I purchased preferred shares in Washington Mutual when it was in distress and lost money when it was confiscated by Sheila Bair. I have argued that it was the most extraordinary action made by government during this crisis and that an essentially solvent bank was confiscated.
In anger I posted my response to the WaMu takeover the day after it happened. I also purchased adwords on Google so that when you google Sheila Bair’s name you will get an advert linking to my blog and explaining why she should resign. It is no secret I dislike Sheila Bair.
Moreover there are law suits (whose basic premise I agree with) that JP Morgan whilst doing due diligence on Washington Mutual was also badmouthing them in the press and encouraging the regulator to take them over. [It is easier to sue JPM than the Federal Government.]
That said – we have a fairly comprehensive proof that JP Morgan did lie to regulators. The only issue is did they lie to regulators when encouraging them to confiscate Washington Mutual or did they lie when they were conducting the stress test? If they lied to Sheila Bair to get them to confiscate WaMu and she believed them then she must resign. But the alternatives I see are worse.
Detailing the JP Morgan lies
First you need to look at the document that JPM released when it took over WaMu.
Here is – with what they think the losses will be in the various stress scenarios.
JP Morgan is predicting $36 billion in losses in WaMu's book in their base case and $54 billion in the "severe recession" case.
These losses are measured since December 31 2007. The losses as estimated in the stress test are from the end of 2008 – and to get the numbers consistent you need to take about 8 billion dollars off these numbers as about 8 billion in losses were realised during 2007.
It already looks like we are in the severe recession. Unemployment is well over 8 percent. On these numbers – numbers that were presented by JP Morgan to the market and to regulators – JPM has to take a further $46 billion in losses on the Washington Mutual book alone. (46=54-8).
Almost all of these losses come from mortgages. Indeed in the presentation JP Morgan made when it merged with Washington Mutual all the losses except about a billion dollars came from the mortgage book.
The only problem is that the losses estimated on mortgages by the regulators (including Sheila Bair) in the stress test include only $39 billion in losses – being 12 percent of the entire mortgage book. Here are the results of the stress test on JPMorgan.
The implication is that there are negative losses in the rest of JP Morgans very large book. This is unlikely.
So we are left with two possibilities both of which involve JP Morgan telling porkys:
- The losses as estimated by the JP Morgan and told to regulators when they were manipulating Sheila Bair into confiscating Washington Mutual were lies – indeed were so grotesquely over-estimated as to be absurd criminal lies or
- The losses as estimated by JP Morgan and the regulators in the stress test are grotesque under-estimates – which – in order to be that grotesquely wrong had to involve major misrepresentations of their book by JP Morgan.
It is possible that both sets of losses were grotesquely mis-estimated - though the differences here are so stark that a simple and honest "bit of both" is not possible.
I prefer the first choice. The losses at WaMu as suggested by JPM never made any sense – and I prefer the idea that – encouraged by JPM’s lying – Sheila Bair confiscated a solvent bank.
The second choice suggests the stress tests were totally phoney and allowed JP Morgan to lie at will. If that is correct the regulators have a duty to confiscate JPMorgan as its embedded losses (using similar ratios as they used in arguing for the Washington Mutual takeover) leave it desperately and diabolically insolvent.
The idea that Sheila Bair confiscated a solvent bank encouraged by lying bankers should not surprise anyone familiar with big-bank lobbying prowess. Most the bears in the blogosphere would prefer believe the stress test was phoney without any real assessemnt of likely losses.
Technical accounting note the losses in the stress test page were before 20 billion in purchasing adjustments. Those purchasing adjustments were JPMorgan over-estimating the losses at WaMu so - as the loans come in a little better than expected JPM shows better-than-real earnings.
POST SCRIPTS: The first response I got to this suggests a third possibility - that JP Morgan (and presumably all the other banks) were ASKED to give the regulators the information that they wanted to hear for the stress test - that they were asked to lie. That I suspect stretches reality. It is hard to keep things like that quiet - and also some banks (notably Wells Fargo) are very unhappy.