man was thrown out of his position for his evident lack of ethics. Hey Vernon, Has Shirley "decorated" any WaMu stores lately? Do yourself a favor and stay off the columns, just stick to burgers!

In my opinion, like Vernon, Kerry has to be booted!!!!

2008 Aug 06 10:13 AM

[deadbolt:]

60 shares? When did you buy them? at $35? or at 6? WM isn't going anywhere. It may not perform well for a few years to come, but it will be back. I've put my money where my mouth is and bought in at $6. It'll recover.

2008 Aug 06 02:42 PM

[User 238058:]

I bought 30 shares at 6 and 30 shares at 4

2008 Aug 06 08:12 PM

[Ron fr Smit...:]

As a long-term depositor, but not shareholder, I got 'wind' of a possible meltdown of the stock, last year & began closing out all of my acct.'s. I found out that it's not that easy to do, if you have numerous direct deposit or direct payments , but I have almost completed the transition, to a few other banks. I found out that it's not a good idea to "put all your eggs, in one basket"!
Never, in my 62 yrs. of life, though, did I ever have to worry about the safety, of my bank assets, as today! Do we, the banking public, really think that the FDIC actually has enough money to cover all of the estimated 100 banks, that are estimated to fail, in the near future? God help America, with the current crop, that currently lead this country & their prospective replacements!

2008 Aug 07 11:50 AM

[Tom Armistead:]

WM is a good buy at 4 or 5 dollars, you could trade in and out. After all, it is well capitalized by regulatory standards and you are paying less then half the smart money price.

If it goes down on you, just hold it a while, at the price you can't lose.

2008 Aug 09 07:44 PM

[natew:]

Hey guys, I myself bought about 2,480 shares at a combined cost of $4.20 a peice last week.
I'd like to think that holding this tight for a little while is going to be the right idea. anyone have any advice? you can email me at [e-mail] with any insights.



On Aug 01 07:08 AM globalHOBBIT wrote:

> What's even more amazing is that some fund knew all this and STILL
> just gave Wamu, rather taken a 6% position in this company. I'd stay
> those people are really the stupid ones. Misery loves company. I
> have a bridge for sale if these people are interested!

2008 Aug 29 07:28 PM

[wamuhomeowner:]

This horrible company paid taxes twice on the wrong house and refused to correct their books. Washington Mutual Bank allows non-accountants access to the loan histories and forced us into foreclosure and bankruptcy while refusing to modify the loan or even correct their books. None of their math adds up even to this day and their officer admitted multiple mistakes on their master loan history under oath before the bankruptcy judge.

2008 Sep 07 08:23 PM