Psychosis

Under the visible stress of repeatedly lying about and denying unmistakable evidence, Washington Mutual reported its bruising fiscal second quarter 2008 results. Everybody could hear management’s connection to reality snap like a dry twig.

Despite a monumental loss of $3.3B for the quarter, an increase of loan loss reserves to $8B from $5.91, cutting $1B in expenses by the end of 2009, selling off $10B worth of assets to free up roughly $550M in capital, readying $40B in liquidity, and the expectation of as much as $19B in mortgage-related losses before the bloodshed subsides, the dashing CEO said “… we are sufficiently capitalized to manage the crisis.” This is where management makes its clean, psychotic break with reality.

“In the face of unprecedented housing and mortgage market conditions, we are continuing to execute on a comprehensive plan designed to ensure that we have strong capital and liquidity, an appropriately sized expense base and a strong, profitable retail franchise,” CEO Kerry Killinger said in a statement. “Our recent $7.2 billion capital raise, combined with the other proactive steps we have taken this quarter to strengthen our banking franchise and further expense reductions, continue to move us toward achieving these goals.”

But what is really concerning is the increase in loan loss reserves and the anticipated $19B price tag for the credit binge ingested during the housing bubble. How is WaMu going to cover that? HOW? About the only thing WaMu did right was to announce it had no intentions of raising more capital, because of course they can’t. WaMu raised $7B from a group of institutional investors led by TPG and those shares are below that offering price now.

Who will buy WaMu now? Would you? The reality is that the best the bank can hope for is a continued stock rally and the possibility of selling off some more of its assets. Furthermore, that chunk added to the loan loss reserves speaks louder than words. It says at least half of WaMu’s split personality expects things to get worse.

As if the past quarter wasn’t bad enough:

Total net charge-offs, or loans written off as unpaid, increased to $2.17 billion, while nonperforming assets grew to 3.62 percent of total assets as of June 30, from 2.87 percent at the end of the first quarter.

No amount of denial will prevent the reverberations of a $2.17B thud.

It’s buy-and-holders who invest the most and sell last. It’s for them that WaMu needs to take a cold look at reality and do the hard things that need to be done. Instead it has a split psychosis standing on the edge of insanity daring itself to jump.