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This just in! The invisible hand of free markets (er, Hank Paulson) is trying to get Washington Mutual (WM) sold. Because we don't want to see bank lines forming across the nation in an election season. If you want to see a human panic...
That darn S&P is downgrading everything now, causing issues. Considering they did nothing the past 5 years (yes of course that mortgage backed security is "AAA"!), perhaps we should abolish them along with the naked shorting. Because now they are just creating panic since they want to be seen as "ahead of the curve".
- The U.S. government has been reaching out to large banks in an effort to organize a buyout of the beleaguered Washington Mutual Inc. (WM), according to a person briefed on the talks between regulators and banks.
- The obstacle, however, is that "no one knows what's in their books," the person said, speaking on condition of anonymity because of the sensitivity of the matter. There could be, he said, "a minimum amount of value there."
- A New York Post report Wednesday citing unnamed sources said regulators have reached out to Wells Fargo & Co., JPMorgan Chase & Co. and HSBC Holdings PLC, among other institutions.
- Rating agency Standard & Poor's downgrade of the thrift to "junk" status, "is likely to add more impetus to Washington Mutual to act quickly," Bruce, who lowered his price target on the stock to $1 from $3, said.
One day we'll look back at these past 2 weeks and say "I was there". (Right now I wish I was not "there" :)
I can only imagine the scenario where the ex CEO of Goldman Sachs (Uncle Hank Paulson), is leading the bailout of the current CEO of Goldman Sachs (GS). How surreal would that be?
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This article has 11 comments:
A number of years ago one of my clients, a retired American Airlines pilot, was in my office to discuss his estate plan, relevant tax issues, investments, etc. The flow of our conversation digressed to his career – and the many flights he’d commanded on his usual route from Oakland to Chicago/O’Hare. Chicago always seemed to have its share of menacing thunderstorms; he always seemed to have his share of dealing with them when landing at O’Hare. He described a few of these “nerve-wracking” landings.
I asked him if the responsibility of some 180 souls in the seats behind him ever added to his stress at those times. His answer: “Nope…I just figured if I get my own butt onto the runway safely, the other 180 will follow”. I’m sure the 180 were glad their pilot was “on the job”.
Some good news for Wamu may have finally arrived. One of its pilots appears to be back in the cockpit, “on the job”, and making adjustments to help land the plane in this thunderstorm.
For the longest time now, many of the few who are still hopeful for the “long” smooth Wamu landing (as opposed to a “short” crash) have no doubt been watching, and with some understandable concern, what steps David Bonderman, and his TPG Capital investors might take concerning their significant stake in WaMu.
Motivation for the Pilot
Recall that in April of this year WaMu announced the existence of an “Investment Agreement” whereby WaMu issued to TPG Capital (TPG), 822,857 shares of common stock at $8.75 per share, and an additional 19,928 shares of a $100,000/share “Series T” preferred stock. The total infusion of cash from this issuance was $2 billion. In addition, WaMu entered into a series of “Securities Purchase Agreements” with a number of its major institutional investors. Under these latter agreements, 175,514,285 shares of common stock were issued to these investors at the same $8.75/share price, and an additional 36,642 shares of a “Series S” preferred stock were also issued at a $100,000/share price. This second infusion came to $5.2 billion. Total additional capital brought in was $7.2 billion.
In conjunction with these agreements WaMu sought shareholder approval to have the authorized shares of the company’s common stock increased from the existing 1.6 billion shares to 3 billion shares, and to have the TPG “Series T” shares and the institutional investor “Series S” shares both converted to common stock at the $8.75/share price. This proposal was ultimately approved by the stockholders of WaMu (June 24th), and approximately 646, 514,286 new shares of common stock were issued to TPG and the institutional investors . The total stock owned by TPG and the institutional investors, after this conversion was completed, was approximately 822,878,428 (roughly the same amount as the stock already then outstanding).
To protect WaMu, the Investment Agreement with TPG prevented TPG from selling its shares during the 18 month period following their acquisition (which means Mr. Bonderman and TPG are - - and this is important - - “on the hook” for the duration…). On the other hand, to protect Mr. Bonderman and TPG (because WaMu now had another 1.4 billion shares it could issue in order to raise capital), the Investment Agreement stated that (1) if WaMu, in that same 18-month period, sells more than $500 million of common stock or other equity-linked securities, or (2) engages in a change of control transaction which impliedly reduces the equity value of the TPG shares to less than $8.75, WaMu is required to pay TPG an amount to compensate it for the dilution sustained.
In addition to the shares held by TPG, David Bonderman himself was reported (in the Prospectus to the Special Meeting of Shareholders) to be the holder of approximately 1,280,008 shares of WaMu (as of June 30th he was reported to own 1,240,294 shares). Being either on or observing the Board of Directors meetings as the Investment Agreement allows (and we can assume otherwise regularly informed as to the on-going operations of the company), Mr. Bonderman is not likely to be selling much of his privately owned shares – where claims of exploiting insider information of WaMu would make him a ready target of litigation or, worse, prosecution. In short, he is “stuck” with those personal shares as well (most of which, by the way had to have been purchased in March - April when the price was about $10-15 share.
Mr. Bonderman and his TPG partners, James Coulter and William Price have a long, established reputation for generating significant profits for their private equity investors (one of which was, in 2002, the California Public Employees Retirement System). In June 2002 the San Francisco Chronicle reported TPG as having accomplished a “30 percent plus” average annual return. In 2005 and 2006, TPG was recognized by various members of the media for its stellar results. It was called "Firm of the Year" by Buyouts Magazine, "Best Global Firm of the Year" by Euromoney Magazine, and "North American Large Cap Private Equity Firm of the Year" by Global Finance Magazine.
Bottom Line: TPG, and Mr. Bonderman individually, have a sizeable 18-month monetary stake, and a reputation, to protect.
The Plane
Pilot or no, the landing can only be as safe as the airplane itself. So here are some of the facts which indicate the soundness (or un-soundness, your choice) of the WaMu aircraft.
WaMu’s retail deposits at the end of August were $143 billion (SEC Form 8-K and related press release of September 11, 2008)
Wamu’s Tier 1 leverage and total risk-based capital ratios as of June 30, 2008 were 7.78% and 13.98% (SEC Form 8-K reported July 22, 2008, Exhibit 99.2, page WM-1). Compare these to the June 30, 2007 (year before) ratios of 6.07% and 11.04%, respectively (ibid). These figures are significantly above the regulatory requirements for well capitalized institutions.
The Fannie and Freddie bail-out hit WaMu to the extent of only $280 million (press release of September 11th); recent news articles repeat Wamu’s statements to the effect that the company had “de minimis trading exposure to Lehman Brothers Holdings and no trading exposure to AIG." Downgrading WaMu’s credit rating primarily due to market conditions, Standard & Poor’s acknowledged that WaMu had enough cash to get through 2010.
WaMu’s exposure to the type of bond investments which killed Lehman and almost killed AIG is limited. Of the $239.6 billion of loans held in WaMu’s portfolio, only 18.2 billion (or 7.6%) are the dreaded “mortgage backed securities” (SEC Form 8-K reported July 22, 2008, Exhibit 99.2, page WM-4). And these MBS’s still generated $335 million of income in the second quarter (ibid, page WM-2).
WaMu’s gross interest income for the second quarter was $4.2 billion, and after interest expense due on deposits and borrowings of $1.9 billion, came to a net income of $2.3 billion for the quarter (ibid, page WM-2; it also reported additional net non-interest income of $561 million). The “loss” which WaMu reported against this income (which translates to a loss for the quarter) is a “provision for loan losses”. It should be noted that this is not an actual out-of-pocket expense suffered by WaMu, but an amount set aside, prudently, in anticipation of future loan losses based upon the statistics of non-performing loans measured during that quarter. However - and this is important - the loan loss provision of 5.9 billion dollars in the second quarter (ibid, page WM-2), has now been updated with a lower loan loss provision of $4.5 billion (as reported in the recent September 11th press release). Is WaMu seeing now, finally, the “bottom” of its non-performing loans (i.e. is the plane is pulling out of the dive)?.
Excepting the $18.2 billion of the mortgage backed securities, the majority of the loan portfolio owned by WaMu is proprietary in nature. This would mean that the $52.9 billion of Option ARM loans need not be recast. For instance, if WaMu is satisfied with its current overall income, it need not “force” the higher interest rate on an ARM borrower, but instead agree to receive, for awhile longer, the lower rate option which was granted with the original loan. The borrower has a similar motivation to continue existing payments: the foreclosure alternative will affect the borrower’s ability to purchase another home for at least 7 years. It will also affect the borrower’s ability to rent a substitute home in the meantime (as landlords do check a prospective tenant’s credit). And who wants to move if they don’t have to? In summary, there is no realistic threat from option ARM loans which WaMu can’t , in its own discretion, keep under control.
The Weather Outside, and Other Factors
The Media Storm. Continues unabated - with its hyperbole, sensationalist headlines and articles. Not too much of it is “balanced”. And all of it making the long and soft landing of WaMu (and any other financial institution or investment bank)) more difficult that it has to be. Does the media actually want the financial sector to fail? Do they actually want to see a larger crash? Kim Jong Il, Mahmoud Ahmadinejad, the nihilistic media.
The “shorts”. Best compared to the gremlin who, in that Twilight Zone episode, was ripping at the wings of the aircraft. The ultimate question is whether SEC chairman Christopher Cox will continue to allow this form of market manipulation – which is, like that gremlin on the wing and “out of reach” (and in this writer’s humble opinion), an unfair assault on all arguably “troubled” and even some otherwise “stable” companies. Nonetheless, in this case, the gremlin is already busy.
The Pilot is Adjusting for Final Approach
David Bonderman has just recently waived the anti-dilution provisions of the original WaMu/TPG Investment Agreement. This opens the door to another investor or investors. It is not an abandonment of WaMu to federal regulators or another Resolution Trust Corporation. Mr. Bonderman could achieve those results by simply doing nothing.
The ultimate question now is what runway awaits the WaMu landing.
Will the remaining 1.4 billion shares be issued to a sovereign fund? To the Fed, to secure another AIG-type bridge loan? To J. P. Morgan to expedite a merger?
It’s going to be one of these.
You guess…and then guess the price.
If any bank does not want to be shorted to death , they need to do one thing. Prove they are relatively healthy by showing every detail of their holdings - and not just saying everything is ok. Not one has done so . So what does an investor assume when companies are unwilling to prove they are ok? That they arent.
Daniel Kowkabany
If Mr. Paulsen can establish a new RTC and engender the transfer of WaMu's (and other banks') non-performing loans to the government's balance sheet, WaMu would instantly be a profitable company....in the high millions (almost a billion) per quarter (look at their last SEC filing and check the numbers).
I do find it interesting that although the financial impact on the government would be the same, establishing an RTC and moving "bad loans" into the government's hands has a much softer appeal than writing an $85 billion check here and there...and there again...and then some more.
It would appear like a "good parent" who simply says "I'll take care of it" and does so without the otherwise frightening appearance of writing large, bleeding checks which run the US coffers dry.
And, once the real estate market turns, which it will (or even before that), the government will be in an ideal position to both (1) convert those bad loans into workable loans with the ready assistance of their "left arm" Freddie and Fannie, or (2) sell foreclosed properties with their own new low-interest loans. Both should work wonders to stimulate the real estate market.... where all other banks now fear to tread.
The United States has always been better able to carry long term debt better than any financial institution or industrial or retail company.
They've been doing it since before you were born.
Paulsen's finally getting it right.