downtoearth

FDIC Won't Run Out of Money, But WaMu May Be Toast

Mr. Whalen:

There is an "un-toast" manner in which you can analyze this situation (with the background facts) as well:

Here are some WaMu details which actually indicate the soundness of WaMu.

WaMu’s retail deposits at the end of August were $143 billion (SEC Form 8-K and related press release of September 11, 2008). But I'll grant you they might be less than this now in light of the media's analysis of Wamu - based not on fundamentals, but on short-sale price results and the ever so trustworthy results of the unregualted, unknowable CDS "market")

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 (WaMu's 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 nonetheless acknowledged that WaMu had enough cash to get through 2010 (the press didn't mention this but tangentially).

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). (However, I would love to see the new RTC purchase these for even 30 cents on the dollar as that would add another $6 billion to WaMu's cash).

WaMu’s gross interest income for the second quarter was $4.2 billion (similar to the quarter before), and after interest expense due on deposits and borrowings of $1.9 billion, yielded a net income of $2.3 billion for that quarter (ibid, page WM-2; it also reported additional net non-interest income of $561 million for the second quarter). The “loss” which WaMu reported against this income (which translates to a loss for the quarter) is a “PROVISION for loan losses”. That is not an actual out-of-pocket expense suffered by WaMu, but an amount set aside 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). WaMu is finally seeing the “bottom” of its non-performing loans. But more on those non-performing loans below.

Aside from the $18.2 billion of the mortgage backed securities, the majority of the loan portfolio owned by WaMu is proprietary in nature (i.e. WaMu owns them and services them) . The $52.9 billion portion of the proprietary portflio, those Option ARM loans in WaMu's portfolio, some of which are, no doubt, non-performing, or less than perfectly performing, are not threatening for two reasons:

(1) WaMu does not have to re-set a proprietary ARM. For instance, if WaMu is satisfied with its current overall income, and expects the California and Florida markets to recover (which they always do, and before all of the others), it need not “force” the higher interest rate on an ARM borrower, but instead agree to receive, for awhile longer, the lower option rate 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 of the “better” homes do check a prospective tenant’s credit first); 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.; and

(2) if one or more of these Option ARM's becomes terribly non-performing, WaMu can pass it to the RTC - another 30cents on the dollar into the cash coffers.

In addition (though watering stock never quite assists the investor like it does the flowers in my backyard), WaMu does have an additional yet unissued 1.4 billion shares of capital stock - another way to generate capital and more cash for operating purposes.

So not all is lost.... wouldn't you agree?

And if not, be more specific with your facts, sir.

Generalized facts laced with hyberbole never helps the market or investors.

Michael Hanson, Tax Attorney