Thursday, September 25, 2008

JP Morgan takes over WaMu's deposits

And shareholders get wiped out, along with debt holders. $16.7 billion in deposits left WaMu since September 15, and the regulators ushered in the shot-gun marriage.

They were quick to say, however, that the FDIC fund would be untouched!

While the exact structure of the transaction wasn't immediately known, J.P. Morgan is expected to acquire Washington Mutual's deposits and branches, as well as other operations. The deal isn't expected to result in any hit to the Federal Deposit Insurance Corp.'s bank-insurance fund, according to a person familiar with the arrangement. But it's likely that another arm of government would have to pick up the tab. Some analysts have worried that a WaMu failure could cost more than $20 billion.

No hit to the FDIC? At least JPMorgan is used to the Fed's accounting! Yesterday, in Bernanke's testimony, he said that home equity loans were worth only pennies on the dollar. Thank goodness JP Morgan only has "high quality" HELOC's. At their latest quarter, they owned $95.1 billion in home equity loans. They charged off $2 billion worth of them, and 3.61% were over 30 days delinquent. Now last December, they had unused home equity lines of $74 billion; in June it was down to $66.7 billion, and the amount of home equity loans outstanding remained at $95 billion meaning even JP Morgan has been closing down unused HELOC's. However in Q2, JPM did $5 billion of new home equity loans. Without these $5 billion of new HELOC's their deliquency rate on HELOC's would of been 3.82%. It means that even JP Morgan's affluent customers are getting squeezed. Or it also means, that Chase mortgage, which was one of the last to quit offering HELOC's, was still underwriting suspect paper, or that the $35 billion of HELOC's in California, Florida, Ohio, Michigan and Arizona are causing significant problems.

Now JPM has a ton of Level 3 assets, courtesy of the merger with Bear Stearns. But if we exclude that $41 billion, JPM still moved $13 billion of mortgage assets into Level 3 the first six months of this year. But with JPM, none of this matters. The bank is too big and powerful for the shorts to attack.

That's why JPM is the Fed's bank. They have a great CEO, and they have the complete confidence and trust of the market. And they do the Fed's bidding.

How else would the market swallow the idea that the run on WaMu wouldn't affect the FDIC fund? (The FDIC "fund" isn't a fund. It's just an entry on the government's balance sheet. And who then, absorbs the $31 billion writedown? But the fund is untouched! More here:)

The market buys it, because Jamie Dimon and his bank is too credible.

And now they have the deposits of WaMu!

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