Friday, September 26, 2008

Meltdown of WaMu: US Government's Troubling Thursday Night Grab

No one questions that the federal government can and should take over and repackage failing banks, but last night's seizure of Washington Mutual's raises questions that are troubling at best. The ailing thrift, whose days everyone knew were numbered, (is) (was) headed by a CEO Alan Fishman who was specifically brought in to sell the company. While the top tier of buyers had looked at WaMu's books and decided to take a pass, there was evidence that a sale to a private equity buyer was in the offing, and talks were ongoing. Several banks were interested in expanding their businesses through WaMu's extensive network of branches.

Two weeks ago, WaMu announced that it was taking writedowns in the third quarter, and that it had sufficient capital to return to profitability. While WaMu continued to look for a buyer, the company also said that it expected its capital ratios at quarter-end to remain significantly above the levels for well-capitalized institutions.

Last night, after the market closing, it was announced that a deal for a sale had been made with JP Morgan and that there would be a conference call at 9:15 EDT with the details. At first it was unclear what had happened. No news was forthcoming from WaMu, as WaMu's deal team, including Mr. Fishman, had boarded a plane in New York to fly to WaMu's main offices in Seattle. While Mr. Fishman and his party were in midair, the FDIC seized the bank on the pretext that a credit downgrade late in the day by Standard and Poors had sounded WaMu's death knell, giving no notice to Mr. Fishman or to WaMu's Board of Directors.

By the time 9:15 arrived JP Morgan's phone lines were so jammed that it was impossible to tap into the conference call, and JP Morgan's website went down under the strain of traffic. In the space of 2-3 hours, in what may be remembered as the fastest deal in history, the Office of Thrift Supervision seized the bank and turned it over to the FDIC as receiver which promptly sold all the assets through a bidding process, with JP Morgan declared the winner. Shortly after the conference call was ended, JP Morgan issued a press release crowing about the fabulous deal they had made. The truth then emerged that JP Morgan bought and what the US Government sold was the assets of WaMu, and not the company. JP Morgan had offered $8.00/share earlier in the year in a stock deal, and last night's action cost them only half as much with little change in WaMu's balance sheet in the interim.

In the meantime, WaMu stock traded yesterday between a high of $2.34 and $1.60, prices which reflected the highly speculative nature of the security but did not take into account imminent federal seizure. There is talk that the S&P downgrade was a prediction of worth if the company was broken up and sold. The vast majority of WaMu Shareholders were institutions, but plenty of small speculators were also caught by surprise by the lightning fast government deal. Today, WaMu stock has been selling at about 16 cents per share and trading will be halted.

Unpredictable action on the part of the government cannot restore faith in America's markets. Theoretically, this is the goal of the sudden interest on the part of the government to involve itself after years of neglect and ongoing capital liquidity problems. The way that the government seized and sold the assets of Washington Mutual is almost a textbook example in how to destroy confidence in the marketplace. Generally speaking, the Office of Thrift Supervision telegraphs its impending takeover in a way that the markets can process this information in an orderly manner. Generally speaking, this is done over a weekend and isn't a surprise.

It took ten days in October of 1917 for Russian revolutionaries to seize their government following years of unrest under Czarist rule. The October Revolution was not the first action by the Bolsheviks nor was it unexpected. In 2007, with unchecked and unaccountable government power, that time frame can be reduced to less than overnight.

UPDATE: The September 29, 2008 Wall Street Journal has an interesting article on how JP Morgan raised 1..5 billion in 24 hours.

6 Comments:

Blogger Balaji said...

it is so very disturbing to see so much financial distress in the USA. What amazes me is how this became so big...

Sep 27, 2008, 12:58:00 AM  
Anonymous Anonymous said...

Why does the unpredictability bother you? If the government signaled that a takeover was coming or even needed, wouldn't that cause a run on the bank - a panic? The way it was carried out, this largest bank takeover ever took place and no deposits, even uninsured deposits, were lost. Why is that a problem?

Is it the authority of the FDIC to swoop in and control the bank? Would you rather there be no FDIC so that the hundreds of banks that are going to fail shortly, and there will be hundreds, will do so without protection any for depositors? Would that be better?

As for the hammer and sickle, isn't that just a bit harsh? Just because a republican administration has largely nationalized the finance sector of the economy, does that make it Communist?

Sep 27, 2008, 7:35:00 AM  
Blogger Publia said...

Hi Balaji--
Don't be disturbed! For several years, before you lived here, people were using credit in an extraordinarily irresponsible manner. And I don't mean hope-for- a-better-life-among-the-poor type of credit, I mean like a neighbor's young son with a so-so job getting a loan for a $200,000 car type of credit. It was bizarre and it was totally contrary to the values that the vast majority of Americans were taught growing up. It was as if we were on a drunken credit binge and easy money was the intoxicant. The vast majority of the abusers really DID know better.

But it wasn't only people. Companies stripped their balance sheets of "unproductive assets." Suddenly earnings didn't matter. Cash flow became King and the traditional conservative ways of American business were forgotten.

All of this played out in a country that was undergoing what I would term an upheaval of values, as people cast asidet the traditional values of morals and religion. Savings? Why bother when there is fun to have! Want something? Buy it today!

As to genuine distress--look to those poor people who had very little money and were encouraged to toss caution to the wind, take a mortgage they couldn't afford on a house they didn't know how to maintain, with no savings as a cushion, there are some bad stories there that are very disturbing.

This financial distress was not only entirely foreseeable, it has been clear for quite a while that a "meltdown" would happen. What is troubling is that after so many years this has suddenly become a "crisis." You are a compassionate sort, but for the vast majority of people irresponsible use of credit is the root of their distress.

Sep 27, 2008, 7:58:00 AM  
Blogger Publia said...

Anonymous,

The problem is not the excellent job by the FDIC employees who did the transition, the poblem is the sweetheart deal for JP Morgan which I think is very fishy. Seized and sold in 3 hours flat deserves some scrutiny. Your comment reflects the official talking points of JP Morgan and it is what everyone is seeing on TV and reading in the press. There is another story there, and I wanted to tell it.

I have some lingering questions. Was there heavy trading trading in various securities held by WaMu on Thursday? Could it be that this wonderful 1/2 price deal for JP Morgan had a bit of help by some clever investment bankers and lawyers who well understood implications of the mark to market rule? Did that lead to the late-day downgrade of WaMu by S&P which is why the Fed stated it acted so quickly?

Then again, I have an investment banker friend who is quite sure that the way this happened points to the willing assent by WaMu, and that the fact that the deal team was on an airplane was very clever indeed.

Whatever the truth, this is a story that will likely never be told, although it would make a great one.

With all that being said, your points are well taken and capably state the other side of the coin. Thanks for taking the time for sharing your thoughts.

Sep 27, 2008, 8:49:00 AM  
Blogger Eidolon said...

I couldn't have put it better myself! I'm one of the private small-time investors who believed that the company would eventually sort itself out and it was a great speculation. Everything to me reinforced that reading. The company was troubled, no doubt, but it was sufficiently capitalized to withstand through at least the end of this year. I lost both stock and bonds in this Batman deal. Fishy doesn't even begin to describe it! Where's the recourse though? Why aren't major investors joining up for legal action? Or even asking the critical questions? Why would anyone buy any stock ever again? Senior debtors just have to tear up their paper? The majority of what I read is gloaters who exited earlier in the year or who are appalled that we're appalled!

Sep 29, 2008, 2:23:00 PM  
Blogger Publia said...

Eidolon, thanks for sharing your story. There seems to be a very active support group at the yahoo finance message boards—you might want to take a look. A lot of speculators came up with a similar scenario as you did. Clearly the pricing on the securities (and probably the bonds, but I didn't take a look into that) reflected the highly speculative nature of WaMu, but didn't anticipate this fast seizure by the OTS. I hope you followed the cardinal rule of speculation, and didn’t risk more than you are comfortable losing.

JP Morgan seems to be very concerned that they be viewed as heroes, but without much change in the balance sheet they got a deal at half the price they were willing to pay not very long ago. Actually, it was a far better deal than earlier, because they only bought the good stuff from the FDIC.

Wall Street has lost the trust of many an average individual investor, and I suppose they could care less because individual investors aren't much of a force any more.

Since you indicate that you bought some bonds, theoretically you could see some of that money. The FDIC is acting as a receiver--sort of like a trustee in bankruptcy but without oversight. If you have more luck at the FDIC's website than I did, you might be able to figure out what that might mean to you.

Sep 29, 2008, 8:50:00 PM  

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