WaMu Cut Deeper and Taken Out

WaMu has now officially been put out of its misery.

The Office of Thrift Supervision seized Washington Mutual today and named the Federal Deposit Insurance Corporation receiver, making the 13th official FDIC bank closure of 2008 the largest in history. J.P. Morgan has been named as the acquiring institution. All of Washington Mutual’s banking operations will resume seamlessly and none of their depositors accounts are at risk according to the FDIC press release.

J.P. Morgan Chase acquired the banking operations of Washington Mutual Bank in a transaction facilitated by the Federal Deposit Insurance Corporation. All depositors are fully protected and there'll be no cost to the deposit insurance fund.

" For all depositors and their customers of Washington mutual bank, this is simply a combination of two banks," said FDIC Chairman Sheila C. Blair." For bank customers will be a seamless transition. There will be no interruption in service as a bank customers should expect business as usual come Friday morning."

It seems that J.P. Morgan will get the deposits, and the taxpayer as usual the shaft.

According to Bloomberg:

WaMu had about 2,300 branches and $182 billion of customer deposits at the end of June. Its $310 billion of assets dwarf those of Continental Illinois Corp., previously the largest failed bank, which had $40 billion ($83 billion in 2008 dollars) when it was taken over in 1984.

JP Morgan’s takeover price (for the branches and deposits) of $1.9B, were it applied to WaMu as a whole company, would imply a share price of about $1.10, which would be about half of its recent lows. However, given that everything but the liabilities has been stripped from the company, we expect the stock to go to zero.

Looks like the short-selling ban did little but delay the inevitable for WaMu.With the multiple takedowns of broker-dealer banks and Goldman Sachs and Morgan Stanley both changing their stripes, only the feds seem to notice the stench coming from the ground where WaMu lies gasping.

Washington Mutual, the nation’s largest thrift with $310 billion in assets, reportedly is under the gun from the Office of Thrift Supervision to get a deal pushed through, but analysts say it all may have to wait until Treasury Secretary Henry Paulson brokers a deal with Congress to get the high-stakes bailout plan pushed through.

“We’re aware of the situation and we’re monitoring it closely,” said OTS spokesman William Ruberry.

Sure they’re monitoring it closely and they don’t want to get stuck with all the “toxic” mortgage assets on the bank’s balance sheet. Washington Mutual’s ratings were cut down to cheap junk by Moody’s Investors on Monday. Then to more junk today by Standard & Poor’s. Even as the bank appeals for fresh capital, spreads on the bank’s debt are wide open.

Credit default swaps on WaMu’s debt rose to an upfront cost of 61.5 percent the sum insured, or $6.15 million paid upfront to insure $10 million in debt for five years, from 54.3 percent on Tuesday evening, according to Markit Intraday. The swaps also require annual payments of 5 percent.

Before the bubble burst in the summer of 2007, to say spreads could gap like this would be grounds for commitment, but here in the aftermath of the bubble burst it’s commonplace.

So what does this all mean for Washington Mutual? Well contrary to the standard analysis out there, it means absolutely nothing:

Meanwhile, WaMu’s situation continues to grow more dire. Federal regulators reportedly have been pressuring the thrift to recapitalize or find a buyer, and two major ratings firms downgraded its credit rating further into junk territory this week.

See, there is no more pressuring Washington Mutual for anything. You can’t get blood out of a dead WaMu. Former CEO Killinger already bled it to the last red cent before leaving the hot seat. The bank’s $310B in assets is now dwarfed by incalculable mortgage-related liabilities. As the option ARM resets start popping off, that debt is only going to grow, not disappear. Who wants it?

A single buyer might be willing to take on the whole company if the mortgage business is shielded by the government. Otherwise, a breakup to segregate its attractive retail banking and deposit base is possible.

Shielded by the government just means an FDIC takeover. In other words, the taxpayer gets stuck with it again. But that goes right along with the Treasury’s bailout plan, and I have to believe that’s what the delay in Wa Mu demise was all about. What that really means is Killinger knew what he was doing all along. He and the other insiders got out with their riches and the taxpayers get stuck with the junk that is now WaMu.