Washington Mutual: The Spiral of Death
By: Cooksquared,
,
Post Archive,
RSS FeedPosted: Friday, September 12th, 2008, 8:37 am MST
Category: Lending, Real Estate
Many people will be surprised to know that “The Spiral of Death or Death Spiral” is actually a financial term and not just reserved for the latest sci-fi film. Ok, maybe its not approved by FASB, but most people in the industry have heard the term once or twice. For those people who may not be familiar, “The Spiral of Death” refers to an event or series of events that triggers and inescapable decline in market value, usually leading to a change in ownership or bankruptcy. The term is most often used in conjunction with Start Ups that issue convertible debt that can be converted to common stock at a deep discount. As the stock price falls, the convertible debt can be converted to a great percent of ownership, until some tipping point where the debt holders own the company.
But as the title betrays, Washington Mutual is the focus here and they may be facing their own kind of “Death Spiral.” With the recent downgrade of WAMU to Junk Bond status (Ba2), their cost of borrowing increases substantially. This becomes very problematic for a bank because they make money by lending at high rates and borrowing at low rates. As their cost of borrowing increases, the amount they must charge customers for loans must increase and the amount they pay for the use of customers funds must decrease. In plain English, their lending rates have to increase and their saving/CD rates have to decrease.
Unfortunately for Washington Mutual, many of their competitors remain in the A+ credit range, putting them at a significant disadvantage. It does not take an rocket scientist to figure out if your competitors can do exactly what you can do for a much lower cost, you should probably find another line of work. Many investors find this obvious, making it even harder for WAMU to raise much needed capital.
The only savior for WAMU is the Federal Government’s open lending policy. But with the government up to their eyeballs in debt (Fannie, Freddie, Bear, Lehman???), one has to wonder how long WAMU can survive? In this not so humble writer’s opinion, not much longer. I would love to hear from the mortgage brokers and those of you out there that depend on WAMU for loans. What is their tone? Have they been more eager for short sales, tighter on lending guidelines??? They are not the first to face this situation and will certainly not be the last. What does a lender do, when lending because a liability rather than an asset?
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Related posts:15 comments
15 Comments so far
They may not make it through the week end.
Michael, I feel it’s important to note too that WaMu is the size of ten IndyMacs. This would be the largest bank failure in US history…by a landslide (so to speak).
And our politicians solution? Just put a freeze on foreclosure
Hey Michael:
Great to see you contributing again. WaMu killed the mortgage brokerage channel about 8 months ago. WaMu hadn’t been a REAL player in that channel, for 3 years.
‘m afraid they won’t be able to blame their problems on brokers- they made this mess all by themselves
“WaMu killed the mortgage brokerage channel about 8 months ago.”
Correction: I clicked the link of the first “related story”; me reporting about WaMu leaving the wholesale channel. That was April 8 so WaMu hasn’t received brokered loans for 5 months.
Dave: The interesting thing about the freeze on foreclosures is it would inevitably speed up the demise of banks that teeter on the edge. How do they raise any money? No one would buy these loans, if foreclosure was not an option. Even the distressed buyers ($0.20 on the dollar) are betting on the real estate ownership play. Without that options, the loans are probably worth a negative value implying you couldnt even give them to someone.
Brian: Thanks for the info and its good to be back. I still wonder about the short sales. This has to be a tough call for them. If they do a short sale, they raise cash, but they take an immediate loss and have to raise more capital by law (tier 1 capital regulations). If they hold the mortgages they prolong the death, but have no hope of raising any more money. This has to be one of the worst times ever to be a lender.
Michael,
I have lately enjoyed reading your comments and your post does not disappoint.
For the past year or so I have been using a cheat sheet to create my guesses/predictions about what bank is going under. It looks like this: make a list of all the lenders that got heavily involved in option arms, rank them by percentage of total portfolio constituted by option arms and wait.
Over a year into this mess yet and we still see nothing about the real problem these banks are dealing with: booking the full interest payment on a loan returning only minimum payments. Only a matter of time and foreclosures before we see a “restatement of earnings” and the death spiral begins. Countrywide saw this toward the end of the third quarter last year and turned a blind eye (remember their “experts” telling us the fourth quarter should turn a profit!). Wamu saw this shortly thereafter and isn’t doing much better.
Who else is on the list? That is the question.
Imagine how rich you could have been if you took that list and shorted every stock a year ago. Next time…because there is always a next time.
Next time…because there is always a next time
You’re killin me!
Who else is on the list? That is the question
National City
[...] that party is a bit short-lived. The exuberance appears to be a bit irrational and the reality of impending bank failures has worried the MBS market again. Short-term, I’m advising clients to lock-in these low [...]
“Next time…because there is always a next time”
What’s the over/under on Wall Street buying sub-prime loans again, MC? I say three years.
Brian,
Its not so much a question of when, but what will they take the form of. Subprime as we know it will be dead until a new crop of bankers rotate into the system, so that could be 20 year, but there is clearly money to be made. I anticipate programs coming back with higher interest rates and maybe even some kind of share equity component. There have been some interesting mortgage offerings of late, where the mortgage company shares in the upside and down side of the sale. Combine that with a high interest rate and you have something that might attract investors again when this mess blows over.
Michael,
… and maybe even some kind of share equity component
Interesting comment. I just finished reading an article about a company that is already doing over $1 million a month in a system just like that. (I’m going to post on it later.) Lending cash to homeowners in return for a piece of their future appreciation. They also assume depreciation risk. No interest rates at all! Just shared equity.
It’s a brave new world out there.
Michael,
…and maybe even some kind of share equity component.
Interesting comment. I just finished reading an article about a company that is doing roughly $1 million a month loaning equity against future appreciation. They share in the upside as well as the down side depreciation risk. No interest rates at all! I’ll be posting on it soon.
[...] that party is a bit short-lived. The exuberance appears to be a bit irrational and the reality of impending bank failures has worried the MBS market again. Short-term, Iʼm advising clients to lock-in these low rates and [...]
[...] that party is a bit short-lived. The exuberance appears to be a bit irrational and the reality of impending bank failures has worried the MBS market again. Short-term, Iʼm advising clients to lock-in these low rates and [...]