Tuesday, September 23, 2008

How much does it take to get the FDIC to take over a bank?

Last Friday’s FDIC event – the takeover of Ameribank – has given me some thought.

It’s a small bank – it has 8 branches, 112 million in assets and 115 million in deposits. 

NPLs were 5 percent June last year.  They were 32 percent at year end and 45 percent by June 30 this year.

45% NPLs is what it took to get an FDIC event.

There is much speculation (see WSJ, Calculated Risk etc) that WaMu might be taken over by the FDIC.

Last I looked (ie last quarter) the WaMu NPL over total assets were 3.62 percent, up from 1.29 percent a year ago or 2.17 percent at year end.  I am not comparing apples with apples.  The NPLs WaMu quotes are against total assets, not total loans – but they are still only in the low 4s.

Now there is plenty of room for NPLs to rise.  There are a lot of option ARMs in WaMu’s book –and NPLs have been rising quite consistently and in my view will continue to rise. 

But if you take the FDIC on form its not likely to confiscate WaMu soon.  It waited more than six months AFTER Ameribank reported 32% NPLs for a takeover.

In the blogosphere I am in a (small) minority of believing that WaMu will probably be OK in the end.  I know its gonna get a lot worse.  But the FDIC seems to take a lot to act – and I am not sure that that much happens at WaMu. 

Then again WaMu might run out funds – and that would force the FDIC hand.  So far there is little evidence of that but…


Anonymous said...

But WaMu is under the microscope.

John Hempton said...

Agreed. And that is a problem.

WaMu has told us (new management) that they have enough cash until next year or whenever it is...

That means they run out of cash then.


Stephen said...

Tomorrow WaMu will increase the interest rate on its online savings account to 4.00% APY... Not a good sign to be paying up that kind of rate in this rate environment.

Liquidity and Capital are the drivers of an FDIC takeover. Not NPAs... Oviously NPAs are an indicator or coming capital problems... but if you have or can get the capital to absorb the losses, the FDIC will not act.

Also comparing such a small private bank to a large public one brings up some other issues. A private owner or group owners of this small bank may have pumped in more capital to buy time. Something that wouldn't and/or couldn't happen on WaMu's scale...

John Hempton said...

I agree its not a good sign. Ameribank had more deposits than loans. Liquidity was NOT a problem. Solvency was.

At WaMu it has more loans than deposits. Liquidity is the problem now not solvency.

Solvency MIGHT be a problem in the future.

But if they can sell mortgages to Pauslon liquidity ceases to be a problem.

This is a VERY dicey situation I agree.


Anonymous said...

New York, September 22, 2008 — Moody’s Investors Service downgraded the financial strength rating of Washington Mutual Bank to E from D+. Additionally, Washington Mutual Inc. preferred stock was downgraded to Ca from B2. All ratings of Washington Mutual Bank (deposits and senior unsecured at Baa3, subordinate debt at Ba1, short term Prime-3) and Washington Mutual Inc. (senior unsecured at Ba2, subordinate at Ba3, preferred at Ca) were placed under review for downgrade.

Anonymous said...

There is more to a bank than just accounting. There is the trust and confidence of depositers. This is the reason there is so much talk of FDIC action. If people run from this bank it will shatter confidence everywhere.

John Hempton said...

I am acutely aware that there is more to a bank than accounting.

And the prefs - trading at 30c in the dollar - were C rated in my mind when I purchased them.

The definition of the ratings gives that away:

B (the official rating) means that they will pay back in most circumstances. C means things need to go right for them to repay.

But lets take the Paulson plan as a given. [I hate the plan - but that does not mean I will not consider it.]

The PP has Paulson buying mortgages from insitutions. If WaMu can sell its mortgages to Paulson then it will be liquid.

Depending on what price it sells them and how many go bad it will be solvent or not.

My view - the Paulson plan stinks. But does that mean you shouldn't trade it?

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