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 over-collateralization 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

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88 Responses to “WaMu: Liquidity Options Running Low”

  1. Great analysis Mr. Mortgage, (Hedgie). It seems as though WaMu is at the epicenter of the next unfolding wave in this collosal mess.

  2. [...] Read the rest of this great post here [...]

  3. [...] Original post here [...]

  4. Great detailed follow up Mr. Mortgage to the ‘WAMU Whacked’ NY Post story this week.

    http://www.nypost.com/seven/07252008/business/wamu_whacked_121470.htm

    Your insights are some of the best I’ve every read. Thanks for getting to the heart of this issue.

  5. As always Mr. M. right on top of things!!!

    WAMU is done, as I have said myself recently. Anyone with 100K plus in their care deserves to lose it at this point! This is ONLY the beggining… We tax payers will cover this bank and MANY more now… YOU FOOLS!!!

    Why do the Sheeple still sleep???

    Will it take blood in the street? Will it take loved ones close to you to see the light? Will it have to happen to YOU??? I just don’t get it!!! I really don’t… How can such a blantant crush on every tax payer in America go through with NOTHING in the way of defense??? HOW can Americans sit by and let THIS happen??I just don’t get it!!! HOW? WHY?

    Are YOU ALL truly that STUPID??? ARE YOU ALL THAT NAIVE??? PLEASE!!!!!!!!!!!!

  6. Stu,

    I’m glad to know that somebody who is obviously smarter than anybody else on the planet is on this. Good for you & get over yourself.

  7. Thanks for posting this informative article.

    When you stated that:

    “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.”

    it reminded me that it is the AUDITED financial reports that come out once a year that are so very important. With the quarterly earnings reports, which are unaudited, they can get by with all sorts of accounting tricks, but AUDITORS are a different story. That’s why we had such a dramatic downdraft in January and why I expect next January to be memorable.

    What day in August will the FHLB audit be released?

    Thanks,

    Tony

  8. Tony – they don’t have to release anything. I must clarify this further. The FHLB continually ‘audits’ its borrowers (banks). What is happening now is that the FHLB’s auditor is auditing the FHLB and they have to prove their loans are backed by WaMu collateral dollar for dollar. It is all about the FHLV vs WaMu now.

  9. Any chance someone knows what the following home just sold for?

    1022 44th St
    Sacramento, CA 95819

  10. House a’ CARDS, House a’ Cards I tell you.

  11. So my WAMU debit card expired 6/08. The original automatically issued replacement card never arrived. I ordered another replacement card a few weeks ago and it did not arrive. I then ordered another replacement card about 2 weeks ago, still has not arrived. I ordered another replacement card on Friday. We’ll see if I get it….

  12. It doesn’t make sense to me that if WAMU has 40 billion in great collateral why they would have to go to the discount window for 10 billion more unless they were worried about this upcoming audit.

    I guess I’m just stating the obvious.

    Tony

  13. I use WAMU as my primary online savings and checking account. I’m under the FDIC limits, but it is the bulk of my daily “working” money to pay bills and live. Is it worth moving my money at this point? All the remaining banking alternatives out here in SoCal are a nightmare Who’s Who in this financial domino disaster. Where do I stash the cash? BAC, Wells Fargo, Downey S&L, Wachovia, Citi? I also have an online HSBC account. I’ve heard little to nothing about their current liquidity, but they always offer among the highest available online rates (like Countrywide, E-Trade and WAMU), so now that raises a red flag in my book. How’s HSBC holding up? How safe are the smaller neighborhood banks like Hanmi, Saehan, Carthay? Anybody have a patent yet on a safety lock for mattresses?

  14. Its all pretty clear… anyone that dabbling heavy in Option ARMs is doomed. Who cares what the situation is today, if they are on the ropes, in 6 months they will be taking a dirt nap. As Option ARM resets are coming at dramatic increases, more and more people will walk from these loans. Can WAMU withstand another 5% in non performing loans? Its all pretty simple… all of us in the business see it coming. If not now… a few months from now…

    My Father always told me… “make your best loss your last one”… unfortunately, the likes of WAMU, Downey, Wachovia and the whole host of characters are pouring on more losses instead of just getting it over with.

  15. Great post MM. What’s FDIC going to do when WaMu wipes out their remaining assets? So IndyMac is going to cost FDIC “$4-$8 billion”….and they only had $18b of insured deposits as of March 31st I believe. Loss rate of 33%. WaMu has nearly $150b of insured deposits. Loss rate of 33% yields $50 billion hit to FDIC’s reserve fund.

    How much does FDIC have in the kitty? $50 billion. BEFORE the indymac-related losses……

    Another day, another bailout.

  16. I will stick to WAMU, BAC is a piece of junk. Its service is aweful.

  17. Great post Mr. Mortgage, I’ll link it. JPM was actually thinking of buying WM back in January, I guess Bear Sterns was a better buy.
    http://www.nypost.com/seven/01122008/business/wamu__jpmorgan_in_talks_935557.htm

  18. Nate G

    “Where do I stash the cash? BAC, Wells Fargo, Downey S&L, Wachovia, Citi?”

    I would go back to the non shortable bank list the SEC put out. They put that out for a reason so that deposits would flow to those banks so that they would be well capitalized. IMO Sometimes you have to take the hint. Here is the list with the foreign stuff etc removed along with fannie and freddie.

    Not a big list after you take out the brokers. Lehman will likely get taken by JPM due to the derivative issues. Based on this list, I would think either BAC or Citi would be OK. At least you know the Fed is going to stand behind them. Since we are already hearing of reports of money flowing to BAC, that would likely be a good choice. This is all my opinion.

    * Bank of America Corp (NYSE:BAC – News)

    * Citigroup Inc (NYSE:C – News)

    * Goldman Sachs Group Inc (NYSE:GS – News)

    * JPMorgan Chase & Co (NYSE:JPM – News)

    * Lehman Brothers Holdings Inc (NYSE:LEH – News)

    * Merrill Lynch & Co Inc (NYSE:MER – News)

    * Morgan Stanley (NYSE:MS – News)

  19. I just put in a transfer this weekend to take my $100k from Wamu and put it into BofA.

    I know it is FDIC insured at Wamu but why bother at this point. Wamu is so close to the point of death, and BofA is now offering 4.11% CD’s that it’s not worth it any more to keep my money with Wamu.

    Seeya Biatch.

  20. I think we are not at the bottom yet,” National Australia Bank CEO John Stewart said yesterday on the Australian Broadcasting Corp.’s Inside Business program. “Things are going to get worse. There are more than 18 million vacant properties for sale in the U.S. just now. That’s more than the whole housing stock of Australia.”

    they said their US holdings (MBS’s) are basically worthless.. wow

  21. I also have been down on Wamy since 2006, very profitably. I made some money, true, but what really concerns me is how incompetent and greedy current Wamu manement is. I can only say that I hope they are fired very soon, and the great employees at Wamu and I know a few, can be freed to do what they do best. Serve the public as a great west coast bank.

  22. 18 million vacant sounds like he was grandstanding US problems so that their getting stuck with the bad paper seem not so bad…..

  23. Now to you think that a little bastard from CNBC or Bloomberg will be trying to interview this banker from Autralia. No way. Nice little trick. The FDIC declares two bankruptcie on Friday when markets are closed. It changes nothing. We wouldn’t want a bank run on Washington Mutual ? They will probably declare it next time at 2 AM on Sunday morning.

  24. FDIC seizures always occur on Friday after market.

  25. Truth Doctor, I apologize for my outburst, but I get so angry over this mess. Time after time these morons that are supposed to represent the people and make decisions that have the peoples of this countries best interest at heart do quite the opposite.

    It truly amazes me what I see coming out of Washington these days. I honestly don’t know how we got this far off track with barely a word spoken from the MSM or anyone of importance. It further amazes me that with all the people in radio and television that truly have a handle on things, these things still go on. This latest “Bail Out” bill passing is the icing on the cake for me. It shows me that perhaps we really can’t make a difference. It shows me that even though it was the worst possible thing to do at this point in time for our country in my opinion and many others, it happened anyway and on a Saturday no less. It shows me that, not only are our politicians, for the most part clueless and incompetent, but they are also reckless with abandon. Our elected leaders are pulling this country down and right in front of all of our eyes to see, yet not a word is spoken on the national scene as a whole.

    Mr. M. is right as usual and so are many other bloggers, but again only a few really listen and obviously really truly care from the looks of it. I called and wrote every person I possibly could on this to say “NO” and I am sure many of you reading this post did the same, but all for not. This machine, if you will, has gotten so big and so fat, dumb, and happy that it now moves almost by itself. The only thing it needs is money and it can obviously print that at will, so how do you stop it? How do we slow it down at least? What can we do at this point? I don’t see many options left for the American people to force change in our Government short of elections.

    We need behavioral changes by the people in this country to be sure, but that needs to be implemented over time and with a media presence helping to force the issue. It is a massive undertaking to move massive amounts of people in a different direction. We need to save and not spend, and we need to do more for one another and not revel in the misfortunes of others as we often appear to do. The news is always about what bad things are happening around the country. Never do you see the MSM report on solutions to these problems we face. They just report on them as they happen. No that the role of the MSM is to be the problem solver of today, but if all your going to do is report problems then don’t you have some responsibility to offer some solutions to help get these problems, that you so often report on over and over again, under control? Is there no moral obligation for this industry as a whole?

    I wish we could wave a magic wand and make things all better, but we can’t, so what is plan B? If what is happening now is the solution then we are all screwed in my opinion. The mistakes being made at the Fed and in Washington are only serving to make matters worse. Their decision to get involved and to “Bail Out” every company that they possibly can is only making things worse and prolonging the inevitable pain to us all. It is heaping a huge financial burden on the tax payers of this country and many future generations as well. By working to stave off the inevitable down fall of housing and the inevitable down fall of many banks and lenders in this country is only serving to create more of a mess and a much larger mess in the future.

    Free market societies are meant to operate on the basic principle that your actions will determine the outcome of your success and / or failure. Never was there room for Government intervention to redirect the course of action that would take place by these successes or failures. Once that happens it changes the natural outcome that should take place and the ensuing chain of events is disrupted as well. As more of this happens the chain of events get so clouded and the natural steps that should occur are so disrupted that decisions start getting made in a vacuum with little to no regard as to why. Decisions are made to simply make them and without reason or any judgment given to what will happen as a result. This is where we are at now in this country in my opinion. We have so skewed the natural economic forces at work by all of these decisions being made that it is virtually impossible to have an outcome that is not one of utter failure. It is almost as if we have to fail in order to allow things to get back on track which doesn’t make much sense on the surface, but is a self fulfilling prophecy at this point. We are in too deep to change the damage that has been done at this point, so lets collapse and try our best to start over is the only likely solution left.

    My only hope is that the collapse is not so big that it engulfs us all to a point were we destroy ourselves in the process. That our future generations can still pick up the pieces without too much damage to them as well. That we as a nation will get stronger through this process so as not to allow this sort of run away bureaucratic train wreck from ever happening again.

  26. Stu-

    The word “bailout” is bandied about a lot.

    17 months ago, Bear Stearns was around 170 a share. If you held thousands of shares and were forced to sell them at 10, I’m not sure you would feel “bailed out”.

    Similarly, shareholders in FNM and FRE are going to get screwed royal if the Treasury purchases preferred shares as part of a rescue. It is most likely the stocks would be near zero.

    Losing 90% of your money is not necessarily a bailout.

    In times of crises, it’s best to be precise with our language.

    We are falling off a cliff in slow motion. Rather than rage at the TV, my view is that it is most appropriate to prepare for what is coming down hard.

    But that’s just my view.

    Tony

  27. Mess ? The word is not strong enough. These assholes should be put in prison with your damn politicians. Crooks in banking and crooks in Washington. You are soo lucky to have all these nice foreigners still tolerating all that shit. This country doesn’t know how lucky it is. Argentina, Turkey did not have this chance. But I know these bastards will start again.

  28. How about the crook, or should I say stupid consumers who enter these loans. Individuals do have responsibility in this! A big part! Nobody was forced to buy a home, or over reach for a home. The banks and lenders brought the product to the consumer. You know what the say, “if the ducks quack, feed them”. People wanted it, and institutions gave it to them.

  29. Housing Realist-

    Your analysis does omit instances where the same mortgage was pledged more than once (multiple hypothecation) in the creation of collateralized debt obligations. Homebuyers did not commit that felony.

    It also omits Moody’s changing of valuation methodologies (from market pricing to historical based pricing models) to cover up their false ratings on CPDO (constant proportion debt obligations).

    There’s plenty of blame to go around. It’s more important, in my view to get our affairs in order on a personal and familial basis.

    This is happening in slow motion, but it is happening.

    Come July 2010 we will not recognize this nation. We need to prepare.

    But that’s just my view.

    Tony
    Tony

  30. I heard a great analogy about the bail-out. “It’s like your kid came home one day and said he owed some really dodgey people A LOT of money, what would you do? You’d probably come up with the money first (bail him out) then have a LONG talk with him afterwards. It’s this long talk afterwards that we all should be paying attention to in the future.”

    I agree that just letting the system completely crash and fail would have far more potential harm. Think about it. I’m not just speaking financial harm. Some really nasty forms of governments rise out of economic disparity. This is how the National Socialists Worker party started in Germnay.

  31. HousingRealist or you could say….

    How about the crook, or should I say stupid Bankers who approved these loans. Banks do have responsibility in this! A big part! Nobody was forced to loan the money, or over reach for a loan. The consumers and lenders brought the loan to the banks. You know what the say, “if the ducks quack, feed them”. People wanted it, and institutions gave it to them.

  32. Tony, I must disagree with you totally on the word “Bail Out” being over used. That is exactly what is happening. When Bear Stearns was sold via a shotgun wedding to Goldman who do you think picked up a lot of the tab for this? The Tax Payer is who!!! We the people of this country “Bailed Out” the share holders and ensuing purchaser Goldman at quite an expense to our wallets. The shareholders should not have received a dime and Goldman if they wanted to purchase them should have paid what they were worth at fair market value. We the Tax Payers should not have been involved at all.

    Further more share holders (mostly China and Russia) of Freddie and Fannie should have been wiped out. If the companies are insolvent by general accounting practices then they should have been allowed to fail and re-organize at shareholder expense. Again the Tax Payers should not have been involved.

    A “Bail Out” is when the Government steps in and uses Tax Payer money to save an ailing company from default. In other words it “Bails Out” the company and its creditors by literally giving them money to pay their bills and stay solvent. The shareholders of Freddie and Fannie benefited greatly from the “Bail Out” those companies just received. If the share holders are smart they would be getting rid of those shares now as quickly as possible before they are not so lucky next time. These companies will fail at some point and we the Tax Payers will foot the bill for their failure, and probably to the tune of 100’s of BILLIONS of dollars. That my friend is clearly a “Bail Out”

    What did you think a “Bail Out” was?

  33. I don’t completely agree with either standpoint.

    The “people” in this country are financially retarded. Is this the fault of “the people” or is it the fault of our culture / government?

    Lets face it, the fact that Americans are NOT taught finance in schools and our culture, government, (tax laws) reward over-spending..I seriously doubt that it’s the “people” fault.

    We live in a nation that encourages DEBT. Our country has never had to suffer the consequences for this ideology, until maybe now.
    Maybe, the time is coming?
    But until we abolish the FED, nothing will change and all this fractional lending nothing will change. Wealth will continue to be re-distributed, making the middle class virtually extinct, while the lower class gets bigger and the upper class gets smaller.

    In the end, people will adapt. Life will go on. There will be no doom and gloom coming from me on this. I actually welcome change.

  34. Hey Od. It’a already the case.

    People don’t know what they want. How about a little more economic education ? Reading, writing and arithmetics. “No stupid adult left behind.”

    And then I remember. People preferred Bush because they could take a beer with him. What a nation of morons and economic alnalphabets ! I just can’t understand how stupid this country has become. It’s not the USA I knew. Mind you the whole stinking western world is crowed today by stupid morons. The Brits and the Spanish are also busted. Spain will be very funny to watch. They don’t have the luxury of infinite money like the US.

  35. Marc

    Spain said “screw it” a long time ago. Why do you think they just lay around eating Tapas and take naps all day long? LOL!

    See, that’s the kind of “change” I look forward to.

  36. Stu,

    Bear was actually sold to JPMorgan Chase, not Goldman…and your point is still valid.

  37. Scratch that sentence about share holders should be dumping shares of Freddie and Fannie. They already are on top of it. Russia just sold half of their holdings or 50 BILLION dollars worth of exposure to these companies. China will follow suit if they are equally as smart.

    Again, this is what happens when there is interference or outside influence in free markets. What should have been allowed to happen will eventually happen, but at a much greater cost to the Tax Payers in this country. The share holders will now be dumping shares at a loss if necessary and salvage what they can. Better than nothing wouldn’t you say? Who do you think is going to pay the ultimate cost once this happens? The Tax Payers of this country will indeed bare the brunt of this cost. As the Government pumps more and more of our tax payer’s dollars into Fannie and Freddie so they can still operate the share holders will continue to dump more and more shares to limit their exposure. At some point the American people will basically own these companies and then they will be at a point of insolvency. That is when they get broken up and reorganized into smaller and more manageable companies and as a result will be worth far less than they are today. The bad paper and losses will be written off and low and behold the Tax Payer will be on the hook for what ever that loss amount is…

  38. Stu,

    I’m confused. You think Fannie and Freddie will be broken up?
    Isn’t this what the gov’t is trying to prevent by bailing them out?

  39. Well in the case of Spain, I think that there is a good chance of a bankruptcy. Why not after all ? Spain loves bankruptcy. It would be the 6th time the country goes bankrupt. Club Med countries and United “Kingdumb” are really in the same situation as the US. The Euro is toast. I wouldn’t buy Euros. I wouldn’t buy pounds. They all are going to get “pounded”. :)

  40. Marc,

    The dollar has that much control over the Euro? I don’t know much about the currency markets, but I thought the Euro was going to “pound” the dollar? No?

  41. Od, to be perfectly honest with you, I have no clue what the Government is trying to do with this “Bail Out” bill. It does not ensure by any means that Fannie and Freddie will not fail. It does ensure that their will be massive risk to the Tax Payers of this country however. If the talking heads in Washington think by propping up these companies by giving them Billion upon Billions of Tax Payer dollars will guarantee they survive then they are sadly mistaken. The markets will determine that and they already are by dumping shares.

    I do know that the unintended consequences of them propping up a couple of companies that are technically insolvent will be utter failure. I love how Paulson said that there was a 50% chance we would need to use the back stop. As I said before… there is a 100% chance we will. If you are insolvent as a company then you WILL REQUIRE assistance to continue to function and operate effectively. What part of this did they not understand as they passed this bill?

    How many shares do you think of the 50 Billion Russia dumped are we Tax Payers going to purchase? How long before 50 Billion more are dumped? How many do you think we will own before all hell breaks loose and they must be taken over? In fact once us Tax Payers get to 51% ownership we (the Government) have in essence taken them over have we not?

    Off course they will be broken up in the end. It was stupid silly to begin with to allow 2 companies to be holders of 50% of the mortgages in this country. Now at 5.2 TRILLION dollars of exposure they are deemed to big to fail. Well money and size has nothing to do with failure, but rather your ability to operate at a profit does. If you are not making money and owe more than you are worth then I don’t care how much you are lent to stay in business, the end result will be failure. All you are doing by lending money to them is assuming their risk at your expense. Why do you think banks and lenders have frozen equity lines of millions of Americans? They do not want to risk losing more by allowing technically bankrupt individuals who are massively under water to borrow more money that will not get paid back in the end. Our Government is just to stupid to understand this simple rule of finance, and unfortunately we the Tax Payer will pay dearly for their incompetence…

  42. “They do not want to risk losing more by allowing technically bankrupt individuals who are massively under water to borrow more money that will not get paid back in the end.”

    This is EXACTLY what they want. All the credit card companies, banks and even the FED have encouraged this over the past 30 years. I don’t think the people “in charge” are that stupid.

    If Americans are put in a situation where they are completely dependent on debt, loans, and big gov’t they will lose more rights and power they could ever imagine. This is why I often joke that Americans are not free. They are slaves to their debt, both as a country and as individuals.

    It’s like Rome, as long as the mob is appeased through shows, entertainment and lack of education, there is no limit to how much gov’t can get away with.

    I agree that the market will correct itself, but this will only re-distribute the wealth once again.
    Making the rich, richer and the poor class larger.

    Modern Day indentured servitude.

  43. od, you are sadly mistaken on your belief as you say:

    “This is EXACTLY what they want. All the credit card companies, banks and even the FED have encouraged this over the past 30 years. I don’t think the people “in charge” are that stupid”

    They do not at all want that. What they want is for people to be debt slaves and to have the ability and willingness to PAY BACK what they have borrowed. The last thing on earth they want is for these debt slaves to not be able or willing to pay the money back. That thrust them into bankruptcy themselves.

    This debacle has become a nightmare for these banks and lenders. They never counted on the populace having their attitude about debt turn around so quickly and that homeowners would be willing to just walk away. They never saw that coming and it scares them to death. The bankruptcy law change didn’t help either because they not only walk away, but nothing happens to them legally. Trust me when I tell you that the scenario playing out is about the furthest thing away from what these banks and lenders had hoped for.

    This entire house of cards was built on the principle of everyone paying back everything that they borrowed and that is not what is happening at all…

  44. Peter Schiff was recently asked in an exclusive interview with Housing Panic the following question and also his ensuing answer

    HP: Is the recent housing gambler bailout just the beginning of socializing this crash?

    Schiff: Believe it or not the damage from the housing “bailout” will exceed the damage from the bubble itself. It’s typical for the government to first create a problem and then exacerbate it through misguided solutions.

    Now I am a HUGE Schiff fan (as well as Shiller, Roubini and many others) and could not agree with him more on his answer. Although he didn’t elaborate as to why, I am sure the GSE “Bail Out” portion of the bill is much of the reason.

  45. Stu,

    It may be a nightmare for lenders now, but the the people who just “walked away” will not “get away”.

    In a world where “credit” is everything, I wouldn’t assume these people will just get away with this.

    Heads will roll.

  46. Stu, True, in the short run this will hurt the lenders. But in the long run..it’s the debtors who lose in the end.

  47. Od, they are already getting away with it. If your loan is held in a non recourse state you simply walk away from your debt and you owe nothing. There is no legal obligation of any kind. You simply give the home back to the lender period. This is totally legal and in fact has been encouraged by new companies that have been formed to help you out with the process. Some folks are actually buying a new house in literally the exact same neighborhood for 30% – 40% less than they owe on their current mortgage and once they close they walk away from there old house and move into the new one down the street. They allow the foreclosure on the old house and remain in the new affordable home. Off course you need money to do this, but many do and others simply stop making payments and add that to there down payment on the new house. Foreclosures are so far behind that by the time they are caught up with they have already saved up enough and have made the move. The new bankruptcy laws have made it that much easier and legal to do this. CC companies will lend to anyone with two legs and a heartbeat let’s face it, and as far as credit goes, it only takes 3-4 years before your credit is restored and then you can get a new mortgage or loan from any bank in the country that still exist by then. I really don’t see how the debtors are losers here. I see where some of these lenders will fail and won’t be around when these folks who walked away are buying a new house in 3-4 years however…

    Oh, and if you really must insist on there being a loser, it is the Tax Payers of this country my friend. You see we Tax Payers are the ones who are lending (via the Fed) all of this money to these failing banks and lenders (Sort of like the Fannie / Freddie model of finance). As they borrow at the discount window Billions upon Billions of our Tax Payer dollars, they are giving us Tax Payers back hundreds upon hundreds of worthless mortgages that we will never get paid back on. All of this worthless paper is being exchanged on a very regular basis for Tax Payer green backs. We are subsidizing this plan and when these lenders go under we will be left with all of these worthless mortgages to deal with. Try as you may to get blood from a stone, but I learned long ago that it is a fool’s errand.

    Tax Payers are on the hook for all of these incredibly stupid decisions being made by our prestigious Senators and Congressman. When all is said and done, we will foot the bill for this entire mess through our taxes, which will have to be raised substantially to pay for it all. That is hardly the debtors taking on the chin…

  48. What WAMU needs to do is. Re write most of there loans under FHA guidelines, offer the customer a no cost loan and sell, sell, sell.

    Modification of note and deed of trust on all non qualifying loans to a fixed rate lowering the interest rate.

    They have mortgage personal in just about every branch, use them.

  49. One thing I might mention here is that everyone is worried about their credit rating by walking away.

    First we have to accept that due to the resets and bank REO inventory, we are going to have depressed prices for a long time. Further, tight lending standards are going to force prices lower based on loan structure affordability.

    But here is something that might be overlooked. Due to the high incidence of walkaway coupled with the extraordinary situation, lenders are going to have to make allowances. Otherwise they are not going to have a very big pool to lend to. If banks fail to lend the money and not recognise the extraordinary situation, then new lenders will spring up that do recognize the extraordinary event and do a bang up business that the banks will miss out on. IMO

    Once people become level headed about the situation and quit mind screwing themselves and work the math the clouds are going to be removed. The best thing to do is get it out of your head and onto paper in front of you and that way you can get on top of the problem rather than having the problem on top of you.

    I can’t quote the guy that said that but it is a good stress management tool!

  50. http://www.bloomberg.com/apps/news?pid=20601039&sid=aryKxwWwjIDQ&refer=home

    Interesting article on Fannie and Freddie

  51. 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

  52. 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!

  53. [...] 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 [...]

  54. 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.

  55. 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

  56. 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…

  57. 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

  58. 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…

  59. 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..

  60. 25% of something is better than 0% of nothing…

  61. 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.

  62. 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.

  63. 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…

  64. 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…

  65. 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.

  66. 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

  67. 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

  68. 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

  69. 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

  70. And what about Wachovia ?

  71. 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.

  72. 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.

  73. 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

  74. 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…

  75. 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

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

    Tony

  77. 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?

  78. 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

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

  80. 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

  81. [...] 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 [...]

  82. [...] 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 [...]

  83. 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!

  84. 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

  85. [...] WaMu: Liquidity Options Running Low [...]

  86. [...] WaMu: Liquidity Options Running Low [...]

  87. [...] Full Analysis Here w/ WAMU liquidity spreadsheet [...]

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

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