Took a stab at creating a Glossary for terms commonly used on iHub: Washington Mutual/glossary
testing table of contents
Prior To Bankruptcy
Washington Mutual Inc (WAMU), is a savings bank holding company. Founded in 1889 as a loan and investment association, the company which later undergo several name chances as well as strategic shifts in it's banking and loan practices through its nearly 120 years of existence. From it's inception until 1983, WaMu operated as a mutual company deriving profits and gains to be reinvested towards services and products for its existing and future members. During the time which WaMu operated as a mutual company, a series of purchases of other banks and holdings were made as a way to expand the membership of the bank and it's services.
In 1983 the company went through demutualization following 94 years of operation. For the first time in it's history WaMu would issue capital stock onto the free market and change it's overal business purpose to "for profit", while it strives to maintain the same benefits and services that it had provided before demutualization. Shortly after converting over the company, WaMu would see its assets double in just 6 years. During that time and the years that followed, the company would go on to acquire 29 more banking companies and divisions, adding more assets to the company's portfolio. WaMu also saw the addition of several mortgage companies and a credit card division into its business plan. By 2005, WaMu had become the 3rd largest mortgage company in the United State, as well as the 9th largest credit card company.
As early as late 2006, WaMu would begin to become a victim of what would eventually become the worst recession in US history since the Great Depression of 1929. WaMu's aggressive business strategy would begin to unfold throughout the end of 2006 and become increasingly disastrous through 2007. As housing rates were at all time highs before the recession began, WaMu would use its considerable leverage and assets to make large amounts of loans in both subprime mortgages and subprime credit cards. The banking division of WaMu at one point before the end of 2007 had nearly 336 stand-alone branch buildings where various types of home loans were processed and approved. WaMu would eventually over leverage themselves due to the high number of Adjustable Rate Mortgages (ARMs). As the US economy slowed down, the number of home loan defaults began to rise in quick succession. This coupled with the falling home prices throughout most of the US meant that even with foreclosures and the properties back in the hands of the company, they were unable to sell them back into the market, or were not able to derive enough revenue from the sale to cover the loan that was made on them. In the mean time, the credit card division was also seeing a surge in the number of late and non payments being made.
By September of 2008, WaMu's stock price had fallen to $2 from its previous highs of around $50 just two years earlier. Amid strong voices from the shareholders, then company CEO Kerry Killinger was dismissed by the company board. In the meantime, the company went looking for a buyer for part of its banking division. WaMu had been unsuccessful in finding an appropriate buy until its seizure by the FDIC. Overnight the companies banking division was bought by JP Morgan Chase in a secret deal brokered by the FDIC for 1.9 billion dollars. At the time it was believed that the assets sold were worth many multiples more than what it was forced to sell for by the FDIC. Particularly troubling was that the deal was done by the FDIC as a result of the failure of IndyMac bank earlier in the year. The FDIC feared that if it did not sell the bank quickly they would not have enough capital reserves in its insurance fund to cover all the accounts should something have gone wrong. This action by the FDIC resulted in massive losses to WaMu shareholders who felt that their holdings were worth far more than what the government had forced upon them.
Shortly after the sale of WaMu's banking division, the holding company would file for Chapter 11 bankruptcy protection, citing $33 billion dollars in assets and $8 billion dollars in debts.
Presently WaMu is operating under Chapter 11 as it tries to reorganize the company. A number of lawsuits have been filed by the company and individuals against JP Morgan and the FDIC concerning potentially illegal activities regarding the sale of the WaMu banking division. The outcome of these lawsuits will have a large impact on the reorganization plan and eventual outcome of WaMu Holding Inc.
FDIC Chairwoman Sheila C. Bair, together with JPMorgan Chase (JPM) CEO Jamie Dimon shared the spotlight for saving Washington Mutual (WM) depositors without costing the government a dime. The story is old by now; JPM got the good and the bad of the bank without the holding company's ugly debt. (Think Clint Eastwood.)
After the glory fades, the reality will come out that the FDIC cannot be trusted. JPM and others were conducting real negotiations with the FDIC at the same time they were conducting fake negotiations with WaMu's management. During the consummation conference call, Jamie Dimon disclosed that JPM had unprecedented access to WaMu's mortgage detail. JPM received computer tapes with the most granular mortgage detail (FICO scores, LTVs, and MSAs) to compare with their own data and develop loss projections. JPM had the time to do a true bottom up analysis.
I do not know if it is common FDIC practice to negotiate the sale of a to be closed bank without informing management. But in this case, it sabotaged WaMu's effort to sell its valuable branch system. I also do not know when the FDIC undercut WaMu's management. Was it before or after the fall of Lehman? WaMu started to face a bank run on September 15 - the day Lehman filed for Chapter 11.
The FDIC alone could be proud of its accomplishment, but in the overall context they further eroded investor confidence. Now the moral hazard has spread beyond equity holders to bond holders. While WaMu had been slowly losing deposits, the fall of Lehman and subsequent nonstop media coverage accelerated withdraws. The $16.7B (9%) deposit loss since September 15 alarmed regulators.
We are on the cusp "investing" $700B in government money to liquefy toxic bank assets and rebuild investor confidence. We got here through a series of miscalculated idealistic policies based on moral hazard. At this juncture moral hazard has proved extremely expensive with little investor confidence to show for it. Surely backstopping a Barclays (BCS) purchase of all of Lehman and a JPM purchase of all of WaMu would have bought a great deal of investor confidence at a cost far less than $700B.
Where does this leave Wachovia (WB)? The stock market and the media would have us believe that the vultures (the mode of JPM) will wait for the FDIC to serve them the carcass. There are many reasons why it is not in the best interest of the government to let that happen. Beyond the shock to investor confidence, the United States should not be limited to a handful of mega banks. JPM, Bank of America (BAC) and Citigroup (C) need competition.
The Paulson/Bernanke team has not been very pragmatic in creating value in the form of investor confidence for their bailout money. Punishing or killing shareholders and now bond holders have proved very expensive to the government. With each new implementation of moral hazard, the government has to lay out more money to lift investor confidence. The latest trade off - forgoing possibly $60B in Lehman and WaMu backstops created the need for Paulson's $700B market maker fund.
Financial Synopsis JPM bought the customer deposits (including WAMU Holding company $5 billion cash, the future of which is yet to be determined), the mortgage loans and the bank branches. They bought nothing else.
In the last quarterly report there are other assets in there including $18.2 billion in mortgage backed securities (only 155 million of which are the dodgy sub-prime kind) and I copy full details below. What is in bold is what was not sold to JPM according to the fibber notify the owner of a house before robbing the house? Hell NO!. JPM & FDIC maintain total secrecy not to notify the CEO & board.
The FDIC makes sure they don't halt trading right after seizure decision. This would allow leaking of news. They make sure reports leaked well in advance so all big fish gets out in time! http://seattletimes.nwsource.com/html/bu... FDIC brags about the great WAMU save, forgets to mention its true owners wont get a penny, not even a penny from $1.9 billion that JPM paid FDIC says WAMU failed Media buys it. No mainstream media person asks what exactly does "Failed mean?" and how did you measure it? Some People loose lot of money, Some people loose life savings, and some people even goto depression Meanwhile another interesting story unfolds, Citi acquires Wachovia. Guess what? Citi has some heart. Unlike greedy, crooked JPM, they do leave WB shareholders with fair value. It is a common practice for many huge companies to honor shareholder value to certain extent. BAC bought countrywide and honored their deal even after rulings. The numbers are in millions (i.e. 7,235 is $7.235 billion)
Cash and cash equivalents
$ 7,235 $ 9,560
Federal funds sold and securities purchased under agreements to resell
Trading assets (including securities pledged of zero and $388)
Available-for-sale securities, total amortized cost of $25,756 and $27,789:
Mortgage-backed securities (including securities pledged of $121 and $1,221)
Investment securities (including securities pledged of $112 and $3,078)
Total available-for-sale securities
All the following is what was sold to JPM
Loans held for sale
Loans held in portfolio
Allowance for loan losses
(8,456 ) (2,571 )
Loans held in portfolio, net
Investment in Federal Home Loan Banks
Mortgage servicing rights
$ 309,731 $ 327,913
JPMorgan Chase's internal documents - January 8, 2010
JPMorgan sues FDIC and Washington Mutual - March 24, 2009
Source: WaMu had 4 rescue offers last year - April 26, 2009
WaMu drew only 1 bid - December 14, 2008
WaMu shareholders could get seat at bankruptcy table - January 7, 2010
WaMu filing: JPMorgan had inside info - December 27, 2009
The Washington Mutual decision - December 6, 2009
The downfall of Washington Mutual - September 28, 2009
WaMu bankruptcy judge to appoint independent examiner - July 20, 2010
WaMu judge excludes examiner’s report - Dec 02 2010