Sunday, September 28, 2008

WaMu's bailout math

JP Morgan paid $1.9 billion to the FDIC for WaMu. It was an exceedingly sweetheart deal. WaMu had $296 billion of assets, and $265 billion of liabilities. So mark the assets down by $31 billion. That's what JP Morgan did; a figure that conveniently wipes out the debt holders, and allows JPM Morgan to contribute the $1.9 billion to the FDIC fund for the purchase of WaMu.

In 2010, JPM now assumes they will now earn over $5 a share, with .60 cents coming from this acquisition, and that WaMu will be $12 billion additive to capital by 2011. Over 600% on the acquisition.

Not a bad price. Mark down the loans by $30 billion one hand, and then declare you will make $12 billion on the deal the next three years! Taxpayers should make sure these loans don't get sold to the government. WaMu shareholders and debt holders alreay paid the bill!

Remember what S&P had to say about WaMu on September 16?

S&P acknowledged that WaMu's deposit base appears to be stable and the company has enough liquidity to meet all fixed obligations throughout 2010. "The bank is operating with adequate capital positions from a regulatory perspective and has demonstrated funding resilience as the deposit franchise has remained stable," the rating agency said.

And what CreditSights had to say afterwards?

``It seems that WaMu's major debt holders have been stranded by regulatory intervention,'' David Hendler, an analyst at bond research firm CreditSights in New York wrote in a report today. ``The deal structure seems to be unprecedented in that it excludes bondholders at the holdco and bank levels from the major assets and liabilities of the operating bank.''

WaMu has $28.4 billion in outstanding bonds, with Los Angeles-based Capital Research and Management Co. its largest noteholder, according to data compiled by Bloomberg.

Bondholders' only recourse may be the capital remaining at the holding company, Washington Mutual Inc., which Hendler estimated at $2.8 billion. It's unclear whether bondholders at the holding company or at the bank subsidiary level will have first claim on the cash because regulators may force the money to move to support the bank subsidiary, he wrote.

Holding Company Investors

If the holding company keeps the cash, holders of $4.1 billion of Washington Mutual Inc. senior unsecured debt may see a recovery of more than 50 cents on the dollar and investors in $1.6 billion of subordinated debt may get back as much as 10 cents, according to CreditSights. In that scenario, bondholders at the bank level may get an ``extremely low recovery,'' the report said.

If the money is moved to the bank, holders of Washington Mutual Bank's $14.8 billion of senior unsecured debt may recover ``in the mid-to-high teens'' and the holders of $7.9 billion of subordinated debt may see a ``minimal recovery,'' Hendler wrote. Holding company bonds would have an ``extremely low recovery'' in this scenario, he said.

Washington Mutual Bank's $1 billion of 5.65 subordinated securities due in 2014 tumbled 24.75 cents to 0.125 cent at 10:10 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Worst Case

``The worst case developed for the major credit instrument holders,'' wrote Hendler, who didn't immediately return a phone call seeking comment.

Now why will the $700 billion bail-out work? Look at the fudge factor. The government can buy these marked down loans at above market prices, and in effect, give a cash infusion to the banking system.

They'll get the same action as Jamie Dimon!

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