Large U.S. bank collapse seen ahead

[J]

I hope it's not Washington Mutual.

WaMu's all but dead, their credit default spreads have blown wide open and are higher now than Bear Stearns' was when it went under. In addition the yield on their 1 year bonds (as of 2 weeks ago) is at 40%, yes, that's 40%. They're done, all that remains is filling in the grave.

[JME2]

I hope it's not Washington Mutual.

It'll almost certainly be Bank of America.

Oh God, I hope not.

[Chardok]

I hope it's not Washington Mutual.

WaMu's all but dead, their credit default spreads have blown wide open and are higher now than Bear Stearns' was when it went under. In addition the yield on their 1 year bonds (as of 2 weeks ago) is at 40%, yes, that's 40%. They're done, all that remains is filling in the grave.

Oh of course not, they're only a year or two late and shutting the door after the horsies are gone and the barn's burning down. It's not as if they have much choice, they're being slaughtered by the markets on all sides, and now that word is starting to trickle out into the mainstream media they're going be in really deep doo-doo. Can you say "bank run"? IndyMac was hit by one and word is WaMu is suffering a case as well, tomorrow's not going to be fun for them after today's coverage on how their shares tanked 35% in a single day.

Or in the case of WaMu and a couple others, getting into subprime creditcards to try and cover their subprime real estate losses. This is NOT what a healthy banking system looks like, quite a few of the things they're doing are desperation measures.

Word on the Ticker Forum board is Lehman Brothers and WaMu are next, Lehman's being the odds on favourite to croak.

Right now there are quite a few US banks running leverage ratios of over 50:1, and I believe WaMu is sitting around 73:1. A 1-2% drop in the value of their investments and they go belly up, which is why they're borrowing like mad from the TAF and whoring themselves out to sovereign wealth funds to raise capital for covering their margin calls. Of course the reason they're so highly leveraged is that it makes them a warehouse full of money on the upside of the economic cycle, when the cycle starts down, well...

What a huge surprise. More doom-and-gloom from J regarding WaMu. Do you even read financial reports and press releases or do you just suck Cramer's cock and read the future of stocks in the pattern of his jizzsquirts on your face?

[The Duchess of Zeon]

I hope it's not Washington Mutual.

It'll almost certainly be Bank of America.

Oh God, I hope not.

Well, I admit that was just on their swallowing of countrywide and a lot I've heard, and I'll frankly concede to The Kernel on the issue, though I'm not going to keep even a couple thousand dollars in their accounts at this stage.

[J]

You mean the repeated financial reports & PR which say they're "well capitalized" and don't need to raise funds, which is followed by share issues and begging from SWFs two days after the reports' release? And how exactly is WaMu going to pay off the 8% dividend on all those convertibles it sold to SWFs when it's bleeding billions every quarter? Not to mention the 40% yield on their bonds which mature next year. How are you going to cashflow that? Tell me where WaMu's going to find that money. I have all their 10-Q and 8-K reports along with info on their assets and mortgage holdings, specifically, where they are and how much they're underwater. Do you honestly think they can survive a 50-80% haircut on their assets? Beacuse that's what's going to happen when housing prices correct back to historical norms.

[The Kernel]

Problem is traditional banks have acted a lot like investment banks and hedge funds in recent years. A lot of them went balls-deep into housing & real estate then leveraged up way beyond the traditional 10:1 ratio for commercial banks, I'm seeing anywhere from 15:1 all the way up to 30:1 which is getting into hedgefund territory. If their frozen & non-performing assets are taken into account that ratio goes up even more. Take a look through this list which a guy on another forum maintains, it's not pretty.

Oh certainly I agree that a lot of banks have wanted to get in on the action of having an investment entity, but it doesn't change the fact that big players like Bank of America are still heavily into traditional banking and are fairly well capitalized and not in danger of a liquidity crisis.

[The Kernel]

Well, I admit that was just on their swallowing of countrywide and a lot I've heard, and I'll frankly concede to The Kernel on the issue, though I'm not going to keep even a couple thousand dollars in their accounts at this stage.

We've discussed this before and you are frankly being totally ridiculous. There is no way in HELL that the FDIC is not going to cover these assets regardless of their current levels of capital. Even if Bank of America were to somehow fail (which is pretty much unthinkable at this point) the US government would quickly shore up the FDIC to cover all deposits, and they'd probably get back most of the money above $100k as well.

The S&L crisis was a lot worse for US banks than the current crisis and the FDIC was more than capable of dealing with the problem. There's no way that the government would allow the FDIC to have its reputation tarnished in any way so unless you have more than $100k in the bank (and judging by what you've written in the past, you don't) you have absolutely nothing to worry about. I know you are prone to being paranoid about such things, but worrying about the FDIC going belly up is silly.

[J]

Oh certainly I agree that a lot of banks have wanted to get in on the action of having an investment entity, but it doesn't change the fact that big players like Bank of America are still heavily into traditional banking and are fairly well capitalized and not in danger of a liquidity crisis.

Yet. The Countrywide loan portfolio they inherited is still sealed and no one other than BAC knows what's really in it and what they're going to do with it. The latter also depends on various lawsuits which have been filed by shareholders & several States, ideally BAC would skim off the meaty portions and let the rest die after it's packaged to some sort of 3rd party holding company, but that may not be possible if the plaintiffs in the lawsuits get their way in which case BAC would have to eat it, rotten portions & all. If that loan portfolio is as scummy as IndyMac's, and it's quite possible it is since IndyMac is a spinoff of Countrywide and was run by some of the same head honchos, then BAC could find itself in really deep trouble.

[Nova Andromeda]

-Looks like Fannie and Freddie are pretty close to bail out. Reuters Story here. (see below for text)

-What does a bail out of Freddie and Fannie mean for the U.S. banking and the mortgage crisis? Does it just mean U.S. national debt goes up by a factor of two and the rich bankers get bailed out and everything continues? If it comes to a bail out does the U.S. gov. get to keep any future earnings from Freddie and Fannie?

-I still don't understand what all of this means for the U.S. dollar. On the one hand we have serious banking problems that look like they will result in major bail outs and a continued lack of credit availability. I think this means the Fed cannot increase interest rates (bad for the dollar). However, we also have massive inflation (may be countered by recent dive in commodities) which is usually countered by increasing interest rates. Furthermore, I doubt interest rates are the only thing influencing the dollar's value. Bad economic reports, etc. around the world have seen the dollar rise against many currencies recent. I don't understand that. The U.S. economy is far worse off than Europe, Austrailia, New Zealand, Japan, etc. yet the dollar rises? Is it simply because the dollar is linked to oil (something else I don't understand)?
-I really wish I knew of a site that explained all of this that I could trust.

-Any help J, The Kernel, or anyone could give to the above would be appreciated.

NEW YORK (Reuters) - Heightened expectations for a government bailout of U.S. home-funding giants Fannie Mae and Freddie Mac drove their debt prices higher on Thursday as investors bet the securities will be guaranteed by the U.S. government even if shareholders are wiped out.

Shares in the government-sponsored enterprises (GSE), which own or guarantee almost half of all outstanding U.S. mortgages, erased steep early losses to post modest gains by midday, but remain near their lowest levels in nearly two decades.

The GSEs have reported losses for the past four quarters, and rising mortgage delinquencies cut into the value of their assets and capital. However, they meet regulatory capital requirements and are successfully rolling over their debt on the regular schedule, limiting the need for any nationalization by the government.

The two GSEs combined finance or guarantee about half of all U.S. home mortgages. As the nation suffers the worst housing market downturn since the Great Depression, their ability to fund mortgages through the issuance of debt is considered crucial for the housing market and economy.

As the share prices evaporate, banking sector analyst Dick Bove of Ladenburg Thalmann said the government should recruit financial industry leaders to oversee dismantling of the two companies.

"The only rational action" to be taken relative to Fannie and Freddie "is to get rid of them", Bove wrote in a research note.

The price of the debt issued by Fannie and Freddie has surged relative to U.S. Treasuries in the past two days, however, on the view that Congressional backing for a bailout mandated in July this year will secure repayment.

Investors are closely watching the performance of the companies' debt, given that the two GSEs will need to roll over $225 billion of debt by the end of September, according to Barclays Capital.

"If they are able to roll over their debt in late September, and the dollar amount is substantial, then it signals that the credit markets are comfortable enough with the current situation and with the government backstop and that buys them a fair amount of time," said Brian Gardner, chief political analyst for Keefe, Bruyette & Woods.

"If that does not turn out well, then the Treasury, if they have not already done so, will at that point be forced to step in and act more quickly than they would have," he added.

Both agencies have demonstrated in debt sales this month that they still have ready access to the capital markets, albeit at a higher cost.

The ongoing ability of the GSEs to finance the purchases of mortgage from private lenders, freeing up money for more lending, is critical to the U.S. housing market as many of the GSEs private competitors shut their doors after record foreclosures on riskier loans in the past year.

A new Freddie Mac five-year note was sold on Tuesday at record 1.13 percentage point yield premium over Treasuries. The pricing enticed enough demand to cut that premium to 0.98 percentage points on Wednesday and about 0.89 percentage point at midday on Thursday.

Freddie's shares tumbled more than 14 percent in early trade on Thursday to erase more than half of their value just this week. At midday, Freddie shares were down about 1.0 percent at $3.22 while Fannie rose more than 4.0 percent to $4.61.

A share bounce could be expected if the government acts to support the two largest U.S. home funding companies without eliminating value for existing shareholders.

But the market is demanding clarity and without it the shares are vulnerable.

"Nobody is going to put equity capital or preferred stock into Fannie and Freddie, with 'what's the government going to do?' hanging over your head?", said Robert Napoli, analyst Piper Jaffray in Chicago.

One option is for the regulator of the GSEs is to waive the requirement that Fannie and Freddie hold excess capital, he said.

"If the government were to provide support that didn't wipe out shareholders ... you will have another year of bad quarters, and it then starts getting better so there's a lot of upside potential," said Napoli. "There's that possibility out there."

The Treasury could also take an equity stake in the companies, buy their mortgage-backed securities or senior agency debt, and ultimately restructure Fannie and Freddie, analysts said.

(additional reporting by Al Yoon and Walter Brandimarte)

[J]

The S&L crisis was a lot worse for US banks than the current crisis and the FDIC was more than capable of dealing with the problem. There's no way that the government would allow the FDIC to have its reputation tarnished in any way so unless you have more than $100k in the bank (and judging by what you've written in the past, you don't) you have absolutely nothing to worry about. I know you are prone to being paranoid about such things, but worrying about the FDIC going belly up is silly.

I forgot to address this point in my last post, the FDIC was able to manage the crisis AFTER the FSLIC was bankrupted by the S&L kablooie and was bailed out with as I recall around $150 billion in taxpayer dollars. Without the FSLIC and taxpayer bailouts, the FDIC would've been toast unless it was also supported with government funds via the taxpayers. Recall that the FDIC has around $50 billion in funds; $150 billion plus whatever the FSLIC had in its coffers is quite a bit more than $50 billion.

[Illuminatus Primus]

Are you and aerius making that fat cash? Rollin' in those c-notes? Make money money! Make money money!

[J]

-What does a bail out of Freddie and Fannie mean for the U.S. banking and the mortgage crisis? Does it just mean U.S. national debt goes up by a factor of two and the rich bankers get bailed out and everything continues?

It puts a temporary floor under housing prices as Fannie & Freddie don't have to conduct forced sell-offs to meet their capital requirements and this takes pressure off the other banks since fewer homes are being foreclosed and dumped on the market. Temporary is the key word.

Housing prices will still be well above historical norms and few will be buying since the exotic mortgage products which enabled the drastic rise in prices will no longer exist; neg-am, interest only, zero down no-doc mortgages are all history (banks are already phasing them out) and only true prime full-doc mortgages will be available. This means 20% down, 36% DTI max, full doc, fixed interest, 30 year max; under those terms the maximum price for a home is around 3 to 3.5 times the annual household income and that's what housing prices will correct towards. As that correction takes place it will destroy banks which have loaded & leveraged up on toxic mortgage & loan products over the past few years.

The banks get more time to turn their business around but this may not end up being a good thing. Instead of a prompt brutal crash we may end up with the Japan situation and quite possibly worse, that is, well over a decade of job losses and having the the economy strangled, a slow crushing time of suckage as people are squeezed from all sides.

If it comes to a bail out does the U.S. gov. get to keep any future earnings from Freddie and Fannie?

Not as it currently stands, the housing bill which was just passed into law states that Freddie & Fannie keep everything. This may change when the actual bailout occurs or if F&F are nationalized outright.

-I still don't understand what all of this means for the U.S. dollar. On the one hand we have serious banking problems that look like they will result in major bail outs and a continued lack of credit availability. I think this means the Fed cannot increase interest rates (bad for the dollar). However, we also have massive inflation (may be countered by recent dive in commodities) which is usually countered by increasing interest rates. Furthermore, I doubt interest rates are the only thing influencing the dollar's value. Bad economic reports, etc. around the world have seen the dollar rise against many currencies recent. I don't understand that. The U.S. economy is far worse off than Europe, Austrailia, New Zealand, Japan, etc. yet the dollar rises? Is it simply because the dollar is linked to oil (something else I don't understand)?

There are parts of Europe which are in deeper trouble than the US, Spain comes to mind and there's a few others as well. The UK is probably in the worst shape of all, Canada being heavily dependent on the US is also in deep trouble.

What's going on now is that investors are scrambling to find a safe place to park their money, and there doesn't appear to be a safe haven. So all that money is sloshing around country to country, sector to sector on guesses, rumour, sentiment and who knows what. There's quite a few who believe US greenbacks are safe (or more accurately, if everything goes to hell the US will be less screwed than others) so there's a been a big buying spree on those over the last couple months which explains the relative strength of the USD.

Where the future takes us is hard to say, I don't have a crystal ball. It's impossible to predict what kind of measures various countries will take as the downturn continues & worsens. What they do and the effects they have will determine where investors park their money & where the various currencies end up.

Are you and aerius making that fat cash? Rollin' in those c-notes? Make money money! Make money money!

Our mattress ran out of room so we had to take out all the old 20's and replace them with brand new 50's. We're also looking to commission an extra-large solid gold dildo with diamond studs so I jam it up your ass and make you lick it.

[Illuminatus Primus]

We're also looking to commission an extra-large solid gold dildo with diamond studs so I jam it up your ass and make you lick it.

Thanks for resolving the pool in my favor over who fucks who between you and aerius. Now I can get in on rolling in dah CASSHHH MONEYYYY.

[Nova Andromeda]

Where the future takes us is hard to say, I don't have a crystal ball. It's impossible to predict what kind of measures various countries will take as the downturn continues & worsens. What they do and the effects they have will determine where investors park their money & where the various currencies end up.

-Thanks for the reply. If you don't mind my asking where do you get your information? I google stuff and look through some news sources and at the resources provided by my bank, but I have yet to find a set of detailed resources that I trust.

Are you and aerius making that fat cash? Rollin' in those c-notes? Make money money! Make money money!

Our mattress ran out of room so we had to take out all the old 20's and replace them with brand new 50's. We're also looking to commission an extra-large solid gold dildo with diamond studs so I jam it up your ass and make you lick it.

-A. Will it vibrate? B. Are you willing to loan it to 'respectable' SDNet members (collateral offered of course)? C. If B is yes then maybe I can get Darth Wong to have his Quality Assurance Program (TM) review it for the rest of us.
-More seriously though, is this 'lovers' spat really useful IP?

[J]

-Thanks for the reply. If you don't mind my asking where do you get your information? I google stuff and look through some news sources and at the resources provided by my bank, but I have yet to find a set of detailed resources that I trust.

Well, be prepared to lose a big chunk of your time getting up to speed but here it goes:

Mish's Global Economic Trends blog

KD's Market Ticker (be sure to read the archives) and his forum. I find his politics distasteful to say the least but his market analysis is pretty good.

Automatic Earth Blog, lots of articles and some commentary, be sure to read the archives.

Mr Mortgage site For all things mortgage related, with concentration on the California market.

I also make use of various SEC filings; quarterly earnings reports and the 8-K report which is a "significant changes" report of sorts. Google will find most of these for you, digging through the SEC's site to find them is a serious pain.

Those are my main sources though I do have others to help fill in the blanks. There's a lot of information to digest and it'll take some time before all the pieces start coming together.

[Stargate Nerd]

Well as long as there's less than 100,000 in your account, you're covered. Still sucks to lose your bank though, I would imagine.

I'm not so much worried about potential loss of money. My dad's business account and merchant services account is with Washington Mutual and switching all that over to another bank would be quite a hassle since I'm responsible of both.

[Nova Andromeda]

-Thanks for the links J!

-Treasury still wants shareholders to own GSEs

Treasury still wants shareholders to own GSEs


WASHINGTON (Reuters) - Any effort by the Treasury Department to backstop Fannie Mae and Freddie Mac would seek to maintain the companies as shareholder-owned enterprises, a source familiar with Treasury thinking said on Friday.

The source said that a cornerstone of any government intervention would be to maintain housing finance companies Fannie Mae and Freddie Mac as private enterprises.

Shares of Fannie Mae and Freddie Mac have plummeted this week after news reports that the federal government was poised to nationalize the mortgage-finance companies.

(Reporting by Patrick Rucker; Editing by Leslie Adler)

-Between this and various other sectors begging for bail outs I find my hackle rising. Why am I stuck in a country where it's: big fish bailouts and everyone else can sink or swim on their own?!? How about we put all the big fish leaders in jail for corruption and/or professional incompetence, take every cent they own, and nationalize their companies instead? Could it be any worse than the current situation?

[Uraniun235]

I've a better idea, Nova. How about we line up the big fish leaders on Wall Street, against the wall of the New York Stock Exchange, and gun them down? I think that would be far more satisfying, and perhaps more intimidating to future generations who might think about engaging in this sort of bullshit.

[J]

What a huge surprise. More doom-and-gloom from J regarding WaMu. Do you even read financial reports and press releases or do you just suck Cramer's cock and read the future of stocks in the pattern of his jizzsquirts on your face?

These are the WaMu corporate bond quotes from my brokerage from about a month ago. Note the rating and yields, these are worthless junk bonds by any measure. Those yields are now up around 40%.

Code: Select all

939322AL7
Financial 71
10 Washington Mut Inc
Non Callable, NYBE, WM 4.000 01-15-2009
Baa3/BBB- 26.052 YIELD
Mat 90.953 Buy Sell
939322AL7
Financial 1080
20 Washington Mut Inc
Non Callable, NYBE, WM 4.000 01-15-2009
Baa3/BBB- 32.978 YIELD
Mat 88.440 Buy Sell
939322AL7
Financial 175
5 Washington Mut Inc
Non Callable, NYBE, WM 4.000 01-15-2009
Baa3/BBB- 32.978 YIELD
Mat 88.440 Buy Sell
939322AL7
Financial 100
25 Washington Mut Inc
Non Callable, NYBE, WM 4.000 01-15-2009
Baa3/BBB- 27.408 YIELD
Mat 90.450 Buy Sell
939322AL7
Financial 260
5 Washington Mut Inc
Non Callable, NYBE, WM 4.000 01-15-2009
Baa3/BBB- 24.051 YIELD
Mat 91.706 Buy Sell
939322AL7
Financial 500
5 Washington Mut Inc
Non Callable, NYBE, WM 4.000 01-15-2009
Baa3/BBB- 27.408 YIELD
Mat 90.450 Buy Sell
939322AL7
Financial 250
10 Washington Mut Inc
Non Callable, NYBE, WM 4.000 01-15-2009
Baa3/BBB- 24.156 YIELD
Mat 91.666 Buy Sell
939322AL7
Financial 245
5 Washington Mut Inc
Non Callable, NYBE, WM 4.000 01-15-2009
Baa3/BBB- 24.716 YIELD
Mat 91.455 Buy Sell 

This is the 5 year credit default spread on WaMu. It's at 1300 basis points and going parabolic. In case you don't understand, that's 13% above the 5 year Treasury, or as of right now around 16.2%. Which means it costs $1.6 million a year to insure $10 million of WaMu bonds against default, and it's headed for the moon.



To sum it up - WaMu can't even issue preferred shares to raise funds without paying a dividend of well over 50%, I don't think I have to explain what this would do to their cashflow if they were stupid or desperate enough to try. Issuing common shares to raise funds would cause massive shareholder dilution and slam the share price towards zero, as if the current price of $3.83 a share isn't bad enough. They're almost out of ways to raise capital and their losses are only accelerating, short of a bailout or buyout they're finished.

A buyout is highly unlikely since the only parties which can do so are already up near the 10% limit, that is, they already have close to 10% of all US banking deposits and acquiring WaMu would put them over the limit. A special exemption or amendment to US banking laws will have to be made to enable a buyout. Bank of America had an exemption made for the Countrywide buyout so they're likely not getting another, that leaves JPMorgan-Chase. I doubt they're all that anxious for more after swallowing Bear Stearns, plus they'd have to get an exemption from the regulators. Wells Fargo has an outside chance but I don't think they're quite big enough to buyout WaMu without putting themselves in trouble.

That's why I maintain WaMu's a spitted pig waiting for someone to get the fire started.

[Stargate Nerd]

I've a better idea, Nova. How about we line up the big fish leaders on Wall Street, against the wall of the New York Stock Exchange, and gun them down? I think that would be far more satisfying, and perhaps more intimidating to future generations who might think about engaging in this sort of bullshit.

Shooting rich people is for communists.