WaMu goes down

And yet another one bites the dust. Washington Mutual was last week’s casualty in a financial saga that has seen Lehman Brothers and IndyMac driven out of business, and that has led to the hastily arranged rescues of Merrill Lynch and Bear Stearns.

In what is by far the largest bank rescue in U.S. history, federal regulators seized WaMu and struck a deal to sell the bulk of its operations to J.P. Morgan. WaMu’s breathtakingly swift collapse was triggered by a wave of deposit withdrawals as many investors – proving to be prophetically right – believed the end was near. The good news is that all WaMu depositors will have access to their cash; the bad news is that holders of $30 billion in debt and all common shareholders will end up with nothing.

To get an idea of how fast and furious WaMu’s fall from grace was, last September its stock was changing hands at $35 a share. In Friday’s trading, it was changing hands at $0.16 a share, and that’s probably overvalued. The irony, if there is any, is that WaMu rejected a takeover offer from J.P. Morgan in March that valued the savings and loan at $4 a share.

Unfortunately, Washington isn’t doing much to assuage concerns of very nervous capital markets. The Bush administration wants Congress to authorize a $700 billion debt issue to allow the government to purchase collateralized debt obligations (CDOs) that banks can’t sell except at large losses, including mortgage-backed securities backed by poorly performing loans. While Democrats say the plan should include direct help for troubled borrowers and protections for taxpayers, some Republicans want any government program to be aimed solely at unfreezing the credit market’s institutions. As of week’s end, the two sides were at an impasse.

Eric P. Egeland
RE/MAX UNITED
847.337.7090
DeerfieldsAgent.com