Isaac

Why WaMu Must Confess

No need to back into the amount of Option ARMs, since they report them in their 10Q (page 36). Total Option ARMs were $53.455bn, of which $1.3bn represents unpaid principal in excess of the original principal balance of the loan.

If one were to look historically at market prices during a crisis of financial assets and compared the implied loss with the actual future performance of the same asset class, would the market likely over or under estimate the severity of loss? I understand you cut your number in half as a schwag at conservatism/realism, but I would be curious to know the true relationship in a historical context. The Option ARMs are held in portfolio (for investment as opposed to for sale) so are not marked to market. Only actual losses in excess of allowances already booked will cause a hit to earnings.

It may be useful to note that 96.5% of the Option ARMs had 80% LTV or less at June 30 (10Q page 44). 3.1% had LTV between 80-90%, and 0.4% greater than 90% LTV. A very drastic economic downturn would have to occur for those loans at 80% of collateral value to experience significant losses, even assuming their are some over-valued numbers in California, Florida and Nevada properties. There are $1.6bn of loans with LTV between and 80-90% and $190mm with LTV greater than 90%. These are very large numbers and areas for concern, just not the $9bn or even $4bn number that you tossed out. This approach probably makes more sense in trying to estimate potential losses than attempting to make a connection between market value and losses realized in WaMu's loan book.

Your short is likely the right bet as the mortgage situation will get worse before it gets better. There are too many resets on the horizon to believe otherwise, but the order of magnitude, at least in WaMu's Option ARMs, is probably lower than your estimate. I would caution you to remember that WaMu's dividend yield is already north of 6%, and it will provide a floor to the stock at some level. Additionally, WaMu is unlikely to trade below book value unless the wheels completely come off the bus, which would imply $27 a share.

Why WaMu Must Confess

No need to back into the amount of Option ARMs, since they report them in their 10Q (page 36). Total Option ARMs were $53.455bn, of which $1.3bn represents unpaid principal in excess of the original principal balance of the loan.

If one were to look historically at market prices during a crisis of financial assets and compared the implied loss with the actual future performance of the same asset class, would the market likely over or under estimate the severity of loss? I understand you cut your number in half as a schwag at conservatism/realism, but I would be curious to know the true relationship in a historical context. The Option ARMs are held in portfolio (for investment as opposed to for sale) so are not marked to market. Only actual losses in excess of allowances already booked will cause a hit to earnings.

It may be useful to note that 96.5% of the Option ARMs had 80% LTV or less at June 30 (10Q page 44). 3.1% had LTV between 80-90%, and 0.4% greater than 90% LTV. A very drastic economic downturn would have to occur for those loans at 80% of collateral value to experience significant losses, even assuming their are some over-valued numbers in California, Florida and Nevada properties. There are $1.6bn of loans with LTV between and 80-90% and $190mm with LTV greater than 90%. These are very large numbers and areas for concern, just not the $9bn or even $4bn number that you tossed out. This approach probably makes more sense in trying to estimate potential losses than attempting to make a connection between market value and losses realized in WaMu's loan book.

Your short is likely the right bet as the mortgage situation will get worse before it gets better. There are too many resets on the horizon to believe otherwise, but the order of magnitude, at least in WaMu's Option ARMs, is probably lower than your estimate. I would caution you to remember that WaMu's dividend yield is already north of 6%, and it will provide a floor to the stock at some level. Additionally, WaMu is unlikely to trade below book value unless the wheels completely come off the bus, which would imply $27 a share.

Why WaMu Must Confess

No need to back into the amount of Option ARMs, since they report them in their 10Q (page 36). Total Option ARMs were $53.455bn, of which $1.3bn represents unpaid principal in excess of the original principal balance of the loan.

If one were to look historically at market prices during a crisis of financial assets and compared the implied loss with the actual future performance of the same asset class, would the market likely over or under estimate the severity of loss? I understand you cut your number in half as a schwag at conservatism/realism, but I would be curious to know the true relationship in a historical context. The Option ARMs are held in portfolio (for investment as opposed to for sale) so are not marked to market. Only actual losses in excess of allowances already booked will cause a hit to earnings.

It may be useful to note that 96.5% of the Option ARMs had 80% LTV or less at June 30 (10Q page 44). 3.1% had LTV between 80-90%, and 0.4% greater than 90% LTV. A very drastic economic downturn would have to occur for those loans at 80% of collateral value to experience significant losses, even assuming their are some over-valued numbers in California, Florida and Nevada properties. There are $1.6bn of loans with LTV between and 80-90% and $190mm with LTV greater than 90%. These are very large numbers and areas for concern, just not the $9bn or even $4bn number that you tossed out. This approach probably makes more sense in trying to estimate potential losses than attempting to make a connection between market value and losses realized in WaMu's loan book.

Your short is likely the right bet as the mortgage situation will get worse before it gets better. There are too many resets on the horizon to believe otherwise, but the order of magnitude, at least in WaMu's Option ARMs, is probably lower than your estimate. I would caution you to remember that WaMu's dividend yield is already north of 6%, and it will provide a floor to the stock at some level. Additionally, WaMu is unlikely to trade below book value unless the wheels completely come off the bus, which would imply $27 a share.