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Friday, September 26, 2008

Washington Mutual - Largest Bank Failure in History

Yesterday the government seized the assets of Seattle's Washington Mutual (WM,) affectionately known as WaMu. At the same time, the government brokered an emergency sale of most of the assets to JP Morgan Chase (JPM.) The deal saves taxpayers and FDIC from another loss as JPM assumes the risk in exchange for the assets at a bargain basement price. WaMu customers should not be affected while shareholders and some bondholders will get nothing.

The failure of Seattle's Washington Mutual is the largest bank failure in History.

We knew Washington Mutual was in trouble because it has appeared high on the survey of "Best CD Rates" where it had the highest 5-year CD rate, currently at 5.0%, for some time. Troubled banks are paying high CD rates to attract capital at far better rates then they can get on Wall Street. For example, AIG is paying LIBOR plus 8% and 80% share dilution to the Government. The current LIBOR rate is 3.46% so AIG is paying more than double the rate WaMu pays for CDs. I suspect WaMu will continue to offer high rates to keep customers during the transition to JP Morgan Chase.
See "Washington Mutual Bank Best CD Rates with FDIC" for current rates as of 9/23/08
WaMu was also #14 on "Dick Bove's List of Banks In Danger of Failing" under the category of "non performing assets as a percentage of equity" so we had plenty of warning in advance. Someone close to me cashed in their WaMu CDs last week, paid the penalty, reinvested $99,000 at WaMu for total FDIC protection of principal and interst until the dust settled then invested the remainder of the money in a new bank for to get full FDIC protection. The government acted before more people pulled their money out and created another run on a bank.

Jamie Dimon, Chairman and CEO of JP Morgan Chase said, "We think this builds a great franchise for us....We are building this franchise for the long term, not next year or the next five years but the next one hundred years."

Merrill Lynch: "The strategic fit is good and exactly what the company has long articulated it wanted, at a knock-down price which manages the risks. "

Deutsch Bank: "Earnings accretion (to JPM ) is mostly offset by P/E dilution and a higher risk profile. Maintain Hold."

Disclaimer. I own and trade XLF, the financial sector ETF, around a core position that is well in the money for both my personal portfolio and "Kirk's Investment Newsletter Explore portfolio." JPM is the number two holding of XLF according to ETFConnect.com:
Holding As of
04/30/2008
% of
XLF


Bank Of America Corporation 8.05
Jp Morgan Chase & Co 7.82
Citigroup Inc 6.08
American Intl Group Inc 5.02
Wells Fargo & Co New 4.78
Goldman Sachs Group Inc 3.67
Wachovia Corp New 2.91
Us Bancorp Del 2.87
American Express Co 2.8
Morgan Stanley 2.51

The best news is for taxpayers who won't have any loss from this deal.

Kirk Lindstrom's Investment Letter Performance

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