Reader Dan’s comments that Smith cites in the Naked Capitalism piece are dead on, with the the following conclusion:
the staggering hole in LEH’s balance sheet that was revealed after bankruptcy creates profound fears about the true solvency of C or UBS. Until the market is convinced they are solvent–and TARP does not do this–the OIS spread will remain elevated and lending will remain frozen.
It is hard to solve a liquidity crisis when what you really have is an insolvency crisis.
I agree with Tom. We’ve been calling Wachovia’s number for quite a while. Last year, when this began, I looked at the list of top option arms lenders and predicted they’d go down pretty much in order. Wamu held on longer than expected.
Wachovia, thanks to their poorly thought out purchase of World Savings’ parent company, has made as many smart, banker-type moves as possible but I still don’t see them making it. The accounting practices associated with option arms is the elephant in the room that no one talks about (mostly because the main stream press thinks we’re all too stupid to understand… who knows, maybe they’re right. The banks certainly did not evaluate the risks properly).
Bob – dead on. Downey is on that list too and even if they could survive the option arm losses I don’t think they can get through all their employee lawsuits.
Sean, Downey has been selling off their loans, but I dont know to whom. One of my sellers received a letter from Downey 2 weeks ago saying that they sold her loan and the new investor has no interest in pursuing the short sale we were negotiating. They even returned the check they had her write to cover the appraisal (which was done), so I know something is up at Downey.
It is hard to solve a liquidity crisis when what you really have is an insolvency crisis
Now that is a great line. I wish I had said it. 🙂 (Although I wish even more that it weren’t so true…)
Yesterday I heard that Downey had cancelled all short sales. It made me awful nervous because I as waiting for final approval on a short sale from HSBC. The approval came through but I think we are about to enter a phase of vastly reduced short sales. In the mean time, Downey jumping on this so quickly (before the bailout even exists) looks like a firm going under and grasping at straws.
PS
Sorry to hear about your client getting dumped at the last minute. That is so frustrating after all their hopes and your efforts have been expended.
A client asked this (rhetorical-sorta) question … JP Morgan is paying 1.9 billion for WA MU; so when all is said and done, where exactly does that 1.9 end up? In whose bank account? Or does it just kinda vanish down a black hole? 🙂
I’ll take a stab at that one. Let me walk you through how I see it:
The FDIC shut down WaMu. If they had to “settle up” on all of their depositors, the FDIC would have lost a LOT of money.
The FDIC doesn’t want to lose money, so they looked at the assets (branches etc.) that WaMu had and said, “Let’s sell them to someone else.”
JP Morgan decided to buy them for $1.9 billion. The $1.9 billion goes to a couple of things:
1. To make the depositors whole because the bank doesn’t keep 100% of their customers cash sitting in the vault.
2. To take over the “losses” that the FDIC would have incurred if they hadn’t sold them to Chase.
WAMU would have overdrawn the FDIC, so now FDIC has 1.9 billion with which to takeover the part of WAMU that Chase didn’t take.
Chase is selling $8 billion in new stock to cover the capital ratios they need for this deal. In Houston, this means huge job losses on top of our little IKE disruption. We still have half a million folks without power.
Another one bites the dust. Good rid-dens to Wamo, hearing about them over and over was getting very old. So the next question coming to mind is how many more before all the big poorly run banks are all gone?
Where did you hear that about Downey? I’m curious because I know there are ways to get around the servicers straight to the investors. Any info is appreciated. email is bobwilson at gmail.com if you can’t post it here.
Sean Purcell says:
PS
Anyone following the bouncing ball of “option arms” is not surprised by this. JP Morgan, however, climbs the ladder of institutions that cannot fail.
As the world of lenders dwindles, can anyone say “play vanilla, please”?
September 25, 2008 — 11:47 pm
Robert Kerr says:
Well, it’s about time. WaMu’s been lying in the grave since March, but refusing to die, like some bad Stephen King movie.
RIP, WaMu. Who’s next?
September 26, 2008 — 3:20 am
Tom Vanderwell says:
As Yves from Naked Capitalism said it:
Hope you like the smell of napalm in the morning. Otherwise, this will not be your sort of day.
Read more here:
http://www.nakedcapitalism.com/2008/09/europe-opens-ugly.html
September 26, 2008 — 4:32 am
Tom Vanderwell says:
If you look at what Wachovia’s stock has done so far today (down 28% in 20 minuts), the market seems to think they are next.
September 26, 2008 — 6:49 am
Bob in San Diego says:
Downey is also gasping for air.
September 26, 2008 — 7:27 am
Sean Purcell says:
Sorry, my comment last night should have read:
“plain vanilla please
as in no real choices when there are so few suppliers.
(It can’t be my eyes so the lap top must be getting smaller 🙂 )
September 26, 2008 — 7:30 am
Bob in San Diego says:
Reader Dan’s comments that Smith cites in the Naked Capitalism piece are dead on, with the the following conclusion:
It is hard to solve a liquidity crisis when what you really have is an insolvency crisis.
BTW, did anyone read JPM’s presentation piece?
Peak to trough price drops in California to be minimum 44%, up to 58% if we see a deep recession.
September 26, 2008 — 7:50 am
Sean Purcell says:
Robert,
I agree with Tom. We’ve been calling Wachovia’s number for quite a while. Last year, when this began, I looked at the list of top option arms lenders and predicted they’d go down pretty much in order. Wamu held on longer than expected.
Wachovia, thanks to their poorly thought out purchase of World Savings’ parent company, has made as many smart, banker-type moves as possible but I still don’t see them making it. The accounting practices associated with option arms is the elephant in the room that no one talks about (mostly because the main stream press thinks we’re all too stupid to understand… who knows, maybe they’re right. The banks certainly did not evaluate the risks properly).
Bob – dead on. Downey is on that list too and even if they could survive the option arm losses I don’t think they can get through all their employee lawsuits.
September 26, 2008 — 7:53 am
Bob in San Diego says:
Sean, Downey has been selling off their loans, but I dont know to whom. One of my sellers received a letter from Downey 2 weeks ago saying that they sold her loan and the new investor has no interest in pursuing the short sale we were negotiating. They even returned the check they had her write to cover the appraisal (which was done), so I know something is up at Downey.
September 26, 2008 — 8:43 am
Sean Purcell says:
Bob,
It is hard to solve a liquidity crisis when what you really have is an insolvency crisis
Now that is a great line. I wish I had said it. 🙂 (Although I wish even more that it weren’t so true…)
Yesterday I heard that Downey had cancelled all short sales. It made me awful nervous because I as waiting for final approval on a short sale from HSBC. The approval came through but I think we are about to enter a phase of vastly reduced short sales. In the mean time, Downey jumping on this so quickly (before the bailout even exists) looks like a firm going under and grasping at straws.
PS
Sorry to hear about your client getting dumped at the last minute. That is so frustrating after all their hopes and your efforts have been expended.
September 26, 2008 — 8:55 am
Cheryl Johnson says:
A client asked this (rhetorical-sorta) question … JP Morgan is paying 1.9 billion for WA MU; so when all is said and done, where exactly does that 1.9 end up? In whose bank account? Or does it just kinda vanish down a black hole? 🙂
Anyone got a good answer for that?
September 26, 2008 — 9:36 am
Tom Vanderwell says:
I’ll take a stab at that one. Let me walk you through how I see it:
The FDIC shut down WaMu. If they had to “settle up” on all of their depositors, the FDIC would have lost a LOT of money.
The FDIC doesn’t want to lose money, so they looked at the assets (branches etc.) that WaMu had and said, “Let’s sell them to someone else.”
JP Morgan decided to buy them for $1.9 billion. The $1.9 billion goes to a couple of things:
1. To make the depositors whole because the bank doesn’t keep 100% of their customers cash sitting in the vault.
2. To take over the “losses” that the FDIC would have incurred if they hadn’t sold them to Chase.
Does that make sense?
Tom
September 26, 2008 — 10:02 am
Cheryl Johnson says:
Here’s what I came up with: WA MU was ~overdrawn~ 1.9bil – this just gets them back to even zero (??!!)
September 26, 2008 — 10:09 am
Thomas Johnson says:
WAMU would have overdrawn the FDIC, so now FDIC has 1.9 billion with which to takeover the part of WAMU that Chase didn’t take.
Chase is selling $8 billion in new stock to cover the capital ratios they need for this deal. In Houston, this means huge job losses on top of our little IKE disruption. We still have half a million folks without power.
September 26, 2008 — 11:02 am
J Boyer Summit NJ says:
Another one bites the dust. Good rid-dens to Wamo, hearing about them over and over was getting very old. So the next question coming to mind is how many more before all the big poorly run banks are all gone?
September 26, 2008 — 1:54 pm
Bob in San Diego says:
Sean,
Where did you hear that about Downey? I’m curious because I know there are ways to get around the servicers straight to the investors. Any info is appreciated. email is bobwilson at gmail.com if you can’t post it here.
September 26, 2008 — 6:54 pm
Robert Kerr says:
BTW, did anyone read JPM’s presentation piece?
Peak to trough price drops in California to be minimum 44%, up to 58% if we see a deep recession.
OH! I hadn’t seen that.
September 26, 2008 — 9:23 pm