Friday, September 26, 2008

Wachovia next

Many of my regular and some of my more perceptive readers have asked about Wachovia.  To date I have studiously avoided stating my position.

Besides - as is now clear - my views are worth little.  I thought WaMu was ultimately better than Wachovia and preferred the preferreds of WaMu to many less risky bets.  I did not (and would not) own the common of either institution.  I would not - as I think at best they wind up diluting themselves massively.  I am fond of shorting commons against preferreds - but that trade is difficult to do these days.

Anway I was wrong.  WaMu was confiscated first.

In the past Wachovia has looked worse than WaMu.  Does anyone other than me remember the Money Store?

It will not be long before Wachovia's numbers are as bad as WaMu was last quarter.

I have no position in Wachovia but if I could I would short the common now.  The way the FDIC acted makes me think Wachovia is toast too.  

If you were the CEO of Wachovia you would be looking for a bride-groom or suitor now.  You would take a bid at a discount to market so the common is just awful.

The prefs in Wachovia would just be a bet on a willingness of someone to pay 50c a share for the common - and now the FDIC appears willing to confiscate the bank and even wipe out the senior debt there appears no reason to do that.  

The FDIC decision might be right - but the public information needed to justify it is simply not there.  The FDIC has some explaining to do.  [I am - I note - inclined to believe that the decision was well thought through - even if at the moment it looks like a shoot-from-the-hip ambush.]

This is important because if the decisions to wipe-out the claims of debt holders appear arbitrary you ensure that nobody is willing to be a debt holder.

And that - more than anything else - spells big problems for Wachovia.  Ultimately it might even spell problems for Bank of America or for America itself.



J

10 comments:

murph said...

You make a good point about wiping out the debt-holders.

The banking system needs to ATTRACT capital in, not scare it off.

The FDIC is patting itself on its back for its handling of this, which included stiffing those who provided capital (debt and equity holders) - meanwhile the Treasury Secretary is in Washington, literally on his knees, begging to bring capital in.

Anonymous said...

The President and his men have done a scare job on America and the sheeple are waking up to the fact that the financial system is unraveling. The gov't with Paulson and BB talking about the end of time is quickly creating the conditions for national bank run, the image of thousands of people waiting to get their money would quickly cause panic. WAMU was a high profile bank run waiting to happen within hours is my guess so the gov't used it powers.

Anonymous said...

I would think that the fact that the boss at WB is formerly of the Goldman gang that it might give them more time and better treatment.

OilyGasMiner said...

I can hear Wachovia’s knees knocking together. The FDIC definitely has her in their scope, and I’m sure we will see another big player, either an institution like JOM or a big investor like Buffett take her under their wings. Lets face it she has a great distribution arm, but unfortunately she jumped on the bandwagon with the rest of the banks and resorted to social thinking and loafed on her proper DD. The best outcome for Wachovia would be a White Knight in shining armor to sweep her off her feet. Almost sounds romantic. But as we know these deals are end with happy endings. I don’t too much recall the Money Store, but it sounds a lot like a synonym for the FDIC, where printing money is there specialty. Have we also forgotten that the US is sitting on $6.9TRILLION in trade deficit. I haven’t found the source as yet, but I’m interested in how much of GDP was contributed by the financials. I guess we can scratch them off the list as major contributors if they ever were in the past. Looking for news on Wach next week, as I’m sure we will hear an update very soon. Have a great weekend everyone!

manch said...

Hi John, what about Santander?

marc.van.den.bosch said...

You shouldn't be so hard on yourself. As you said so yourself, making a speculative bet is a thing of percentages. It's not because you've come out at the wrong end of a bet that the bet was flawed. As long as what you stood to gain in case everything turned out ok was worth the speculation.

Perfect foresight is claimed by many, but I haven't seen it myself. Not playing the game prevents you from winning. It's the sizing of your bets, covering your ass and considering that you could be proven wrong that will earn you money.

In the long run, that is.

cvd said...

There are 4 banking regulators in the US. WaMu was regulated by the OTS - lowest on the totem pole.

The FDIC is next lowest. My suspicion is that it's easier for the FDIC to take over a bank that is regulated by the OTS (or by the FDIC) than one regulated by the Fed or the OCC.

I also think the Fed is more likely to intervene to assist a bank that they, or the OCC, regulate.

Maybe that will help Wachovia where it didn't help WaMu.

Anonymous said...

While this is a very sensitive topic, let me just play devil's advocate here. You think that in a liquidation process, the senior certificate holders will be made whole on the basis of JP Morgan's marks. But you are forgetting an important point here.
The JP Morgan marks were simply based on a more conservative estimate of expected losses. However, the current market prices are way below almost everyone's estimate of losses. For eg: JP Morgan assumes that the Option ARM book losses are likely to be ~20%. However, if the FDIC had tried selling these loans in the market, the best bid would have been 50 cents on the dollar (or ~50% loss).
Being a participant in the mortgage capital markets, let me just say that if that portfolio were to be truly marked to market, even the FHLB advances would not be completely made whole. Now we can all argue that the current market values are just way too low but the fact remains that the senior debt holders would have been anyway completely wiped out in an actual liquidation. The one other option that FDIC prob. had was to wait and hope for better market prices as a consequence of the bailout plan. However, hope and wait is, in general, not a good strategy.

Anonymous said...

Dang shame -- Wachovia a year or two ago bought out my parents' home town locally owned bank that had been there since the Revolutionary War (the first one, in the 1770s, not the one starting next week).

If the gov't was smart enough to sell the banks back to the people in the counties they serve, would that help?

I dunno. Wasn't it FDR who, when told there were 13000 banks in the country, replied that it was a damned shame there weren't 1300 bankers?

Anonymous said...

I think it's a very mistaken idea to try to rely on real analysis now. The fundamentals are disconnected from reality to a point where emotion and fear is king. I'm not saying Wachovia is the buy of the century, but as Baron Rothschild indicated that the best time to buy is when the blood is running in the streets, the blood is running in the streets. I think one of the largest beneficiaries in our new Union of American Socialists bailout is Wachovia. If they do a deal on their own before the package is released, the company goes out ala Bear Stearns. If they can hold their breath for a few more days, we've got a nice 100%+ return from here. Very little to do with Alt-A loans, Tier 1 assets, or reserve requirements- just pure emotion.

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