WaMu Shows, Again, Smart Money Can Be Wrong 21 comments
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From AP News:
The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.
Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.
So, what can we learn from WaMu's ordeal?
- Among WaMu (WM) investors are Bill Nygren of Oakmark Funds, David Dreman of Dreman Value Management and Charles Brandes of Brandes Investment Partners. These are respectable, proven value managers with years of experience. So, the most important lesson here is that we have to do our own work. Even professionals can be very wrong.
- WaMu was Bill Nygren’s largest position, accounting over 15% of portfolio. The significant value destruction of WaMu caused Oakmark Select I Fund to drop 14.6% in 2007 and a further 9% drop this year.
- So, don’t make a financial company your largest position, unless it has a very strong balance sheet and no liquidity issues, plus superior management, like Berkshire Hathaway (BRK.A).
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This article has 21 comments:
Disagree.
1) This sweeping advice would have been true a year ago and still true three months ago.
2) Should a 'national bailout' package go through, there are several financial stocks that will benefit directly and others indirectly.
3) There may even be a few that could appreciate over 100% within a few days!
Just because WM went under doesn't mean that the rest of the troubled financial stocks have the same coming. It all depends on how the 'bailout' is structured.
CrossProfit
I totally agree. Financial companies don't actually make or build or create something tangible. What they deal with is papers and paper money, the paper money can grow a lot in value, but it can also vanish in an instant.
Instead, choose companies that make something people can see and use, and something that actually does something in real life. Those companies rarely go bankrupt. For example, I never heard that a semiconductor hardware company or chip company went bankrupt. When things go really bad, they get bought by a competitor with usally more than 50% premium on depressed stock value. So, actually, you can make a lot of money out of troubled tech companies.
Don't build your portfolio on vaporware. I didn't have to learn this lesson, my common sense has worked well for me.
I'm using tabs in Firefox. The page was titled "A Message on Washington Mutual". I have a number of tabs open, and I saw "A Mess..."
I'm always amused that investors place blind faith in the Berkshire Hathaway portfolio, with the assumption that there are no potential ticking financial bombs hidden somewhere in the vast insurance empire; nor do they question the high P/E ratios of some of the BRK.A core investments, especially consumer staple companies, that sell at premiums simply because Warren Buffet consumes them (i.e. invest in what you personally like).
Armchair quarterbacking is great sport--"don’t make a financial company your largest position"-- but, it's worthless as advice for future investment returns. I'll stick with "Buy low, Sell high".
First, FDIC seized WM on a Thursday and immediately gave it to JPM. This implies that FDIC had agreement from JPM to do the deal. WM was in the process of finding a suitor, and JPM was one of the suitor candidates earlier in the process. JPM must have been contacted shortly after they did their due diligence because they had an offer ready. This means that FDIC KILLED any prospect of JPM purchasing the company before seizure. There ought to be a lawsuit against somebody in there somewhere.
Second, FDIC was out of money. They get $1.9 billion in the deal to help bail out other troubled banks. That's not how the FDIC system was supposed to work. FDIC's funds were supposed to come from insurance premiums, NOT from equity shareholders and subordinated debt. Low premiums created a moral hazard for this situation within the FDIC, who desperately needed more money to cover potential upcoming closures.
Third, Warren Buffet and Jamie Dimon are totally dependent on the $700 billion Washington financial system bailout for their deals to bear real fruit. This means that there is ... once again... tremendous pressure on Barney Frank and Chuckie Schumer to come through for their buddies on Wall Street. Every Democrat in Washington (well almost every Dem) gets contributions from these guys.
Fourth, letting the beneficiaries of Wall Street contributions (Frank, Schumer) manage the bailout deal is so incredibly remarkable! No wonder that the part of the country 20 miles away from Wall Street is ready to cut off their own noses to spite their own faces and let Wall Street fall into the Atlantic.
Fifth, all the major offenders in this situation got up in Switzerland and spoke about how THEY controlled risk. Frank and Schumer have done nothing as heads of their committees to ensure that this was actually taking place. Paulson and Bernanke have known about the Level III asset risk forever and have done nothing.
So government was the problem when they said we have to subsidize home ownership for low income and minority buyers who couldn't come up with enough down payment/ monthly payment/ funds to fix up their property. Government was the problem with a system where contributions bought concession on regulation of risk. Government was the problem when contributions bought concession on oversight to ensure markets stay free. Now the recipients of these contributions think we should bail out the companies that took advantage of this system.
The original deal doesn't even pass the smell test.
You probably should submit your comments as an article to SA. You're right, this does not pass the smell test (little does these days).
Please consider seeking a bigger audience for this information. The mainstream media is running a thousand different directions right now, and that's the best time for crooks to loot.
Just do something. We all know we have to subsidize the banks for the sake of the economy. Just do it AFTER diluting current shareholders. That'll do the trick and avoid benefiting those who created the problem in the first place.
How can you justify selling something you don't have?
Especially when you are doing it to destroy the mom and pop investors who just want to invest in American companies and hope they'll grow in the usual sense. The short sellers and hedge fund managers who pursue this activity are criminals in a real sense, and eventually when they are identified, there will be incredible class action litigation - which should strip them to the bone.
Stealing is stealing - no matter what lipstick you paint it with
Tick, tick, tick.....
Your post was much better than the article so I will comment only on your post.
First - There were lots on interested parties for WM. JPM was way ahead because they had already done DD and made an offer to WM in the Spring. They just did a better job on this one than anyone else. You're probably right though about the FDIC killing any chance that WM had of selling before a seizure. I can just see them "negotiating" with JPM: "So...what do you guys need to do this deal?"
Second - The FDIC doesn't get the $. WM (the holding company) gets the $1.9 billion. I'm sure it will go a long way to pay off the $80 billion in debt and $20 billion in Common & Preferred stock they have outstanding (JPM does take some of the debt, - the covered bonds-, it's not clear yet how much).
Third - Buffet's deal is much more dependent on the bailout than JPMs. This is such a great deal for JPM that it's hard to believe, much better than the Bear Stearns deal.
Fourth - This is a really great point. They should have something in the bill to prevent contributions to any congressman from any individual, PAC or other affiliation with any company receiving bailout funds. This is probably a bigger moral hazard than the Executive Compensation issue.
Fifth - I think the original Paulson/Bernanke proposal was far better than anything we will end up with after Congress works it over. Conceptually, the original proposal was a bailout only to reestablish the credit markets, which have totally dried up, and that's the real problem Paulson/Bernanke were trying to address. Now it's being tied to companies and only the worst companies will choose to participate. That means it won't be very effective. Banks will have to sell loans at a price (market?) that is probably lower than what they have it on the books for (held to maturity value), so it will provide liquidity but no benefit to the capital ratios.
Dr. Tantillo blogs from a branding perspective, and posits that any company must stay true to its brand's 'core features' to succeed.
"As with most of the marketing losers of the past, WaMu put 'image' marketing first and let rapid growth eclipse brand and marketing fundamentals."
"One clear takeaway from the WaMu debacle is this: any advertising you do should reflect what your company, brand or service is all about and, in doing so, reinforce for you what your brand essentials are and who your Target Market is."
Here's a link to the full post
Dr. Tantillo blogs from a branding perspective, and posits that any company must stay true to its brand's 'core features' to succeed.
"As with most of the marketing losers of the past, WaMu put 'image' marketing first and let rapid growth eclipse brand and marketing fundamentals."
"One clear takeaway from the WaMu debacle is this: any advertising you do should reflect what your company, brand or service is all about and, in doing so, reinforce for you what your brand essentials are and who your Target Market is."
Here's a link to the full post
Dr. Tantillo blogs from a branding perspective, and posits that any company must stay true to its brand's 'core features' to succeed.
"As with most of the marketing losers of the past, WaMu put 'image' marketing first and let rapid growth eclipse brand and marketing fundamentals."
"One clear takeaway from the WaMu debacle is this: any advertising you do should reflect what your company, brand or service is all about and, in doing so, reinforce for you what your brand essentials are and who your Target Market is."
Full post: blog.marketingdoctor.t...