Sunday, September 28, 2008

The reckless, irresponsible seizure of Washington Mutual: please read in Washington DC

I lost money on this – so you can take my analysis with the caveat of a slightly angry grain of salt.

But I still think the seizure of Washington Mutual is the most capricious government action of this cycle and possibly the worst thing that has happened to American Capitalism this cycle. But that takes a little explaining.

Lets do it on a typical current account deficit country bank. In a country with a current account deficit the loan to deposit ratio of the bank is usually something like 130. That is banks in current account deficit countries have more loans than deposits. Banks intermediate the current account deficit. I have blogged about that extensively – see here and here amongst others.

Here would be the typical capital structure of such a bank rebased so that total assets and liabilities equal 100.

Cash, securities, other semi-liquids 8
Loans 76
Other assets 16
Total assets 100


Deposits 59
Secured funding (say pledging assets - which happens in America more than other jurisdictions) 19
Other liabilities 3
Senior borrowing 6
Junior borrowing 3
Preferred stock 1
Equity 8
Total liabilities 100

Loan to deposit ratio 129%

I cannot spell out how common this sort of structure is. It would be a typical bank in most current account deficit countries other than that the secured borrowing may be unsecured in other countries. In the US banks can pledge assets to the Federal Home Loan banks – which is secured funding essentially backed by the US Government. In the UK there would be much less equity in the structure than in other jurisdictions. In America slightly more. If I were to rebase the balance sheet the equity in the US would be typically about 8%, in Australia about 7%, in Spain a little thinner and in the UK about 4%. After you adjust for goodwill these numbers are another percent or two lower.

Now generally (and I am talking in good times) the equity was a high return piece that got good returns under the understanding it could go to zero. Every equity holder knew (or at least should have known) that a wipeout was a possibility. The preferred stock was typically a very long dated instrument (say 30 years) with no security whatsoever and a dividend that could be suspended. There usually wasn’t much of it but anyone that thought rationally about it knew it could be wiped out. It also yielded say 500bps more than Treasuries. It was junk at pretty well all banks - though it could sometimes have a fancy rating.

But the senior debt in this structure was often medium dated, yielded say 120bps more than treasuries and was considered pretty safe.

After all – to wipe out the senior debt the equity, preferreds and junior debt needed to go first.

In this example above 12 had to be bad to touch the senior debt and 18 had to be bad for the senior debt to be worthless. As there was only 76 in loans in this table then 18/76 = 23 percent had to be bad. That was before you considered that the business would typically have some pre-tax, pre provisions earnings. So to wipe out the senior debt typically 30% of the loans had to be bad. As most of the loans in most banks in current account deficit countries are mortgages and would have a recovery rate maybe 50% of the loans need to default. With a bank diversified across a country that seems implausible even in these times of mortgage stress.

For the senior debt holders even to be hurt 30% of the loans probably needed to default. It was always possible – but the senior debt holders have (with some considerable intellectual justification) acted as if it were unlikely they would be nicked. They had plenty of protection – provided by equity, preferreds and junior debt.

Now if you notice in this capital structure the difference between loans and deposits – the lending that makes current account deficits countries possible – happens as either secured borrowing or unsecured senior borrowing. In countries without the Federal Home Loan Banks (which provide secured funding) the difference between loans and deposits is funded almost entirely with the senior.


What makes this structure possible is order of creditors and the reliability that governments/liquidators etc will honour that order of creditors and ensure that the senior debt instruments at least (and all the other debt instruments) will get a fair shake when things go pear shaped. If in a liquidation the senior was considered parallel the equity or preferred then the senior wouldn’t exist.

The seniors knew they took a risk. We know that because of the 120bps they charged. But these people think (with some justification) that they took very little risk. They relied for that justification on the notion that governments had rules which shifted the losses where they belonged, on equity, preferreds, juniors and seniors in that order. If they didn’t believe that then all senior funding would disappear and all institutions that were reliant on that senior funding would fail.

Ok – there was a minor bait-and-switch in this post. The ratios that I put out there were Washington Mutual in their final published results as a bank holding company. They are however not atypical – and the variants are fairly described in the following paragraph.

Now what has the Government done here. It has confiscated the institution and sold everything except the liabilities marked equity, preferred, junior and senior. It confiscated the liquidation rights of the senior and junior debt. [It confiscated the liquidation rights of the preferreds to but that is an understood risk in owning preferreds. And whilst I lost money here I am far more angry about the other…]

If WaMu had been placed in liquidation I am pretty sure the seniors would have got something. If the senior debtors had been allowed to conduct an auction for WaMu (compromising all the junior stuff including the prefs I owned) then they would have got something.

Except that the liquation rights – well established order-of-creditor rights – were denied by a swift US Government action.

Now I understand that there is a strong policy presumption in favour of a quick government disposal of a failing institution – and that policy presumption might at some stage trump the rights of some holders of paper. However a pretty strong case must be made.

Now lets compare the WaMu case with the IndyMac case. In the IndyMac case I think the government acted fairly. The main issue with the IndyMac case is that there is accountability. The government is liquidating the IndyMac loans in full public glare – and it is clear that they have lost (considerable) moneys. The senior debt (if there were much) would know pretty clearly that they were toast because they could see the results of the liquidation.

This visibility is not available in the WaMu case as there is no public liquidation – instead the assets were confiscated and flicked to JPMorgan as part of essentially the same transaction. The confiscation of WaMu would not have happened when it happened if there had not been a simultaneous buyer. So the senior debt holders never got their order of creditors.

The lack of visibility creates a lack of accountability. Sunlight (visibility of the liquidation) is the greatest disinfectant. In the WaMu case senior debt holders from the outside look as if they had their rights taken from them (and those rights were valuable) by a government official without any method whatsoever of auditing the decisions of said official. That is why the actions of the Government were capricious in this case. [Some comments on this blog have wondered why I think it was capricious. I stand by that wording...]

It would of course be more acceptable if there was a large body of evidence that the government put forward to justify their complete disregard for quite senior rights here. The evidence for instance in the Bank of Credit and Commerce International was pretty strong. BCCI was a criminal organisation and the dosh was simply stolen. There were criminal prosecutions. There was sunlight… and so we could be sure that the government acted with justification.

But in this case the Feds did very little to justify their decision. Lets run through some of it.

  • On September 8 WaMu changed its CEO and announced it had entered a Memorandum of Understanding with the Office of Thrift Supervision.

WaMu also announced that it has entered into a Memorandum of Understanding (MOU) with the Office of Thrift Supervision (OTS) concerning aspects of the bank’s operations, principally in several areas of its risk management and compliance functions, including its Bank Secrecy Act compliance program. In addition, WaMu has committed to provide the OTS an updated, multi-year business plan and forecast for its earnings, asset quality, capital and business segment performance. The business plan will not require the company to raise capital, increase liquidity or make changes to the products and services it provides to customers.
Note that the business plan in this press release did not require that the bank either raise capital or increase liquidity. Moreover it did not require that the bank forecast liquidity.
  • On the 11th of September the bank noted its available liquidity was about 50 billion dollars and that the bank continued to be capitalised significantly above the well capitalised levels.
  • On the 17th of September the bank confirmed what everyone knew, which was that the bank was for sale. TPG (the private equity group) waved their pre-emption rights with respect to any transaction.
  • On the 24th of September there were no bidders for the common equity.
  • On the 25th of September it was taken over.
Now in the middle of this sequence the press became alive with stories about how bad it was at WaMu. Lots of people close to the deal were talking – as I noted in this (unfortunate) post. They were talking their book – that is spreading nasty rumours about WaMu.

We know that there was a run on deposits starting on the 15th of September with a net deposit loss of 16.7 billion. That run was almost certainly triggered by the wave of stories about WaMu and that wave of stories was triggered by investment bankers trying to buy WaMu on the cheap. In other words government action was as responsible as anything else for the run.

Moreover – and nobody has denied this – WaMu had 50 billion in liquidity. Only deposits above 100K will run if the government publicises that FDIC deposits are safe. 50 billion of liquidity less the 16.7 that ran left plenty. Its almost certain that WaMu had sufficient liquidity left to deal with its jumbo deposits. WaMu after all was a retail bank – and jumbo deposits were not the driver.

Now the clincher – in the OTS fact sheet on the WaMu liquidation is this little zinger:
Maintaining Capital – In late 2006 and 2007, WMB began to build its capital level through asset shrinkage and the sale of lower-yielding assets. In April 2008, WMI received $7.0 billion of new capital from the issuance of common stock. Since December 2007, WMI infused $6.5 billion into WMB. WMB met the well capitalized standards through the date of receivership.
Note the OTS thought that – at least as of the date in which they confiscated the bank – it was well capitalised. It was probably also liquid - after all 50 minus 16.7 is a lot when we are talking in billions.

Now the future of WaMu was uncertain. They clearly had plenty of losses coming at them. The company estimated those losses as 19 billion. JPM has estimated 31 billion. On both those numbers incidentally the senior debt holders in WaMu should – in an orderly liquidation – be made whole. Get that – on JPM’s own numbers the senior debt holders should have been made whole – and yet the rights of these debt holders were confiscated.

I don’t know the future, the OTS doesn’t know the future, and JPM doesn’t know the future. Nobody really knows what the end result for WaMu would be in an orderly liquidation. Everyone knew that WaMu was in some trouble. That was clear.

The OTS/FDIC carried a risk – the risk being that the losses would be so large that would wind up costing the government money.

The government solved its problem – and it did it by taking away the rights of the senior debt holders to an orderly liquidation – when on the numbers given by the ultimate acquirer the senior debt was likely to be whole or near to whole.

The Government did this seemingly capriciously. It changed the order of creditors and the basis on which banks all across America raise wholesale funds.

Now there is not much raising of wholesale funds by banks at the moment. But after this deal there is likely to be less. It is simply the case that there is now a new risk for people who provide wholesale funding – and that risk is that the government will unilaterally abrogate their rights – without appeal, without due process and without accountability.

In the process the OTS and the FDIC have effectively removed the main low-cost source of funds of pretty well all banks in America. They will have put the fear-of-Government into such people globally. This is the opposite of moral hazard. In the Moral hazard case people take too many risks because they believe the government will reimburse their losses. But in this case people are going to take too few risks because they know that government might unilaterally remove their rights and property.

This was – by far – the least justified government action of this credit cycle. And it spells doom for any bank in America that is ultimately reliant senior (and hence well protected) but unsecured financing because it is so capricious.

Those banks are many – but we can start with Wachovia whose destiny (failure) is now nearly certain – and for whom the precedent is set. But after that we can go for all the banks including the champions such as Bank of America and Citigroup. Creditors now face confiscation of their rights by the US Government without oversight or audit or even process.

At that point there is no creditors and the economy collapses. The trust needed to make capitalism worked has been removed. I am not a conservative - but I will argue - along with many conservatives - that the most important function of government in a capitalist society is provision of a framework by which property rights can be defined and enforced as this is the key to making a capitalist society function. The Government is now acting as if the framework does not apply to them. That is bad whatever your political persuasion.

What next

The FDIC and OTS have won the battle with respect to WaMu. They got rid of WaMu without any cost to the taxpayer. The WSJ lauded that achievement. They really did get out of their WaMu risk quite neatly – and I will bet the heads of those organisations went to bed feeling pretty pleased with themselves.

But in the process they have doomed about two thirds of the US banking system.

I am still a believer that government – whilst not stuck with great incentives will grope for right solutions. But that belief of this former (competent) public servant is being shaken to the core.
And whilst Wachovia and dozens of others will eventually hit the wall because of this decision the Government will work out that it has a bad process before Bank of America fails.

But I think it is time that the process is short circuited. The heads of the OTS (John Reich) and of the FDIC (Sheila Bair) should be sacked now and for cause. Mr Paulson better get control of this situation and let it be known that the US has a process for dealing with senior creditors and making sure that their rights are honoured.

Otherwise heaven help us.



John Hempton

41 comments:

Anonymous said...

Fair comment, Mr Hempton.

Senior Bondholders would expect to get something back in a liquidation.

The only possible exception would be that the liabilities position was so bad that the bondholders would have not gotten anything anway. I cannot believe this was the case and therefore the FDIC ignored Senior Bondholders rights. Why now invest in any bond debt of a troubled institution, financial or otherwise?

Carlos

Tom said...

Very interesting.

This looks like a windfall for JPM then, they basically get WM for $31B (writedowns).

What are the non-rebased numbers in your example?

Tom in DC

John Hempton said...

Multiply by 3.09 billion to get the WaMu numbers not rebased.

Someone pointed out my liabilities added to 99. It was rounding error as I rounded to the nearest percent.

manch said...

The seniors don't have legal recourse?

Anonymous said...

I like your blog very much. Thank you for sharing your thoughts.

What happened to WaMu is not very different then what happened in the Texas bank crisis. This is the difference between depositories and other corporations in the US. It is worth noting that US banks do not go bankrupt -- they have FDIC receivership. The tradeoff for deposit insurance is that the FDIC has extraordinary powers, and it has used them in the past.

Senior debt investors in iffy banks either forget that in a crisis management looses all control of the bank's destiny to the FDIC (again, not like a bankruptcy), or they hang their hat on the notion that the bank is too big to fail, i.e. the liabilities of the bank at the senior level (e.g. derivatives) are so important to the system that the FDIC will preserve them even if it requires an infusion of FDIC assets.

John Hempton said...

No there is no recourse.

I am aware - acutely now - of the extraordinary powers of the Government in a failing financial institution.

Governments have extraordinary powers. They can conscript you, put a gun in your hand and force you to kill people or be killed for instance.

But a basic concept is that the use of extraordinary powers requires extraordinary justification.

We have had the use of extraordinary powers when there was no evidence that WaMu was insolvent (indeed the OTC said it was adequately capitalised up to seizure) and little proof that it was illiquid.

The FDIC has some explaining to do. If they can't justify themselves then what we have is seizure of property without justiification or appeal in a crisis. It really is the opposite of moral hazard.

J

Anonymous said...

With this kind of action the government also hinders a private sector solution to the credit crisis. Who would invest in troubled, but probably viable, banks knowing the government can and will confiscate everything when it panics over a tanking share price and declining deposits?

And yet, if the House Republicans are to be believed the private sector is expected to clean up the mess.

Oh, and don't beat yourself up to much over the WaMU call. This is a good blog and your analysis was probably sound, you knew there was a chance of the FDIC taking over and that possibility has now realises itself. Keep up the good work, I find your views very much worth reading.

Anonymous said...

With this seizure, the goverment has created a self fulling prophecy.

When the bailout is passed, the big banks will NOT lend the cash out IMO. They will park it in foreign currencies and commodities.

They KNOW the regional banks are hurting. Now they KNOW the FDIC will bend rules, seize the smaller banks and give them to the big banks at firesale prices.

When the Big banks move the bailout money into euros etc it will drive the dollar down, and force the Fed to raise rates.

And of course higher rates means LOWER home prices, adding further pressure on the small banks.

Anonymous said...

http://www.guardian.co.uk/business/2008/sep/26/banking.creditcrunch1

The Office of Thrift Supervision said customers withdrew $16.7bn of deposits in 10 days beginning on September 15 - the day Lehman Brothers declared itself bankrupt, sparking a crisis of confidence in the banking system.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation (FDIC), said the outflow alarmed WaMu's creditors, who became increasingly reluctant to extend funds. "Those who were willing to lend to them were no longer willing to do so," she said.

Anonymous said...

Anonymous pointed out the powers of the FDIC well. And you responded, if I interpert your remarks properly, that you recognize the risk inherent in bank investing but that you expected that the FDIC would only use its "extraordinary" powers in "extraordinary" circumstances. Actually you used the term government as, I assume, a proxy for the FDIC.

Are these not extraordinary circumstances? Should not a rational investor assume that the worst could happen, including government using or perhaps abusing its power? My answer would be yes and in that case, any investor that puts himself at risk should do so with recogintion of the fact that the absolute worst may in fact occur.

Anonymous said...

This bank, shareholders and bondholders were sacrificed on the altar of passage of the bailout bill. The people in Washington will do anything to get what they want. Lawlessness is the name of the game. Had to keep the panic going. Thank God only 4 more months.

Blank Xavier said...

I think the problem is that most Western Governments have forgotton that there are ethical standards to which their behaviour must adhere - in this particular case, to do with ownership.

I suspect this has come to pass because Western States are all now big, bloated creatures, with huge tax rates and accounting for a near-majority of all spending.

They have become *used* to taking vast amounts of other peoples money and spending it. Keep doing that for year after year and I suspect you begin to forget about the ethics of ownership - that unilaterally taking what belongs to others is theft.

My view is that Government exists because we agree that the should, to perform tasks we individually cannot - defence, social security, etc.

Government has NO right to intervene in the lives of others, except in self-defence.

This view of Government is of course wildly removed from current reality; and the extent to which it is removed is the extent to which we are not free and that our freedom is taken from us - economically by tax or politically by law - by the State.

The State is democractically elected, but it's actions are for it no less dictatorial in their consequence.

Anonymous said...

has wamu disclosed its financial statements post-jpm asset sale? are the senior bank level or holdco bonds worth looking at? the holdco bonds closed at 40 on friday and the bank senior bond were more like 15. any expectation that senior bank paper sees higher recoveries than 15?

Anonymous said...

Equity bank investors upset that their investment has been wiped out by gov't FDIC activity need to be reminded that it is a RISK and ask themselves the question if they are being compenstated for that risk. If not then capital needs to flow in another direction were risk are better identified and the rewards compenstated. This gov't bailout proves that the financial community cannot off load risk into outer space or break it into such tiny pieces that it doesn't matter.

Anonymous said...

I agree absolutely, this whole sored mess revolves around what at one time were legal contracts whether it was a home buyer signing a mortgage they knew they couldn't pay or banks making loans that simply had no chance of being repaid, with the government now stepping in with the ability to throw what were legal contracts out the window. This is spreading having hit Fannnies and Freddie, AIG, and the bannks it will eventually hit other industries with the owners of the companies kicked out in the street and goverment deciding the fate. That is The Fatal Concet.

Charles Darke said...

I can understand your anger. The US actions are not so far removed from Russia's 'state appropriations'.

I wonder if those who have lost will take legal action to recover their losses?

cvd said...

Again, you're missing the subtleties of regulatory politics. The closure of WaMu is a disaster for the OTS - and, if you're cynical (which you should be in the political arena) it's a boon for the other agencies.

The other point I think you're missing relates to the bailout. Speculation about the bailout made an outright sale of WaMu impossible - why buy anything until you see whether or not the Feds will take of some of WaMu's crap? The cost of taking WaMu into receivership continued to climb due to the deposit run and the bailout prevented anyone from buying without a takeover.

Caz said...

Thanks for your commentary. I'm not a regular reader but Googled "Wamu creditors confiscated" and it directed me to your article. I am surprised that the media has missed a big part of the story.

According to the press releases JPM got $276B of assets ($307B book value written down by $31B)in return for accepting $188B of deposit obligations. So as near as I can tell, JPM got an $88 billion capital infusion for a total consideration of $1.9B! Did JPM have to take on any other liabilities, or did it ancually receive an $86B windfall from the FDIC? It's hard to tell.

Anonymous said...

Hi,

Sorry for being stupid, but why dont you sue them?

There must be many others willing to do this.

Anonymous said...

Good piece, Mr Hempton-
I also lost money on WM bonds. I also agree with your assessment of how bondholders were sacrificed to get a quick deal with no government money involved. You say there is no recourse, but is that necessarily so? After all, the terms of the Bear Stearns deal were also renegotiated when it became clear that they were not fair. Someone in the government ought to take note of your statement of what this behavior will do to future availability of capital if it is allowed to stand. Your thoughts?
Also, the bond I hold (which, by the way, had a Jan 2009 maturity!) closed Friday at 30, instead of being worthless. Why is that? What is the mechanism by which bondholders will recover any money at all under the existing deal?

SS

James B. Shearer said...

I found this post confusing. Aren't depositors, even uninsured depositors, senior to debtholders? Who got the money that you think should have gone to the bondholders?

Anonymous said...

If you can't see a JP Morgan CDS exposure cover up, you are not looking! I have been screaming this since the Lehman Bankruptcy. I've sent the e-mail below to news agencies (CNN, Bloomberg, WSJ & CNBC)and a few bloggers and the only one that actknowledged and confirmed my story was Martin Weiss. Read it and make sure the word gets out!

OK, here is the story as it was reported and now verified:



On Monday the 15th of September Lehman Brothers Filed for bankruptcy and later that day received two advances of funds from J.P. Morgan Chase totaling $138 Billion Dollars. The story went on to report that Lehman Brothers then used those funds to settle some outstanding CDS contracts that it had contingent exposure. Then The Treasury Department transferred $87 Billion Dollars from its coffers to J.P. Morgan Chase as repayment from and on behalf of Lehman Brothers. The article was unclear as to a second payment of $51 Billion was paid or not and I assumed that matter would have been cleared up in the follow up story. The author of the original story seemed to have obtained his/her information or at least some of the information from papers filed by Lehman Brothers with the bankruptcy court, as he/she stated that Lehman Brothers requested that the court give J.P. Morgan’s cash advances priority when the court was settling their financial affairs.



Below is a cut and paste of the story ran by Money and Markets covering the reason everyone should be owning Gold Futures, but look at bottom of the total of Bail Monies expended by either the Treasury Dept or the Fed to date and you’ll see the $87 Billion of Tax Payer Money to J.P. Morgan on behalf of Lehman Brothers who the Fed & Treasury said they would not help. Why is there NO NEWS of these transactions in the American Press! If they are not dodgy, then explain them. How does that go under the radar?



The Bear Stearns takeover by JP Morgan, which was midwifed by the federal government (cost to taxpayers: $29 billion)
Special Fed liquidity programs including the Term Lending Facility and Term Auction Facility ($200 billion)
The Economic Stimulus package ($168 billion)
The Federal Housing Administration's scheme to refinance failing mortgages into new, reduced-principal loans with a federal guarantee ($300 billion)
The bailout for Fannie & Freddie (up to $200 billion)
The bailout for AIG ($85 billion)
Last week's decision to block short-selling of financial stocks
The insurance program for money market funds (potentially $50 billion from the Great Depression era Exchange Stabilization Fund)
Direct Treasury purchases of mortgage-backed securities ($10 billion)
Another $300 billion injected into global credit markets on Friday
Add in the $700 billion proposed for the current bank bailout plan, $87 billion in repayments to JP Morgan Chase for providing financing to underpin trades with bankrupt investment bank Lehman Brothers, etc., etc., and I tally up over $1.8 TRILLION ... so far.



My major problem with this is the Fed and Treasury has always stated that they were not going to bail out Lehman, Lehman did declare bankruptcy, but yet the Treasury obviously expended $87 Billion Dollar of Tax Payer Money on behalf of Lehman without bailing them out. They got 80% of AIG for lending AIG $85 Billion Dollars and that was huge news. How did $87 Billion get expended and nobody or very few seem to know about it? Why are we even thinking about giving them another $700 Billion when they are obviously playing games with $87 Billion?



You might want to take a close look at why J.P. Morgan and The Treasury want to keep any big news about Derivatives and CDS exposures out of the news. Remember the Bear Stearns collapse, who had about $30 Billion of Derivate and CDS exposure? Who was the forced buyer? (J.P. Morgan) Who holds 50% of worlds Derivatives and CDS contracts and has exposure to them? (J.P. Morgan) Who just coughed up $138 Billion to assist Lehman Brothers to quietly settle CDS contracts while in Bankruptcy? (J.P. Morgan) Who repaid J.P. Morgan on behalf of Lehman? (The Treasury) Who denied AIG a $40 Billion Dollar bridging loan all weekend and was about to let them fail with Lehman before doing an 180 degree back flip when they found out AIG’s CDS exposures and CDS interconnections? (The Treasury)



$62 TRILLION DOLLAR MARKET unraveling is what really has these guys spooked. $700 Billion is just a drop in the bucket!



Best Regards and Good Luck,



Jim

jb said...

If WM took the 31 billion in writedowns JP Morgan put on would it still be viewed as well capitalized?

Does that count the mass withdrawals that were taking place in terms of deposits that were being moved out or did they still have room despite the deposits going out.

if thy did--then I think you have a right to be pissed. If not, then I think WB and Citibank are possibly next.

Anonymous said...

Given this drastic degradation of seniors, shouldn't the credit rating agencies be out now, marking down all banks with one fell swoop?

If seniors weren't aware of the omnipotent power the FDIC has,they should be sensing it through the ratings given to this debt. Surely a couple notch knockdown has to reflect an action which seemingly violates the 4th amendment?!

Robert said...

I think James is right that the stuff about priority of claims is mostly a smokescreen. The depositors, the seniormost creditors, got paid in full. The next tranche, senior loans, will receive a small dividend on their claims. Everyone else is wiped out.

So your real complaint is either that the price to JPM wasn't a fair market price, which might be true, or that you think WaMu's creditors should have been given time for the market price to increase. I can't really comment on the first argument. Is there any evidence that a better offer was out there, or could have been found? Given the failure of the sale process, I think not.

The latter argument, that WaMu should have been given time for its sale value to increase, is not very good. If the creditors are only receiving a de minimis payment from the JPM purchase, then that means that the depositors and the insurance fund were only a de minimis loss away from being hit by a further decline in market values. Why should the senior creditors have to run the risk of loss when the upside will go to creditors and equity?

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martin said...

Here is a link the bankruptcy filing for WMI.

It seems the holding company claims 32 + billion assets and only 8+ billion debts.



http://seattletimes.nwsource.com/ABPub/2008/09/27/2008209491.pdf

Anonymous said...

I'm sad that you're in this situation, but there're those of us who'd never want to have anything to do with Washington Mutual. When you dance with the devil on a bridge over hell, you shouldn't expect it to be like on the Brooklyn Bridge. WaMu was a reckless, irresponsible institution, lots of sensible people thought that it was worthless. Why would one want to deal with them?

Anonymous said...

Good post. Problem can be simplied to the involvement of politicians. Politicians can and do write/rewrite laws. Even here in the US. Depositors (i.e. voters) versus big nasty bondholders? Eazy choice.

What if the government came in and said, we will guarantee all existing individual, government and small business deposits up to [insert relevant amount - I do not know] for the near future. In the meantime, we will begin selling all assets, replaced with Treasury purchases until and such time that we can reasonably sell or dispose of the bank and/or return all small depsosits. We will assign the losses and they will go, equity, preferred, sub, senior, big depositors, government. And my best guess is that senior would have had a substantial loss, but not the near to total wipe out.

The problem is they tried to do all of that in 1hr. It probably amounts to illegal taking. And unfortunately, I agree that bank financing will never be the same.

sovietsky said...

Wamu actually did run out of money. $50bn of liquidity included brokered deposits which they were no longer able to roll.

dcxavier said...

The first thing JPM did after they acquired WM was take a $31B writedown. So WM really didn't have 7.8% Tier 1 capital. The bank was genuinely insolvent, negative capital, operating only because they had cash in hand. Admittedly, JPM had some negative assumptions about the future of the housing market, but if they come true, senior holders would have been wiped out anyways.

jason said...

any one know how much senior debt issued by wamu? for a holder of senior debt, how much can he get back in percentage?

Anonymous said...

According to WM bankraptcy petition "debter estimates that funds will be available for destribtution to unsecured creditors". Since the filing of the petition the price of the senior notes jumped to $60. Does this mean that senior bondholders will be compensated after all?
If this does not happen, however, can anyone please comment on a possibility of legal recourse.

Kinabalu said...

The worst thing about this seizure was that the parties interested in acquiring WaMu did their due diligence, negotiated with management, then went out the door and around the corner and negotiated with the FDIC. The FDIC had a fiduciary responsibility only to depositors, the power to close the bank, and a great incentive to do a deal that cost them nothing.

JPM can't be faulted for doing a great deal, but the FDIC really went too far on this one. JPMs $31 billion of writedowns is not "instead of" the $19 billion loss estimate of WM it is "in addition to" and almost certainly has some built in profit. Some commentors suggested that WM wouldn't be "well-capitalized" if it had taken that additional write-down. If no tax benefits are considered you would be correct. However the standard at that point isn't "well-capitalized" it's "capitalized at all".

As a common stockholder I knew I had a high risk investment, but if I were a senior debt holder I would be very irate at the way this went down.

larry said...

FDIC is requiring senior debt holders to file written notice of claim. Info is on the FDIC site at:

http://www.fdic.gov/bank/individual/failed/wamu.html

Has anyone filed yet?

wtf said...

This issue is far from over. Just read through some of the articles and posts regarding the bankruptcy on http://wamurape.org and the developing court cases against JPM.

Krissa said...

Here, http://money.cnn.com/galleries/2008/fortune/0812/gallery.market_gurus.fortune/4.html , may be some clues to her reasoning, though.

Anonymous said...

It’s my understanding that the WMI lawyers have requested a Jury Trial. I hope that they (Weil, Gotshal & Manges) get it and examine (under oath); Paulson, Bair, OTS Officials & Dimon. I expect them to go for triple damages when it’s proven that the FDIC knowingly (or out of negligence, doesn’t matter) gifted more than the “whole bank” to JPM(c) (Providian for example). I’m not a lawyer but it’s obvious to me that JPMC’s recent Proof of Claim was a joke and a mockery of Judge Walrath’s order.

Abraham Lincoln (attributed): “You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.”

It’s that simple folks – FDIC/JPM wants you to believe all was well with the fire-sale of WAMU but the truth is: The FDIC has no idea what they conveyed to JPM and as a result has recently resorted to claims of mismanagement and underfunding in an attempt to “thump their chest in public” even though their own sister agency (OTS) was in the WAMU books for months and said WAMU was well capitalized. And JPM while on one hand says (in public mind you) they paid fair value for the assets of WAMU and their purchase of WAMU brought great relief to JPM and its shareholders (you’d have to read JPM’s Shareholders PR), JPM contradicts itself in its own pleadings to the court saying that if there is a reversal of sorts – JPM stands to lose Billions (with an s) not 1.9 Billion…

I hope and hope for a jury trial – the good thing about Bankruptcy court is that they follow the the letter of the law to a “T”. We may not get triple damages but Paulson, Bair and Dimon will be severely damaged by their own words and actions – God Bless America.

Joseph E. McCluskey said...

After 7 months JP Morgan still holds 4 billion dollars, the ownership of which is contested on highly questionable grounds. Imagine someone keeping $250K of your money after you ask them to hold it for you. You ask for it back and they say it is not yours because they have it. The bank holding company is not the bank. The money belongs to the WMI, the holding company. Sheila Bair and the FDIC have admitted publicly that they have no legal right to seize holding companies. Therefore JPM is simply saying, "possession is 9 10th of the law". If this is this true I may have to go into the thieving business too!

Anonymous said...

Unfortunately I lost $84,000 of my retirement fund due to that seizure. Money that will never come back that I had saved from the 1980s. No one cares in our government. It was a total joke, yet banks like Wachovia were in much worse shape.

Anonymous said...

Obviously this whole fraud/travesty isn't over. The case is ongoing. An equity committee has been appointed by the US Trustee.

The illegality of this seizure was staggering and the truth will see the light of day in the coming weeks.

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.