Next Victim, Please!

Wachovia cash bonds have dropped by 20 points today. The CDS is trading with points up front and the last quote I heard is 33/37.

One corporate bond salesperson opined that Golden West Financial ,which Wachovia acquired, looks very much like WaMu (WM).

Separately, a commenter on another post at the blog noted that Morgan Stanley (MS) CDS is trading points up front. I do not have a quote.

This cannot continue. The system is eating its young.

Comments

[JohnKing:]

>This cannot continue. The system is eating its young.

This needs to continue. Your analogy is false.

Bad business models fail and better models emerge in a free market economy. Some (not all) banks took on a casino model, now they pay.

Thats a very good thing.

2008 Sep 26 11:37 AM

[lavalyn:]

No, it's all the short sellers' fault! Wait...

2008 Sep 26 11:57 AM

[Alan von Al...:]

I suppose if IBM ate Google, that would be eating its young, or maybe Bank of New York Mellon snacking on TPG and Ptooey Chewy 20-20.

Okay, a dead serious comment. Morgan Stanley and Wachovia might take a hit big enough to sink one or both. Could be downgraded. Or Fitch rating cut. Maybe run out of cash. Who exactly does this hurt?

Were depositors hurt when JPM took over WaMu?

2008 Sep 26 11:58 AM

[JasonC:]

Depositors in Wa Mu were not harmed, and the FDIC didn't need to spend a cent - JPM is making everyone whole.

As for Wachovia, the action in its bonds today is insane. I see offers at 50 cents on the dollar for notes maturing in March of 2009, to yield 230%. Modest size, but not yet taken.

2008 Sep 26 12:01 PM

[JasonC:]

On the "who does it hurt" question, Wachovia has $1 trillion in liabilities. Are *you* going to guarantee them?

2008 Sep 26 12:03 PM

[David Chang:]

Wachovia is the next to fall. It has $120 billion in option ARMs. JPM marked these loans down 17%. This would result in a $20 billion writedown. WB has another $130 billion in residential real estate assets (Alt-A, home equity and subprime).

If WB were to mark assets down to the JPM/Wamu levels, WB would have to writedown an astounding $30 billion. Could WB raise $10-15 billion without severely diluting shareholders?

2008 Sep 26 12:05 PM

[JasonC:]

Wachovia recently raised over $16 billion in fresh capital, half of it stock and half of it bonds. It still has $22.5 billion in market cap after falling 25% today. Yet some of its notes are going unbought at 50 cents on the dollar, that will double in 6 months if it survives.

I'd say that is pretty comprehensive evidence that the credit markets simply are not functioning. People ought to be willing to snap up its bonds at such prices, which is what you could expect to recover even in bankruptcy, pretty much.

2008 Sep 26 12:23 PM

[JasonC:]

Now seeing some recovery - the 50s and 60s have all been take, small size left offered at 70, larger size offered at 80. More like ordinary distress, less like a completely unworking market.

2008 Sep 26 12:26 PM

[Stone Fox C...:]

Agree. This must stop! Seriously doubut these assets are worth only 17%. WB should be required to write them down that low unless they aren't paying at the house has lost 80% of its value.

2008 Sep 26 12:46 PM

[JasonC:]

The only securities that can lose that percentage are junior tranches in MBSs that were salami'ed into 10-20 slices, or "CDO squared" securities that repackaged such junior slices and sliced them again. The last was the worst example of fraud marketing in the CMO mess, since "senior" tranches of "junior" slices were confused with truly senior securities. Such practices by a few tainted the entire market, as now few of the end managers trust what is actually inside any given security. But there is no way whole loans of any kind are going to lose 83 cents on the dollar. The worst subprime cohorts have seen rates of default in the 30s or so in a short life, and may have projected defaults over entire lifetimes as high as 70%. Some recoveries are poor with workout costs included, but are still going to run on the order of 50%. That means all the bids below 50 are risk premium bids, and do not reflect true liquidation value - for whole loans, mind. Some junior tranches will indeed be worth zero when the losses are that severe on the whole loan. Again, that confuses investors and they fear the whole asset class may be worth what some juniors will fall to. Why? Because some of the junior tranches had original credit ratings like AA and A.

Meanwhile back on planet earth, Wachovia notes have recovered to 74, with $1.3 million offered there (some bids eating into that block, which is 50k min bid) and more offered up at 80 (1k min bid). The dealer yield on the lower quote is 85%...

2008 Sep 26 12:59 PM

[JasonC:]

Another $2 million plus in Wachovia paper, this time with 3 months to run, is now offered at 79 cents on the dollar, to yield 132% to maturity.

2008 Sep 26 01:23 PM

[JasonC:]

National City short term debt yields 63%, offered at 75 to 85 cents on the dollar for notes with 5-7 months to run, different coupons etc.

2008 Sep 26 02:12 PM

[JasonC:]

People are worrying about LIBOR being 3-4% above treasuries. Loans of the same maturity to major banks are going begging at 20-40 times the quoted LIBOR rates.

2008 Sep 26 02:13 PM

[JasonC:]

If anybody in authority had half a brain, they'd say to heck with these clowns in Washington and to heck with precedent or instructions, and the Fed's open market desk would just wade in and buy all of this stuff for freshly created dollars.

2008 Sep 26 02:15 PM

[JasonC:]

Sorry to keep banging this post with updates, but it ought be to considered the key story of the day, and kudos to Mr. Jansen for focusing on it early.

The high rates I gave earlier are for the short term debts. Lower prices still are available for longer dated Wachovia paper, and the absolute price may be far more important than the calculated yield, either in bankruptcy or in total profit terms in the event of a full recovery.

Long date WB paper is available at 30 cents in modest size. There are many more issues at 50 or into the mid 50s with terms as short at 3 years or as long as 10.

One reason distressed bank debt is trading so poorly in the terms received by Wa Mu bond holders. Basically they will get 10 cents on the dollar on average - though senior issues could end up anywhere between 20 and 50 cents, depending on how the remnants of the JPM buyout are awarded. The FDIC let JPM take the deposit liabilities and substantially all of the assets, other than holding company cash. Even so it needed to raise $10 billion in stock to cover the write downs it is going to take on the asset side of the acquired sheet.

But the result is that much bank debt now looks like preferred stock in recover terms, the "senior" bonds looking like subordinated - because the depositor's senior position is going to be favored by regulators ruthlessly, in the event of failure.

Trade with care therefore, and eyes open.

2008 Sep 26 03:02 PM

[Alan von Al...:]

Again, if shareholders and bondholders are whacked, how does that hurt FDIC insured depositors?

My broker has a big honking notice on every page:
INVESTMENT ACCOUNTS AND INSURANCE PRODUCTS ARE NOT A BANK DEPOSIT - NOT FDIC INSURED - NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY - NOT GUARANTEED BY THE BANK - MAY LOSE VALUE

So? I have very little exposure right now to stocks and bonds. Not more than the insured maximum in CDs and cash, spread among several currencies. All deposits are in super strongest banks.

I wouldn't pay 60% or 25% or 17% or 2% for a piece of Wachovia.

2008 Sep 27 02:27 AM

[WEBISKING:]

Capiatlism like war isnt pretty.WE have become the greatest country in the world because we are the strongest and our poor people live better than the affluent in most societies.Forget the doom and gloom All this money on the"sidelines&quo.... that is in either cash or commodities or coal and ag names will EVENTUALLY be deployed into HIGH QUALITY common stocks. Real estate Bubble of 2001-2006 has still not"recovered&quo.... 1982 I locked in a 5 year CD at 17 % ,todaythat same CD will yield less than 4%. FUND managers DO NOT GET PAID to be in CASH ALL YEAR. Find companies like PM XOM and others with a Reasonably priced PE ,have a ROE average of at least 18% annually over the last 5 years and are worth over 100 billion dollars in market cap and can"absorb" large investments by the"big boys"

2008 Sep 27 09:45 AM

[User 169946:]

"Bad business models fail and better models emerge in a free market economy."

If that were true, then the brokerage houses of GS and MS were following a flawed business model. Do you believe that?

2008 Sep 27 10:22 AM

[Diane Ritter:]

Wachovia failing is good news. Bankruptcy isn't a symptom of the problem. Bankruptcy is the SOLUTION to the problem. If the FDIC would get the lead out and wade in there and close down the rest of the banks who's balance sheets smell to high heaven the whole crisis would evaporate. We don't need a mega dollar bailout. We need to CLOSE DOWN the rest of the problem banks and sell their assets to their competitors. Their healthy, well run, well managed competetors. And the sooner the better.

2008 Sep 27 09:32 PM

[notsosmart:]

this bailout is a big scam like iraq.the sheeples get fooled so easily.after all they have important matters-football,penna... series,abortion,sams sex marriage,ten commandments in school(the pol who sponsored this could not name them)etc.the guys planning this bailout must be laughing all the way to their swiss bank account.

2008 Sep 28 12:02 AM

[WEBISKING:]

Time will prove thatThis deal will be profitable the SMARTEST FINANCE GUY Buffett said it will MAKE the TAXPAYERS MONEY, Those who bought Ko at 49.99 MO at 19.72 and Pm at 49.50 this week will EASILY make double digit annual returns DESPITE all this doom and gloom .Be greedy when others are fearful and BUY QUALITY at discount prices

2008 Sep 28 09:09 AM