WaMu: Liquidity Options Running Low

Posted on July 27th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

WaMu stock price keeps falling. From $40 per share less than a year ago to $20 four months ago to $3.03 a couple of weeks back before the SEC and Treasury ganged up to prop up the markets yet again.

The SEC, FDIC, OTS, bubblevision and various other media sources are in a big finger pointing contest, blaming everything from negative press to bloggers and short sellers for WaMu’s obvious struggles. I blame WaMu. There is solid evidence everywhere that WaMu is struggling. The stock price plunging aside, the massive amounts of the most toxic of loans ever created on their balance sheet is well-known and what is at the heart of their troubles.

In an attempt to put out some good news on Friday WaMu revealed they had an extra $10 billion in “capital,” which said it bolstered “liquidity” to more than $50 billion this month. Liquidity refers to cash, unencumbered securities that can be sold easily, lines of credit with the FHLB and access to the Fed’s discount window primarily. While “an extra $10 billion” and “$50 billion in liquidity” may sound great in the headlines the funds came from borrowings from the FHLB, the Fed’s discount window and a few large repurchase agreements.

When I first read this press release from WaMu, it reminded me of the news in January 2008 when Countrywide was collapsing. The story was that Countrywide had “$50 billion in ready-liquidity” and it was being re-run every 10 minutes on bubblevision. That news popped up their stock price for a few weeks and then it all fell apart again.

It could just be me, but I don’t think access to more loans qualifies as good news. The Fed only takes good collateral and FHLB in many cases puts blanket liens across all of their collateral so this “extra” $10 billion may have come at a hefty cost.

Keep in mind earlier this week WAMU’s Treasurer Robert Williams in an interview with the New York Post said “The banks raising of more than $7bn from TPG has made borrowing from the Federal Reserve’s short-term borrowing window unnecessary.” Did he change his mind literally the next day as WaMu admitted that part of the extra $10 billion cushion absolutely came from Fed Short-Term borrowing window?

Many investors feel the same way and question whether the FHLB will continue to open their lines of credit to WaMu.

Look at what is still happening to WaMu Credit Default Swaps. The cost of protecting WaMu’s debt soared in the past week. This speaks fairly loudly.

Through sources, I have learned that the San Francisco office of the FHLB is currently reviewing all of their WaMu collateral they lent against. The San Francisco office has $51.5 billion of advances outstanding to WaMu as of March 31st, which is the second largest amount to a single bank in the entire system. WaMu has admitted this is happening but won’t make any comments about the FHLB’s opinion on the quality and value of their massive portfolio “exotic” loans such as Pay Option ARMs, subprime fixed and ARMs, HELOC’s and intermediate-term ARMs it lent against.

However, sources inside the FHLB have said they are “concerned” with the quality of their portfolio, and rightly so. It is absolutely no secret to anyone that Pay Option ARMs, HELOCs and subprime loans in bulk are worth pennies on the dollar and have not had a decent bid in well over a year.

Key to this story is next month’s regularly scheduled FHLB annual audit by the Federal Housing Finance Board (FHFB), in which the FHLB has to prove that the money they lent to WaMu is backed by collateral buck for buck. If it is not, they have the right to ask for more collateral.

Their regulator pointed out that the FHLB system “has never lost money on our advances.” They have achieved this by over-collateralizing their loans. But it takes a lot of overcollateralization when you are dealing with Pay Option ARMs, subprime and HELOCs worth pennies on the dollar.

Regulators at the FHFB explained that based on the credit worthiness of the bank that they could have a blanket lien on WaMu’s assets. But if not and they find that their collateral is not sufficient they can ask for more collateral to cover the deficiency, which is essentially a margin call; or they can swap out the designated “weak” collateral with good collateral such as US Treasuries, Agency MBS or other investment-grade securities.

Whatever the case, $51.5 billion in loans collateralized by the most toxic of assets may result in WaMu having to put up more “assets” to keep their line in good standing. Either that or Paulson will just put out a proposal waiving the pay back of all loans to the FHLB until Jan 2009 and all is good!

In all seriousness that this story deserves, an FHLB executive said “when regulators give them word that there are liquidity concerns they go and get specific collateral, actually taking individual notes and having securities moved to the FHLB. They over-collateralize their position in case the market moves against them.” They have a lot of catching up to the market to do, that’s for sure.

Keep in mind, if the FHLB were to seize assets, that would likely shrink WaMu’s line of credit with them, which they claim is part of the current “ready-liquidity.”

Many, including yours truly, have been all over WaMu for their massive portfolio of toxic loans since late 2006 trying to raise red flags in hopes some regulatory agency would understand how ugly it could get when so much of WaMu’s “assets” are tied up in the most toxic mortgage loans ever created.

In reviewing their balance sheet and loan portfolio, I do not see what the FHLB could seize to get whole. Below are two spreadsheets of WaMu’s world. The first is the consolidated Balance Sheet and the second is their Loan Portfolio breakdown. I have made notes in red on each sheet. Other than their $36.668 billion in cash and cash equivalents (maybe), I don’t see much of their $226.99 billion “assets” secured by real estate that can be easily sold if the FHLB were to seize them.

WaMu Consolidated Balance Sheet Detail

WaMu Loan Portfolio Breakdown

As WaMu tries to make the market feel confident in its liquidity with blanket statements of how it raises capital – persons close to CEO Kerry Killinger say, “In the last two weeks I’d characterize him as being despondent. I think he’s really at a standstill not sure of his next move.”

Best, Mr Mortgage

<>

88 Responses to “WaMu: Liquidity Options Running Low”

  1. What we need is MORE regulation, not less.

    These money market players are all hyperleveraged. That’s why we are collapsing in slow motion. Bear Stearns was 30 to 1, FRE and FNM are around 60 to 1.

    Glass Steagall brought stock market leverage under control. Now you need 50% margin to trade. It was 2% margin in 1927. They fixed that.

    Unfortunately the Bond and Derivatives markets DWARF the stock market in size. We are talking 480 TRILLION in value.

    Yet these players are maxed out at 30 and 50 to 1 margin, i.e. only putting up less than 1 million dollars to control 100 million.

    That’s why we need MORE, not less government regulation.

    The stock market behaved very nicely for 72 years after they installed the 50% margin requirement.

    Now we need MORE regulation to reduce credit market leverage.

    It’s that simple.

    Every trader makes bad bets sometimes. But when you HYPERLEVERAGE it at 60 to 1 and cause a systemic crash, sorry, party is over and the Federal Reserve is going to come down HARD on these 32-year old twits that caused the crash which will result in tens of thousands of excess deaths worldwide over the next decade.

    Tony

  2. Tony

    You state that the Federal Reserve should come down
    hard on the people that caused the problem. I would
    like you to look at this from another angle.

    “The Federal Reserve System (the Fed) has been the
    central bank of the United States since it was
    created in 1913. The main purpose of a
    central bank is to regulate the supply of money and
    credit to the economy.”

    Once you understand that this was a money supply
    problem, too much credit extended, then the problem
    goes squarely back on the Federal Reserve.

    The Fed allowed and should have arrested this problem
    but they did not. I would not use the excuse that it
    was Wall Street banks that took over the money supply
    because it (the money supply) is still under the nose
    of the Federal Reserve. This is where the final
    responsibility lies. Once you recognise this as a
    problem of too much credit (too much money into the
    economy) and hence money supply, all finger pointing
    should be going to the Federal Reserve.

    Let’s review one more time.

    “The main purpose of a central bank is to regulate
    the supply of money and credit to the economy.”

    This is where EVERY finger should be pointing and
    somehow the Fed is getting through this scott free.

    If ever there should be a demonstration, it should be
    held in front of the 12 Federal Reserve Banks!

  3. […] the credit default swap market has recently been sounding the alarm over Washington Mutual (see WaMu: Liquidity Options Running Low, Credit Default Swaps on WaMu, Uninsured Depositors at WaMu Begging for Trouble, or Death Spiral […]

  4. Just a bit of an ‘out there’ observation.. but ol’ Osama Bin Laden has got to be pretty pleased with himself – it seems to me that the ‘real’ damage of 9/11 wasn’t the collapse of the twin towers, or the deaths at the Pentagon, or in the other plane.. but in the collapse of the US financial system as they (Bush et al) took the bait. They got involved in Iraq to the tune of $12 billion a month.. and dropped rates thereby creating an even larger credit bubble which ultimately burst, causing major pain across the board.

    Of course, its just an observation from a little fish in a very big pond.

  5. Oh and BTW guys, this is the mission of the Federal Reserve. I hope that in reading and full examination of the problem, you will see where responsibility lies. What you are witnessing is what happens when credit is expanded at too rapid of a rate and it collapse on itself.

    Not home buyer, not loan officer, wall street banks, yes there are issues and I have left out some positions in the chain of failure. In the end, this was a Central Bank failure.

    Mission

    The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.
    Today, the Federal Reserve’s duties fall into four general areas:

    conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates

    supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers

    maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

    providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system

  6. Covered Bond Market… HERE WE COME!!!

    In what is yet another totally short sighted and manipulating move, the Government has pushed there silly stupid little incompetent foot in the door and came up with yet another hair brain plan for our lenders to utilize in order to keep the pyramid scheme working.

    In yet another highly leveredged move that will cost the Tax Payers a bundle, we now welcome Covered Bonds to the show.

    When will it end? Good question, but you won’t like my answer… When each and every Tax Payer is totally BROKE and not until then!!! The top 2% will control evrything and the bottom 98% will eat when they are told too. VERY sad… truly sad indeed.

    Mr. Mortgage you must do a story on this, as most readers probably have no clue how bad this is or even what it is… Many certainly have no clue at how terribly bad this move could end for the Tax Payers in this country!!!

    Just more of the same folks…

  7. Bert-

    I thought we lived in a democracy. Congress amended the federal reserve act so that it also promotes full employment in an environment of price stability.

    That’s the law.

    Remember the sage advice of John Templeton. If 95% of the people are positive something is going to happen, bet the other side.

    95% are betting on inflation.

    That’s wrong.

    What is happening is consistent with absolute liquidation of world’s financial system.

    Look at how price of gold and now oil are tanking consistent with deflationary burst.

    I’m sure I can’t convince you of this. Get back to me in two years.

    We are falling off a cliff in slow motion.

    Just my opinion.

    Tony

  8. Tony, it is the Governments intervention within free markets that is the problem. Reagan was right about deregulation, but it ONLY works if the Government stays out of things!

    We do NOT need more laws, more rules and more regulation, but rather what we need is to be left alone to have free markets work by themselves. Do you honestly think that Fannie and Freddie would have gotten so big if not for their implicit guarentee on their paper and the lower percentage of interest that they pay as a result? Please… NO way on earth!

    We are partly in this mess because of regulation and involvement of big brother. Markets work themselves out if left alone, but always respond to outside interference in the manner that best suits them. Can you blame them? Without the BS that the markets must deal with on a regular basis, because of this interference changes everything at a moments notice. That causes wild swings and unintended moves of desperation by many institutions that otherwise would not have acted.

    We are producing a self full filling prophecy of destruction…

  9. I see Merrill reported a $5.7 Billion loss – but something stood out in the news:

    Merrill said it sold $30.6 billion of CDOs to an affiliate of the Dallas-based investment firm Lone Star Funds, resulting in a pretax writedown of $4.4 billion. Merrill will provide financing for about 75 percent of the purchase price, according to the statement.

    So Merrill is financing 75% of the sale of their CDO’s to Lone Star? Isn’t that like Nortel providing the financing on products to dot.com companies? A bit rhetorical here but.. isn’t this dumb?

    I know they aren’t alone in doing this.. but jebbuzz..

  10. 25% of something is better than 0% of nothing…

  11. the covered bond market deal is no biggie. Paulson knew Merrill was going to drop a shit bomb today and had to come up with something. They are out of bullets.

    I am putting together a story for all this stuff but the list of topics just keeps getting larger.

  12. Stu the free market types said that these sigma 4 events would occur only once every 100,000 years. They are actually happening every 10 years and each one is far worse than the one before.

    Capitalism is in jeopardy. The central banks aren’t going to let theories that failed the test of the marketplace threaten the foundations of society itself anymore.
    Time to reduce leverage, whether the free market types like it or not.

    The central bankers are PISSED that trillions have been lost for no reason and tens of thousands will die in the coming depression.

    Time to tighten up. WE NEED TO REDUCE LEVERAGE.

    I suggest you get ready.

    Just my opinion.

  13. Thanks Mr. M.

    Tony, I do agree with you totally on inflation as YOU deem it to be. Prices are coming down everywhere and on everything. Even though it cost more to produce, in order to sell it you must make less per sale. Companies trying to maintain their profit margins of years gone by are only asking for BIG trouble. It won’t fly and they will go under if that is their business model. People are totally tapped out and will not stand for price hikes or they will just simply not purchase from that store any longer. Many businesses realize this and as a result are not raising their prices, but others are not and will ultimately pay the price for their stupidity.

    Inflation is however the printing of money (or increase of credit) and that is where we differ in our view. This is very much alive and well and will continue for quite some time. The Government is about to turn the printing presses on full speed and it will be awhile before they are turned off. That is TRUE INFLATION in it’s ultimate form my friend!!!

    Unless or until interest rates rise to say… 4%-5% immediately and then ultimately 7%-8% then we will continue to add to the price tag of this mess…

  14. Tony, again you miss the one vital point that disrupts your entire premise… INTERFERENCE!!!

    NONE of this would have occured if not for Government interference and regulation. Free markets work wonderfully on their own and have since the beggining of time. ONLY and I mean ONLY when their is outside intervention that changes the course of natural events from happening do we get into trouble. Forces from outside the rhelm of the issues at hand change the natural occurance from taking place and makes decisions being made unrelated to what the decision should be if made freely, but now becomes a decision based on new policy or new regulation. That changes instantly the entire landscape and the, up until now, very clear picture that was originally drawn up. Not good…

  15. Tony Buzan

    I am fully aware that the Fed was charged with full
    employment. At the same time, they have their
    primary responsibilities. I also understand that the
    disapearance of capital is a monetary contraction. We both obviously know what that means. We are in
    the most stupid situation here and government is
    going to screw it up worse. Just watch as they try
    to “fix things”.

    When we went off the gold standard we lost our
    ability to adjust our currency to remain competitive.

    Because we were so “awesome” we went to the “dollar
    standard” This is the end result.

    We can trace this all the way back to the “London
    Gold Pool” where our denial started.

  16. Stu-

    I’m convinced that HYPERLEVERAGING is a key factor in this crisis. If it takes more regulation to raise the margin requirements, so be it.

    Bert, you state the “Primary” responsibility of the Fed is something other than full employment. This is false. There duties of full employment are just as important as price stability. That’s just the way Congress wrote the Humphrey Hawkins legislation. The Fed has no choice. They have to treat both equally.

    It’s the law.

    Tony

  17. Here is my view:

    In July of 2010, two years from now it will be clear to all that we are in a BEAR market for commodities (that includes gold and oil), real estate, and stocks.

    The legendary Henry Kaufman (known as Dr. Doom when he was head of research at Salomon Brothers) stated that when we enter a time of complete liquidation of the world’s financial system the ONLY place to park your money is in the safest bonds you can find.

    And this is exactly what is playing out. Gold and oil are collapsing, as well as real estate and the stock market.

    And government bonds continue to soar.

    That’s my opinion.

    Let’s revisit it in 2 years.

    tony

  18. Tony Buzan

    While you can cite Humphry Hawkins, for some reason, the Federal Reserve states their responsibilities as follows. If the Fed states this as thier responsibility, then by the Fed’s OWN MEASURE, they have failed. If the Fed does not consider this thier responsibility, then they should not so state.

    http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm#3

  19. This is the first bullet point from the link you cited:

    * conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices

    It says they are pursuing FULL EMPLOYMENT and Stable prices.

    Precisely as I said. Equal weight to both.

    Because they have no choice. It is the law, precisely as set forth in Humphrey Hawkins.

    http://en.wikipedia.org/wiki/Humphrey-Hawkins_Full_Employment_Act

    They are simply following the law Congress passed.

    They have no choice.

    It’s the law.

    And according to Antonin Scalia, you get slapped down hard if any entity created by Congress does not follow the law.

    And Scalia is no socialist.

    Tony

  20. And what about Wachovia ?

  21. Index data delayed 15 min.
    DJIA 11,348.47 +217.39
    NASDAQ 2,315.84 +51.62
    NIKKEI 13,159.45 -194.33
    RUSSELL 714.46 +18.35
    NYSE 8,375.01 +114.82
    TSX 13,289.51 -14.45
    USD 73.41 +0.75
    Crude Oil 121.49 -3.24
    Charts…

    Well well well Ain’t that strange. The Saudi shit bags to the rescue. This is not accidental specially after a horrendous loss by Merill Lynch. I have noticed the same pattern two weeks ago. I like a lot the US dollar explosion on real bad news. It’s soo funny. Republican shitbags and their Saudis buddies. It’s more complicated than you think M. Mortgage. Hammer oil while printing like crazy ! These bastards have associates across the world.

  22. I agree with Tony Buzan as to the big picture. There is no way that the government can print enough money to account for the asset deflation that has already commenced in the housing market and will soon spread to commodities of all kinds. We already see this process beginning with oil. Remember, the recession is just taking old. Note also, as Bob Brinker often says, that the impact of high oil prices is deflationary. One might say the same about commodities prices generally. He’s right, and we are already seeing profound changes in the behaviour of consumers, changes that, going forward, will decrease demand significantly.

    After the bursting of the real estate bubble of the late 1980s, Japan pumped money into its economy for at least a decade, and deflation still worked its way through their economy like an uncontrollable cancer. The same thing is about to happen globally. The explanation for this seeming paradox is, as Tony says, the use of leverage, global financial institutions are being compelled to implement a model of credit and debt austerity, because there is no alternative, investors and depositors will destroy them if they don’t. The Federal Reserve lacks the resources to contain the consequences of the unwinding of leverage in a system where hedge funds were allowed to purchase mortgage backed securities with $32 in borrowed money for every $1 of investor funds, as occured in the Netherlands.

    Stu’s Peter Schiff quote is $100 spot on as they say in Britain. Invariably, when a financial crisis first emerges, the malefactors dictate the contours of the response to a disturbing degree. That’s what we are living through now, the type of government interventions, like the Bear Stearns bailout and the proposed assistance to Fannie Mae and Freddie Mac, transactions that Joseph Stiglitz has rightly criticized as lacking transparency, lacking accountability and failing to provide for public upside benefit from the expenditure of public funds. Funds are being channeled to institutions to keep the malefactors afloat, instead of being directed towards consumers to put in a floor of demand, and the outcome is likely to be extremely unpleasant. Only Maoists will celebrate.

  23. Good points Richard.

    Additionally Japan is a perfect example of a nation where deflation occurred despite having a fiat currency and fractional reserve banking. The two concepts are BY NO MEANS mutually exclusive.

    Tony

  24. Excellent post Richard!

    While the government continues to do all sorts of silly stupid things to prop things up, it is the free markets that will do what they must to succeed.

    That is why most all of their efforts to date have proved worthless…

  25. Tony Buzan

    Remarks by Governor Ben S. Bernanke
    Before the New York Chapter of the National Association for Business Economics, New York, New York
    October 15, 2002
    Asset-Price “Bubbles” and Monetary Policy

    http://www.federalreserve.gov/BoardDocs/Speeches/2002/20021015/default.htm

  26. I’m very familiar with this. What is your point?

    Tony

  27. This post certainly raises a lot of red flags concerning WAMU. I would consider taking our money out of WAMU and into, perhaps, either BAC or CITI but our house that we moved into five years ago was financed through WAMU. Is it true that my wife and I have little recourse except to remain with WAMU because our mortgage is through WAMU?

  28. perhaps others can answer your question more authoritatively, but I believe that the answer is NO

    first off, my mortgage is with Citimortgage, while I bank with a local credit union

    second, the likelihood is that WAMU sold your mortgage within 30 days of delivering the money to escrow for the seller

    third, you should think about why you want to move your money from WAMU, upon a failure, you should have FDIC protection for an amount up to $100,000, but there are legitimate reasons to go elsewhere anyway, a revulsion at how WAMU did business, for example, the way it pushed these toxic loans, and also, just comfort, even with FDIC protection

    someone upthread suggested that the SEC list of 19 banks which can only be shorted under certain conditions indicates that the Federal Reserve has selected them for ultimate survival, and wants them to receive capital from vulnerable institutions like WAMU

    it’s not a totally implausible notion by any stretch and BAC and CITI are on that list, but even so, caveat emptor

    personally, I’d also look into your local credit unions, I haven’t heard that they have been caught up in this so much, for example, many CA state workers use the Golden 1, but again, you need to do your due diligence

    but, this is an amateur’s point of view

  29. […] liquidity options for WaMu are running low, though I’m sure the government won’t let that one unravel, […]

  30. They are far more likely to let WM unravel than many others. WM is NOT a primary dealer in government securities and is not part of the inner circle.

    BS was a primary dealer. As a primary dealer, it was a principal “Underwriter” for the open market operations of the Fed and in daily contact with the NY Fed every morning.

    WM is (and never was) in such a position.

    Here is a list of primary dealers.

    http://www.newyorkfed.org/markets/pridealers_current.html

    Tony

  31. […] things he points out are very similar to the research piece I released last week called WaMu: Liquidy Options are Running Low. To get a great overview of both WaMu and Wachovia, read both. -Best Mr […]

  32. […] Mortgage’s Guide to the TRUTH! » Dr Martin Weiss Confirms Views on WaMu and Wachovia on WaMu: Liquidity Options Running LowMr. Mortgage’s Guide to the TRUTH! » Dr Martin Weiss Confirms Views on WaMu and Wachovia […]

  33. Hi Guys,

    I went through WAMU’s Q2 unaudited balance sheet this evening with an accountant friend. In our opinion, when assets are marked to market, they are bankrupt/insolvent. In fact, there really isn’t much wiggle room. We didn’t even have to spend much time on it.

    Given the provisions TPG put on the purchase agreement, I see no way that WAMU can make it through this thing in one piece. Seriously.

    Can anyone paint a scenario saying otherwise? Honestly, I would love to hear it, because I do not see any light in this tunnel. What would they need to do? Get a $15B infusion from a Sovereign Wealth Fund, and then pull a Merrill on top of that?

    In my opinion, these guys are totally gone. I’m sick of all of their flip-flopping in the news/financials. There are strong banks out there that never made these toxic loans, and that are well-positioned to benefit from this whole debacle, if only we give them the chance. Those banks, collectively, will also benefit our economy.

    Great posts… I am new to this board, and really appreciate all of the comments and insight!

  34. In case of WaMu failure or chap 11, will its preferred’s now yielding 16% fare the same fate as the common, i.e. go to zero ? as I believe preferred stock is lower than Wamu debt in asset hiearchy

  35. […] WaMu: Liquidity Options Running Low […]

  36. […] WaMu: Liquidity Options Running Low […]

  37. […] Full Analysis Here w/ WAMU liquidity spreadsheet […]

  38. […] WaMu: Liquidity Options Running Low (87) Posted on July 27, 2008 3:18 PM […]

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