The Morning Ahead

The factors to monitor in the morning are near overwhelming.

To start, we have an FOMC meeting. Will the Fed cut rates?

Henry Paulson is scheduled to testify before Congress in the morning, and later in the day he is scheduled to give a speech at the Brookings Institute about the economy and housing. He is likely to be very cautious at both venues about what he says. Will he by accident trigger more downside action?

Lehman has filed for Chapter 11 and other banks have continued to trade with it. Yet, despite being in Chapter 11, and presumably under court supervision, Lehman continues to push for a shotgun sale of its money management firm, among other assets. How will this activity sit with the bankruptcy judge and other bankers?

The Merrill Lynch acquisition by Bank of America looks shaky. Will the deal still be alive by the end of the day? How tight of an acquisition contract was John Thain able to draw up in such an intense, short term period?

What news will develop from the AIG situation?

How will the markets react to the downgrade of WaMu?

Will the panic in the investment bank arena spread to the two remaining major independent players, Morgan Stanley and, the very well connected, Goldman Sachs? 

How bad will things get overnight in overseas trading?

Have a good nights sleep.

-Robert Wenzel

WaMu Rating Lowered to Junk by S&P

Washington Mutual Inc., the biggest U.S. savings and loan, had its credit rating cut to junk by Standard & Poor's because of the deteriorating housing market.

S&P reduced its rating on WaMu to BB- from BBB-, leaving it three levels below investment grade, the ratings firm said today in a statement.

``Increasing market turmoil and the related impact from managing its concentrated mortgage franchise in this troubled housing and credit cycle led to the downgrade,'' S&P wrote. S&P cut its rating on the subsidiary bank to BBB- from BBB.

-EPJ Newsdesk

Emergency Meeting on Lehman Rescue Resumes

Deliberations resumed Saturday at the New York Fed today as leading Wall Street executives met to try and find a solution to the latest crisis, Lehman Brothers.

Germany's Finance Minister Peer Steinbrueck urged that a resolution be found to the Lehman Crisis before Asian markets open Monday, warning ominously, "the news that is coming out of the U.S. is bad."

It is believed that participants in the meeting also have on their agenda discussions about problems at American International Group and Washington Mutual. AIG's shares dropped about 31 percent on Friday.WaMu has reported severe losses because of the mortgage crisis.

According to WSJ, in addition to New York Fed President Timothy Geithner, government officials in attendance included Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox. The Wall Street executives included Morgan Stanley Chief Executive John Mack, Merrill Lynch Chief Executive John Thain, J.P. Morgan Chase CEO Jamie Dimon, Goldman Sachs Group CEO Lloyd Blankfein, Citigroup Inc. head Vikram Pandit and representatives from the Royal Bank of Scotland Group PLC and Bank of New York Mellon Corp.

Other industry leaders that attended were Credit Suisse CEO Brady Dougan, Morgan Stanley Chief Financial Officer Colm Kelleher, Citigroup Chief Financial Officer Gary Crittenden, UBS AG Chief Risk Officer Thomas Daula, J.P. Morgan investment bank co-head Steve Black and Goldman Sachs Co-president Gary Cohn ... In all, about 30 banks were represented
-EPJ Newsdesk

As The World Crashes....

Bear Stearns..Gone.

Fannie Mae...Government hearse has arrived.

Freddie Mac...Government hearse has arrived.

Lehman Brothers....A priest has been called.

Washington Mutual...On life support.

Wachovia...Alarm buzzer in Emergency Room is screeching.

AIG...Being rushed to hospital.

Merrill Lynch...High fever.

Goldman Sachs (Where Henry Paulson was Chairman and CEO before heading the Treasury).....Today's closing price: $153.47 per share.

-Robert Wenzel

WaMu Cut to "Junk," Sees $4.5 Billion Loss Reserve

Washington Mutual Inc was downgraded to below investment-grade status by Moody's Investors Service, after the S&L projected a $4.5 billion third-quarter increase in reserves for bad loans.

Moody's cut WaMu's senior unsecured debt rating two notches to "Ba2," its second-highest "junk" grade, from "Baa3," with a "negative" outlook. It also lowered its rating for the banking unit to "Baa3" from "Baa2."

WaMu said it has $50 billion of liquidity from "reliable funding sources," and expects capital to remain "significantly above" regulatory minimums for "well-capitalized" lenders.

WaMu said about $3.4 billion of the reserve increase is expected to come from residential mortgages. Credit card reserves would rise by $600 million from the second quarter as the thrift moves securitizations back onto its balance sheet, not because credit quality is deteriorating

-EPJ Newsdesk

WaMu Closes Down 30%

Shares in Washington Mutual fell 98 cents, or 30%, to a 17-year low of $2.32.The stock had fallen nearly 20% on Tuesday and 3.5% on Monday.

-EPJ Newsdesk

WaMu's CDS Spreads Surge to Record High; Stock Plunging

The cost of protecting Washington Mutual's debt with credit default swaps has surged to a record high, Reuters reports.

Five-year credit default swaps on Washington Mutual traded at 40 percent upfront, plus 500 basis points annually, up from 32 percent upfront plus 500 basis points a year on Tuesday, according to data from Phoenix Partners Group. That means it now costs $4 million on an upfront basis plus $500,000 a year to protect $10 million of debt for five years.

Wamu stock is currently down another 20.61%, trading at $2.61 per share.

-EPJ Newsdesk

The Creeping Roll Of Government In The Financial Sector

The nationalisation of Freddie Mac and Fannie Mae by the Treasury is not the only control step taken by the government this week.

Washington Mutual announced that it has entered into a Memorandum of Understanding with the Office of Thrift Supervision concerning aspects of the bank's operations, principally in several areas of its risk management and compliance functions, including its Bank Secrecy Act compliance program. In addition, WaMu has committed to provide the OTS an updated, multi-year business plan and forecast for its earnings, asset quality, capital and business segment performance.

Committed to providing a multi-year business plan? It's questionable that for moral hazard reasons the government should be involved in backing up any of these institutions at all, but it is far beyond the pale for them to become involved in the oversight of the operations of these organizations.

Assuming you buy that the government should bail these institutions out, and we don't, a bailout is a far cry from requiring them to submit business plans. What is this all about?

WaMu CEO Forced Out

Kerry Killinger is being ousted as chief executive of Washington Mutual, according to WSJ.

Succeeding  Killinger will be Alan Fishman, currently chairman of New York commercial mortgage broker Meridian Capital Group.

WaMu's shares have fallen about 85% in the past year. It has large holdings of mortgages made in regions where house prices have fallen sharply. More than $50 billion of its holdings are option adjustable-rate mortgages.

WaMu Offering 5% on 12 Month CDs

Money is getting real expensive for WaMu.

WaMu is paying 5% on an FDIC insured CDs in an environment when few banks are paying over 4.25% and most banks are under 4% for one year CD.

HTcr

Putting Bankers Who Understand Banking In Charge

The last thing the government should be doing is baling out all these jokers that are writing off billions. They should be allowed to fail, if they can't figure out away to survive on their own. Clearly, they have no idea how to manage risk or how a bank should be run. After they are out of the way, bankers who actually understand banking will rise to the top and the banking structure will be much, much stronger.
Any bank that withstood the temptation to do the nutty deals that most banks were doing over the last couple of decades has some pretty solid people in charge.

They should be the bankers of the future that should be rising to the top right now. And they are out there. Consider this story written by Eric Dash of NYT:

As many of the nation’s lenders widened their loan offerings, Hudson City [Savings Bank]stuck to collecting deposits and issuing mortgages, preferring to operate as a mom-and-pop boutique instead of a financial department store. It continued to screen borrowers carefully, since it planned to hold their loans instead of selling them to outside investors. And it steered clear of complex investments its executives could not value, the kind that would later turn toxic as the housing market collapsed.


Now, the bank that flew under the radar screen has quietly racked up a market value of $10 billion, eclipsing troubled giants like Washington Mutual that have been swamped by mortgage and credit card losses in recent months.

And Hudson City’s stock has been on a tear. Shares have risen more than 51 percent since the credit crisis began last August. The KBW bank index, one popular measure of the financial sector, is down 40 percent over the same period.

Hat tip: Nick

Who's Afraid of the Banking Crisis?

Not Toscafund Asset Management.

Toscafund , the London hedge fund that invested in Washington Mutual Inc. in April hss bought more WaMu shares and has also bought into Sovereign Bancorp. Inc.

Toscafund, founded by Martin Hughes, owns 105.5 million shares, or 6 percent, of Seattle-based Washington Mutual, according to a filing yesterday with the SEC. The fund bought a 5.1 percent stake in Sovereign, it said in a separate filing.

WaMu rose 59 cents, or 12 percent, to close at $5.33 in New York Stock Exchange composite trading.

Given that the Fed is not now increasing the money supply, there is little chance for a quick rebound in the mortgage market. Further, any rumor that a bank is in trouble can go viral in a matter of minutes. Nothing is exempting WaMu or Sovereign from these not so pleasant facts. Thus, Toscafund either knows something we don't, or is putting riverboat gamblers to shame with these extremely aggressive bets.

Lew Rockwell On Supposed "Bankrupt Banks"

Lew Rockwell, on his blog, provides some odd advice, today. Rockwell under the headline "Bankrupt Banks" writes:

The whole system is shaky because of fractional reserves, of course, but if you have more than $100,000 in Wachovia, WaMu, or Downey, GET IT OUT.

But, why single out these banks, and try to play bank analyst? The prudent thing to do, since FDIC coverage is good for only $100,000 per bank, is to never have more than $100,000 at any one bank.

WaMu Liquidity Increases

CNBC's David Faber has a solid report on the current WaMu situation, here.

Speculation That Unsecured Creditors Were "Pulling Funds'' From WaMu

WaMu tumbled for a second day in New York trading after Gimme Credit LLC said unsecured creditors were ``pulling funds''.

Mixed reports are coming in from all directions on Washington Mutual.

Gimme Credit analyst Kathleen Shanley cited a decline in federal funds purchased and commercial paper to $75 million from $2 billion at year-end, which Washington Mutual reported this week in its second-quarter results. Securities sold under agreements to repurchase dropped to $214 million from $4.1 billion at the end of 2007, she wrote.

"We won't use the phrase `run on the bank,' but we would be remiss if we did not observe that many creditors have quietly been pulling funds," wrote Shanley. Their actions are ``presenting an increasing funding challenge," she wrote. Gimme Credit is an independent research firm serving corporate bond investors.

WaMu responded by email to Bloomberg, "As we stated publicly months ago, WaMu funds all of its business through its banking operations and does not rely on commercial paper." Note this email response doesn't exactly answer the question of the size of any withdrawals. Should this be filed n the non-denial, denial box?

Chief Executive Officer Kerry Killinger has said the $7 billion cash infusion led by TPG Inc., coupled with plans to save $1 billion annually by trimming the mortgage business, gives WaMu enough money to ride out the U.S. housing crsis.

Meanwhile, credit-default swap rates are soaring on WaMu debt. Credit-default swap sellers demanded 14 percentage points upfront and 5 percentage points a year to protect WaMu bonds from default for five years, up from 7.3 percentage points a year yesterday, according to CMA Datavision.

Analysts at Piper Jaffray, Merrill Lynch and Friedman Billings Ramsey Group Inc. said after WaMu's earnings report that it may need to raise more cash. According to a clause in the TPG agreement, if WaMu raises more than $500 million in equity at less than $8.75 a share within 18 months, it must compensate TPG for the difference.

Standard & Poor's said WaMu has the liquidity to meet obligations without raising more funds through 2012. Analysts at Lehman Brothers Holdings Inc. and UBS AG also said the company should have enough capital.

Washington Mutual Stock Down More Than 25%; Analyst Says It Faces $28 Billion In Losses

WaMu shares were down over 25% in midday trading. Lehman Brothers analysts in a note Monday said WaMu could be forced to substantially boost its reserves to cover an estimated $28 billion of losses on the balance sheet, with $21 billion coming from mortgages.

Banks in the Danger Zone

On the heels of the failure of IndyMac Bank, Richard Bove at Ladenburg Thalmann has run a few screens on bank stocks to see who else may be in danger of failing.

In a report, he looks at all the FDIC-backed institutions, comparing each bank’s bad loans to its overall assets through two ratios. First, he divides the “non-performing assets” of an institution--bad loans, late loans, foreclosed assets--by all of its outstanding loans. “A ratio above 5 percent suggests danger.” The overall industry ratio is below 2 percent.

Downey Financial, Corus Bankshares, Doral Financial, FirstFed Financial, Oriental Financial, and BankUnited Financial all have danger zone ratios with Downey the highest at 13.6%.

Then Bove ran a second set of numbers dividing a bank’s non-performing assets by its reserves plus common equity. “A ratio about 40 percent is the danger zone.” You have all the same names as listed before, PLUS WASHINGTON MUTUAL which comes in with a ratio at 40.6 percent. Bove calls this being “on the edge” of danger but not quite there yet.