September 15, 2008

Well, At Least Rates On Treasuries Are Falling…

It’s going to be a rough morning (and then some), so let’s just get this out of the way…Lehman is going bankrupt (think mortgages) while Merrill avoids a similar fate by getting acquired, the equities market is bracing for a wild ride (not in a good way), and option ARMs are rearing their ugly head over at Washington Mutual (and beyond).

As many as 45 percent of borrowers with payment-option adjustable-rate mortgages issued from 2004 to 2007 and bundled into securities may default, according to Fitch Ratings analysts Roelof Slump and Stefan Hilts. Washington Mutual held $52.9 billion of the mortgages, also called option ARMs or negative amortization loans, on its books in the second quarter, with defaults doubling to $3.2 billion from the end of 2007, according to a filing with the U.S. Securities and Exchange Commission.

Two other relevant option ARM factoids: “About 83 percent of the option ARMs issued from 2004 to 2007 were underwritten without full documentation of borrowers' incomes,” and “Washington Mutual issued half its option ARMs in California.”

No word on the exact Option ARM breakdown (so to speak) in the Bay Area.

Lehman Files for Biggest Bankruptcy as Suitors Balk [Bloomberg]
Bank of America to Acquire Merrill as Crisis Deepens [Bloomberg]
U.S. Stock Futures Drop, Pointing to Steepest Slump Since 2002 [Bloomberg]
Washington Mutual Hobbled By Increasing Defaults on Option ARMs [Bloomberg]

First Published: September 15, 2008 6:30 AM

Comments from "Plugged In" Readers

It doesn't matter that treasury rates are falling. You're not actually going to be able to get anything near those rates.

Deleveraging is not business as usual.

Posted by: scurvy at September 15, 2008 7:18 AM

Sorry, meant to say that you can't get near those rates for a mortgage.

My bad.

Posted by: scurvy at September 15, 2008 7:20 AM

This might be a dumb question but didn't Lehman Brothers have access to free (or near free money) at the Fed window? Were they cut off or they decided not to borrow? Why wouldn't they continue to borrow and survive a few more weeks?

Posted by: chuckie at September 15, 2008 8:23 AM

So is this the capitulation moment?

Many thought that the failure of Bear Sterns was the big moment. Personally, I thought the failure of Fannie and Freddie would have been the moment but alas the market seemed to shrug it off.

This could be the moment but as I write this the market is down 225 after being down 340 on light volume. All the market talking heads keep saying they are looking for that big down day on heavy trading volume and that will be the signal that the market has capitulated and hit bottom. Given that this STILL does not appear to be the capitulation moment.

Or am I just looking at this wrong, since the housing crisis is unwinding so much slower then other busts should we be even looking for that single big down trading day?

Will the moment be a collection of several big announcements over time like we have seen since the collapse of Bear Sterns.

Posted by: badlydrawnbear at September 15, 2008 8:24 AM

Bought 10 contracts of the WM APR 4.00 Put last week. I think I'll go out for a nice dinner if that pick pays off this week!

Posted by: Jimmy (Bitter Renter) at September 15, 2008 8:40 AM

Everybody should be refinancing now. 30yr fixed mortgages are now at 5.5% conforming, and 5.825% to 6% for jumbo. It's amazing what's going on.

Just call your mortgage broker.

Posted by: Prime at September 15, 2008 8:41 AM

The problem with Lehman was not liquidity it was solvency. They held around $50 billion in illiquid assets that they were marking at prices that were significantly higher than they would have received had they tried to sell them in the open market. The company held $600 billion in total assets on a capital base of $25 billion. This is why everyone who could read a balance sheet was short Lehman's stock. It is why Lehman couldn't get a deal done in time to save itself.
I know everyone is looking for capitulation. The Lehman bankruptcy (in addition to a possible failure of AIG and WM and WB) have enormous repercussions for the market and economy that all those bozos on CNBC who keep talking about "we've hit bottom" don't really understand. We are in the middle of a massive delevering cycle. With Lehman, Bear and Merrill gone. AIG, WM next, if you thought it was hard to get a loan before, it just got alot harder.

Posted by: k10 at September 15, 2008 8:44 AM

You can only re-fi if you can qualify.

That's a big if for many folks these days.

Posted by: Mystery Realtor at September 15, 2008 8:46 AM

Everybody should be refinancing now.

Refi on liar loans? They'll ask you docs and good luck on that. You overstated your income which is illegal. Remember?

Refi on 0-5% down loans? They'll ask you to shore up your loan with more cash. Are you ready to put cash in a depreciating asset? A big like margin calls, imho.

Refi on 80/20 fixed rate 30-year amortized loans? Sure. By the way, the 20% you put down 4 years ago is gone along with your principal payment.

Posted by: San FronziScheme at September 15, 2008 9:12 AM

ebay rumored to be laying off 10% (1500) soonish... i don't think today is capitulation day. far too many ripples that need to capsize boats before the pain is clear outside of housing & finance. give it time...

Posted by: tony at September 15, 2008 9:30 AM

tony, please tell me you are not repeating the valleywag story (which reported a report that ebay *should* do this).

It's bad enough trying to keep track of the armchair economists (who pick and choose data to fit their outlook)!

I do believe the entire silicon valley has superfluous employees (google could lay off 20% of its employees and not change a thing), but let's not get ahead of ourselves just yet :)

Posted by: dub dub at September 15, 2008 9:40 AM

tony, a friend of mine at ebay told me the same thing two weeks ago. Said he was safe but that the number was larger than what you said.

Posted by: scurvy at September 15, 2008 10:01 AM

@dub dub

no sir, not the 'wag (although you might be surprised how right valleywag can be -- unfortunately, i can only call them out after they occur due to proliferation of NDAs et al).

in this case, it was a baron's story (based on an analyst group), which AP has picked up. my friends at ebay have been networking very aggressively of late...

dub dub, know you don't need this link, but FWIW for the rest of the crowd:

http://news.google.com/news?hl=en&ned=us&q=ebay+layoff

here's the baron's article:
http://online.barrons.com/article/SB122125823888930015.html?mod=googlenews_barrons

Posted by: tony at September 15, 2008 10:09 AM

I was just watching the business channel and they were talking about a large Japanese bank (Mitsubishi) and how its stock was down, but that it doesn't have much exposure to the subprime loans so it should fare well. Is this entire mess because loans were given to people that couldn't afford them in a market that wasn't sustainable in its growth? All this crap all over the world because of inflated real estate in the US? Is that even possible? What kind of smart people did we have running these companies if they thought that buying these securities could actually make them money? It doesn't add up. Am I missing something?

Posted by: majr at September 15, 2008 10:20 AM

tony -- thanks, the links are helpful. Funny I didn't even bother googling because I've felt layoffs could begin (almost) anywhere in tech any time now :)

Most of the folks I know in tech are "worried" (that's an easy one), but none are having trouble finding work yet.

And sorry if my original response seemed curt.

Posted by: dub dub at September 15, 2008 10:21 AM

Foreign banks are losing money on mortgage-backed securities that they purchased from U.S. Investment Bankers, such as Bear Sterns. That's why the mortgage melt down is affecting foreign banks.

Posted by: Jack M at September 15, 2008 10:34 AM

All this crap all over the world because of inflated real estate in the US?

Only partly. If you look at European RE prices, they followed the crazy pace that the US has set. Think Ireland and Spain that are suffering a downturn, but also UK, France, Italy and others that had big RE appreciation between 2002 and 2007.

Think of prices in Paris France. Areas selling for 1500 Euros/m2 or less in 2000 sold for a minimum of 5000 Euros/m2 in 2006-2007. All this while incomes were almost flat.

Low interest rates, loosened lending standards, blind faith that it would go up and up and up. They had the same recipe for a meltdown as the US and they are sh!t-scared that they'll go through the same pain as us.

And it's not only Europe. China was crazy too (Shangai prices through insane levels) as was Australia and many many others. The US led the world and now the slo-mo trainwreck if starting to affect everyone.

But no, it will not affect "proper SF" ;)

Posted by: San FronziScheme at September 15, 2008 11:01 AM

I didn't realize that Europe and China followed the same pattern with real estate. That makes it scarier. Does this cause money to dry up everywhere which means you can't have growth? I am a little confused on the growth aspect. How do you sustain growth forever? As for the SF proper joke we hear all the time, I think we can all agree that even if values didn't go down significantly, we are all affected by these huge things that are playing out in the world markets. Does this make a global market better or worse for the world?

Posted by: majr at September 15, 2008 11:15 AM

I don't know about a global meltdown. But the popular idea that the world was disconnected from us is just being proven wrong. Problems in the US do affect the world either through bad investments or decreasing imports or many other channels. And we are affected by other people's problems, no question.

Posted by: San FronziScheme at September 15, 2008 11:29 AM

The amazing thing about the 10-yr falling to below 3.5% is that many homeowners in SF who do not need to refinance b/c they are well capitalized CAN refinance for 0.5-1% lower right now. True, docs are required, 20% down etc, but the point is that those who don't need lower mortgages are the ones who ironically will benefit, and who WILL refinance and save another 500-1000/month based on 500-1mil sized mortgages.

Posted by: Prime at September 15, 2008 11:39 AM

Prime-

So? You don't think they should have some reward for being in the minority that actually is prudent about their money?

The government is trying to bailout the irresponsible (from mortgage companies to individuals). That will hit everyone - including the responsible ones. Shouldn't the responsible ones get something back?

Now if only the responsible fence sitters had options... But they don't, and they won't.

Posted by: Treeman at September 15, 2008 11:46 AM

So a big bank failed and the sky is still there.

The banks were supplying blocks of mortgages that they divided up and sold. They took big fees and gave themselves fat bonuses from all of their "profits". No one wanted the lower tranches so the banks held them on their books at something near full value, because, after all, if the market recovered, everyone would pay on their loans.

So they just kept doing this right through the meltdowns: make the loans, take the fees, pay them out in bonuses and hold the bad stuff at nearly full value.

Of course, the money ran out as they collected more and more of this stuff. Had they stopped, they wouldn't get bonuses, so they weren't about to stop no matter what the market was doing.

The theory was that if the market didn't recover, the government would bail them out, so they were still making these types of loans. The sub prime stopped awhile ago because they couldn't even sell the upper tranches, but they kept going full bore on the alt-a stuff because they wanted the fees, and as long as they could stuff the lower tranches on their own books and keep them there at full value, they could keep collecting bonuses. The reality was that if they had been properly accounting for the lower tranches, they would realize they were losing money on every issue, but that would conflict with their bonus plan so they looked the other way, sucking money out in the form of bonuses and letting the shareholders deal with the problems.

It is THAT practice which should finally come to a screeching halt. It is THAT practice that kept the SF market alive, as people with high credit ratings kept taking no doc loans, way out of line with their incomes. With the banks holding the lower tranches that took the first risk of nonpayment, the investors figured why not.

It's down somewhat from the peak, because it got harder to sell off the upper tranches, but it hadn't died as of Friday. It should be dead by next Friday.

Fortunately, the people who took those loans are in no position to sell, so the supply is keeping pace with the lower demand. When their hand is forced, and they have to sell, life will be different, but for now, everything is A-OK with the SF market, though volumes, and listings, should start to trend down in a couple of months.

I expect that SF medians will go UP as the subprime problem that is driving up volumes at the low end starts to fade. By the end of 2009, failing some sort of bailout, prices in SF will start heading down in a big way.

Posted by: tipster at September 15, 2008 11:47 AM

Treeman - This is just the nature of capitalism, however you define the word. Homeowners have always been the minority in SF. The gov't is trying to bailout America's overleveraged borrowers, and b/c they cannot discriminate, the SF homeowners who are doing fine (there actually are many who don't need to sell in case you were wondering) get bailed out before. You put more money in the hands of the well capitalized or rich, and you hope that money trickles down to the less wealthy.

The issue is, like it or not, the gov't will tend to ALWAYS bailout irresponsible masses, if things get dire enough. Things are very dire right now for middle america, and equity investors, and we are seeing the bailout right now in full force, like it or not. Don't fight the Fed, and don't fight the gov't. Profit from them.

Posted by: Prime at September 15, 2008 11:55 AM

Actually, I'm not the one complaining. I get it, and I'm fine with people who don't need a break getting a break. I was just pointing out that they are getting a break, but they were also responsible.

Posted by: Treeman at September 15, 2008 12:00 PM

When is this hitting the bottom?

I'd say after AIG, WaMU and Wachovia all disappear, in anther 3 weeks? I am not counting the smaller fishes.

Funny how the RE crisis has turned into a banking crisis. No major builders fail this year, but look at the banks.

Posted by: 11223 at September 15, 2008 12:01 PM

Bought 10 contracts of the WM APR 4.00 Put last week.
Bought WM outright (sure wish my basis was lower than $2.0/share, though.) I'm willing to go against Satchel here and bet that the Man does not want to see lines snaking around the block at every WaMu branch in the country. Click... I think I just heard Hank loading a shotgun in the vicinity of JPM (and wouldn't be suprised if some "guarantees" are included).

Posted by: EBGuy at September 15, 2008 12:08 PM

^^^I highly doubt that any of those three will disappear. Wamu is probably in the worst shape of the three (especially considering their exposure in CA), but even they are pretty well capitalized compared to the banks and others that have failed so far.

Posted by: Brutus at September 15, 2008 12:10 PM

With banking industry, confidence plays a big role. if everyone thinks that you are in trouble and stops doing business with you, you are dead in a couple of days, because evrything is highly leveraged.

This is unlike more traditional industry like auto makers. they have been struggling for year, and they are still just that - struggling.

Posted by: 11223 at September 15, 2008 12:16 PM

But why is AIG in trouble? What happened to them? From the talk on the TV, they are very large. I heard something about problems with their credit rating. If they get downgraded and then have to borrow money I guess they have to come up with more collateral which can put them in a cash pinch? Thanks for the crash course in Econ 101. I wish I had taken more courses like that in college.

Posted by: majr at September 15, 2008 12:32 PM

Wachovia will surive. They are well capitalized.

Posted by: Jack M at September 15, 2008 12:57 PM

Wachovia will survive. They are well capitalized.

Posted by: Jack M at September 15, 2008 12:57 PM

Going to close my Washington Mutual accounts and switch to a Schwab high yield investor checking account. Is Chuck a safe bet these days?

Posted by: sf at September 15, 2008 1:01 PM

AIG is failing for the same reasons the investment banks are failing, because they were leveraged 30 to 1 and were using over priced RE assets to do it.

So instead of having 1 billion in assets to support the extra 29 billion they borrowed they only have 100 Million in assets supporting 29 billion in debt and suddenly they have to come up with 900 million in cash.

To do that they have to try and sell something, like Lehman tried to sell it's commercial real estate holdings (which they couldn't sell today), but no one wants to buy it so they, Lehman, are now bankrupt.

AIG is just another player in the game who used RE assets to come up with money to insuring all this now worthless assets and bad debt.

So the banks assets are worthless, the assets AIG was using to come up with money to provide insurance are worthless and it all just spirals out from there


Posted by: badlydrawnbear at September 15, 2008 1:04 PM

but even they are pretty well capitalized compared to the banks and others that have failed so far

Um, no. Just look at the very high interest they are paying on CDs and you'll realize they are running a ponzi scheme.

The game WM is playing is to book profits based on people who are paying the option arm loans. People make the minimum payment, which doesn't even cover the interest, and WM uses the fact that they are paying at all to keep the loans they are holding at full value on their books. No point in writing off a "performing loan".

They also book as revenue the payment the customer was supposed to make, not just the minimum, so they have been booking phantom revenue in spite of the fact that real cash isn't coming in. They then hold that phantom revenue on their books so that they can appear well capitalized.

They ignore the fact that independent appraisers would value those loans at around 45 cents on the dollar because the fact that someone is making the minimum payment does not really mean they will make the higher payment or that they will do anything but walk away when the payment resets.

That's what this whole crisis really is: it was a shell game with a couple of different flavors, and now the people playing the shell game have run out of dollars to move around. Wamu stays afloat because it basically bribes depositors using an FDIC insured CD at 5% to use to pay the defaults they are racking up on their mortgages. At some point, the defaults overwhelm the ponzi scheme and WM fails.

Most people think it's not too far away.

The problem with a ponzi scheme is that you cannot stop the scheme or it collapses. So the sooner they fail the better.

AIG insured mortgages that everyone knows are not going to perform. They took the fees and pushed off the liabilities, which they grossly underestimated because everyone else was underestimating them and they wanted the business so they sucked it up and insured the loans. All the kings horses and all the kings men, won't be able to put humpty dumpty back together again when they finally take their big fall.

That will be when the pension funds inform their members that they lost all their money. No need to book the loss now, when it is currently insured by AIG!

Posted by: tipster at September 15, 2008 1:06 PM

^^^I'm not saying that they aren't hiding some shaky numbers, just saying that their numbers aren't even in the same realm of shakiness as Bear Stearns, Lehman, or even Merrill's numbers. "Disappear" is the word I was focusing on too - Bear basically disappeared. Lehman definitely has now disappeared. Merrill really hasn't, it's just simply been bought by someone else with a better balance sheet. I can't see any of the three mentioned above as "disappearing" like Bear or Lehman.

Posted by: Brutus at September 15, 2008 1:15 PM

"The game WM is playing is to book profits based on people who are paying the option arm loans. People make the minimum payment, which doesn't even cover the interest, and WM uses the fact that they are paying at all to keep the loans they are holding at full value on their books. No point in writing off a "performing loan".

They also book as revenue the payment the customer was supposed to make, not just the minimum, so they have been booking phantom revenue in spite of the fact that real cash isn't coming in. They then hold that phantom revenue on their books so that they can appear well capitalized."

How do you know this?

Posted by: anon at September 15, 2008 1:38 PM

Whether those 3 are going to disappear is anybody's guess, but I actually look at today's development as a big step forward towards hitting the bottom of this wave of RE correction, although I stand to lose $10K in my rollover today, tears...............

Some one has to take the loss for all of us to move on.

Posted by: 11223 at September 15, 2008 1:42 PM

11223, it is so nice of you to take the lose....can you take the lose for me (and I am sure a lot of others are suffering too) too?

Posted by: John at September 15, 2008 1:44 PM

11223, it is so nice of you to take the lose....can you take the lose for me (and I am sure a lot of others are suffering too) too?

Posted by: John at September 15, 2008 1:44 PM

Whoever went long on WM, sorry ... I hope it doesn't work out for you (I also have my company and personal accounts there but I opened accounts at BofA just to make sure). The sooner they go under, the sooner I can make a nice profit off their demise.

Anyone know what happens to the time value of a put option if the underlying goes BK? (I bought the $4 put when the stock was trading at $3.60. It cost me $1.72 so the "time value" is around $1.32).

So I'm thinking that it might be worth closing out that position when WM is trading at around $1.... maybe tomorrow.

Posted by: Jimmy (Bitter Renter) at September 15, 2008 1:56 PM

Jimmy,

When WaMu goes belly up, the stock will trade down to "option value" - probably between $.25 and $.50. Your option will go deep "in the money" (ITM). The more ITM an option goes, the LESS time value (theta) is present. (BTW, the same goes for deep "out of the money" options.)

What you are referring to as "time value" (the $1.32 difference between the intrinsic value of the option at purchase ($.40) and the option cost is actually a composite of time value and implied volatility. Now that your option has gone so deeply ITM (even more after hours, because that lumbering leviathan of a bank was downgraded to junk), it will behave much like being short the stock (but with limited downside risk is the stock rallies).

You might find this page useful is you are a budding options trader

http://optionstradingbeginner.blogspot.com/2007/07/option-greeks.html

I hope that helps!

Posted by: Satchel at September 15, 2008 3:08 PM

I think I'll go out for a nice dinner if that pick pays off this week!
Well, at least give us an evocative description of your meal -- as I won't be eating out for a while if WaMu goes belly up!

Posted by: EBGuy at September 15, 2008 3:09 PM

What an exciting day in the markets!

Here is a great piece from a point of view that is sadly lost among all the gnashing of teeth and wailing over the evaporation of all this phony wealth going on (the whole piece is worth reading, as is practically everything on the mises.org site):

"The events on Wall Street, the collapse of Lehman and the selling off of Merrill, are magnificent and inspiring events. What we see here are examples of sweeping and fundamental change taking place, a huge upheaval that affects the whole of society, and toward the better, since what we have going on here is a massive reallocation of resources away from failing uses toward more productive uses.

Hundreds and hundreds of billions of dollars are on the move, sweeping all before them. And yet take note: it is not war accomplishing this. It is not violence. It is not the result of a planning committee. No election is necessary. No terrorist act took place. There was no government edict.

The agent of change here is that composite of all the world's exchanges that relentlessly shove resources this way and that way, so that they will find their most economically valued uses in society....

http://mises.org/story/3109


Posted by: Satchel at September 15, 2008 3:12 PM

How do you know this?
it's in their financial statements. you can read it in their 10-Q

I learned about WaMu doing this in 2006. This is when I realized they would not survive. (they started doing it in 2005)

here is their 10Q from July 2008

they call it "capitalized interest recognized as income from negative amortisation"
From Wamu's own site:
4) Capitalized interest recognized in earnings that resulted from
negative amortization within the Option ARM portfolio totaled
$255 million, $336 million and $344 million for the three months
ended June 30, 2008, March 31, 2008 and June 30, 2007.

To put this in perspective, in Q1 2005 they were booking $25 million as income, from borrowers who were NOT paying their full interest. now it is up to $344 million a quarter. So they've booked BILLIONS of dollars of profit that they will never see. (there's nearly a billion bucks in just the quote above)

As a side note: washington mutual's debt was just rated to JUNK. they cannot survive independently. they will be likely merged to someone else. I can't imagine they'll be taken into receivership by FDIC. FDIC doesn't have enough money.

my goal is not to be rude: but nobody who understands finance thinks that Washington Mutual, AIG, Merrill, Wachovia, Lehman, Bear Stearns, etc are well capitalized. They are horrendously undercapitalized and probably insolvent (i.e. bankrupt). This is not a liquidity problem. a liquidity problem would be easy to fix.

even Bank of America may face a large bit of indigestion trying to absorb both Countrywide and Merrill (I am doubtful that deal will get done in the way it was proposed... perhaps later it will happen but on very differnt terms).

There is a reason why these particular firms are being sent to the guillotine in this order. Because they all have such horrendous balance sheets. and this is no "surprise" to anybody either. I believe I've been talking about Fannie/Freddie going bankrupt for 2-3 years now, Lehman going bankrupt for over a year, and WaMu and Wachovia and for a long time as well.

There isn't a secret "short-club" where people get together and decide what to short. Instead, we all just read their financials and realized
-they are all way overleveraged
-they are all way undercapitalized based on their leverage
-they are massively underwater on their RE portfolios

there are a lot others too (like downey and first third and so on)... the firms of this weekend making news right now are just the biggest.

but you have to be able to read a balance sheet, to see how they've "shuffled" things. even then, it is very hard to figure out just how much toxic garbage is in these HORRIFIC companies.

Posted by: ex SF-er at September 15, 2008 3:39 PM

Knowing now what you know about all this, reread the announcement from S&P:

How WM is well capitalized "from a regulatory perspective" i.e. the game they are playing is legal but we aren't buying it any more.

How WM "has demonstrated funding resilience as the deposit franchise has remained stable." i.e. they upped the interest rate to keep the ponzi scheme going, and so far, it's been working.

How WM "is currently solidly positioned to meet all of its fixed obligations through 2010" meaning the CDs they've been selling at a loss are covering their fixed interest obligations for the next year and a half.

This is just a shell game. What S&P said today was that WM's slight of hand is among the best, but in the end, the game will likely be over.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCbDcNYTh_cI&refer=home

Posted by: tipster at September 15, 2008 3:48 PM

but in the end, the game will likely be over.

Not definitively? Why not?

Posted by: anon at September 15, 2008 3:52 PM

I'm not saying that they aren't hiding some shaky numbers, just saying that their numbers aren't even in the same realm of shakiness as Bear Stearns, Lehman, or even Merrill's numbers.

brutus:
you can't really compare Bear/Lehman/Merrill's numbers with WaMu and Wachovia because
-Bear/Lehman/Merrill=Investment Banks
-Wamu/Wachovia=Commercial Banks
-AIG=insurance carrier (and writer of CDS)
-Fannie/Freddie=GSE's

I would say all of the above firms have horrific balance sheets, but they differ based on different compositions based on what they do. But they're all so bad it's hard to tease out a positive on any of them.

But WaMu and Wachovia have the worst financials of any of the big national commmercial banks
lehman/bear/merrill have the worst financials of the big national investment banks
AIG has the worst financials of CDS writers

that's why they're going in this order.

there are other fairly large banks that will fail as well... but I'd prefer not to state my opinons on them because their failure (timing) partially depends on what happens this week (what the govt does).

Posted by: ex SF-er at September 15, 2008 3:53 PM

now it is up to $344 million a quarter.
Maybe I am reading the note wrong, but don't you mean it is now down to $255 million a quarter (June 20, 2008) from a high of $344 million a year ago (June 30, 2007). Okay, I checked previous releases and it looks like it peaked at $361 million
March 31, 2007 -- back when they were still -- uhhhh, "profitable".

Posted by: EBGuy at September 15, 2008 4:10 PM

oops, sorry. EB guy is correct.

you would think this is a good thing, right? but it's not necessarily. the income derived from accrued but not paid interest is going down for good and bad reasons.

in the past people didn't pay the full Principal+interest due, but they did pay at least the minimum neg-am payment. when they do that, WaMu can book the non-paid interest as "income"

however, now the borrowers are DEFAULTING. Since they're not paying even the minimum neg-am payment WaMu can't book the interest accrued as income.

there is a slight positive though to the reduction in this income bracket: some of those loans are out of WaMus life now...

but overall it's a bad thing.

I apologize for misstating this.

Posted by: ex SF-er at September 15, 2008 4:16 PM

ex-SF-er,

Oh, I definitely understand the difference - and a lot of the reason that I don't think those companies (WaMu, Wachovia, and AIG) will just "disappear" is because of the differences.

Will those companies be standalone companies identical to what they are now by this time next year? Probably not. But I would be shocked to see them filing for bankruptcy for several different reasons - that was what I was saying.

Posted by: Brutus at September 15, 2008 4:52 PM

oh... gotcha!

I agree, they won't all go bk because they can't. there isn't enough FDIC money for them.

I'm sure the shotgun wedding is being planned as we speak!

Posted by: ex SF-er at September 15, 2008 6:36 PM

Jimmy,

You paid $1.72 for the $4 puts in WM. Clearly you know very little about options trading and you're lucky you had someone like Satchel who is nice enough to explain implied volatility to you. I'm not so nice, particularly to someone who gets on a message board and gloats about how smart he is for basically shorting 1000 shares of WM at $2.28 in the hopes that it goes to $1, when he doesn't even realize that shorting the stock at $3.60 (where it was trading at the time that you purchased the option) would've been a much better trade. In a week where GS is down $40, AIG is down $15, and all the rest of the market it getting creamed and anyone with half a brain could've picked a number of phenomenal short opportunities and made a killing, you still think it is appropriate to brag. Congratulations, you've officially done the dumbest options trade with the worst risk reward I have ever seen. And I used to be a professional options trader for several years and thought I'd seen it all.

Posted by: k10 at September 16, 2008 10:45 AM

A lot of times you can't get hold of stock that is priced under $5 to short.

I think the Fed bailout of AIG is going to go over very well, especially amongst the financials. I am kind of surprised that they have the authority to do this, since AIG is not a bank. Perhaps Congress gave them the authority.

I think The Fed has been injecting liquidity via Open Market Operations as well, but I can't figure out exactly how much. Does anyone know where they publish this? I have been looking on the NY Fed web site, but I can't find it.

Posted by: NoeValleyJim at September 16, 2008 9:50 PM

The Fed's bailout of AIG will no doubt be well received by some - certainly Hank Greenberg is feeling pretty good about his national treasure plea today on CNBC. I think the other Hank (Hank Putin Paulson) is completely out of control. He should be impeached. Whatever happened to the notion of letting bankruptcy courts function as provided for by our constitution and centuries of case law? Nothing should be considered too big to fail when failure is exactly what is needed. Screw the counterparties - it would all get sorted out.

Posted by: FSBO at September 16, 2008 10:12 PM

What AIG did was turn lead (lower rated bonds) into gold (top rated bonds) by "insuring" them. They collected up front fees in exchange for unduly risking the shareholders capital that gave them the AAA ratings.

Like all the rest of this so called credit bubble, what this was, in the end, was the theft of the shareholders equity by the managers the shareholders entrusted. They managers threw away the shareholders equity in favor of "earnings" that ignored the losses it took to get these "earnings". In return, they justified big bonuses while the shareholders' equity drifted to nothing. The boards of directors who are supposed to prevent this from happening, were in fact picked by the managers and so they all went along. The ratings agencies took some of the loot and looked the other way.

However, if AIG fell, pension funds, who are required to hold only the top rated bonds, would have to sell them quickly, all at the same time, causing massive losses. The people losing their pensions would have been very angry. The government had no choice.

Of course, they had no authority either, but that's beside the point...

Posted by: tipster at September 16, 2008 10:26 PM

Cogent summary tipster.

Once the rating agencies announced that they were going to downgrade AIG it was inevitable that they would be nationalized. A credit downgrade for AIG would have triggered a downgrade in all the bonds that they "insured".

Posted by: diemos at September 16, 2008 10:36 PM

I understand the logic expressed by tipster and diemos - but bondholders should take the hit. If the bonds needed to be downgraded, then downgrade them. Holders could decide whether to dump them or not. These bonds weren't created with the full faith and credit of the US taxpayer behind them. The courts and subsequent lawsuits could sort this out. The government is playing a totally inappropriate role with this bailout.

Posted by: FSBO at September 17, 2008 12:15 AM

FSBO is right. The bankruptcy courts should liquidate AIG, but the Fed felt that an orderly "liquidation" conducted by the Fed is the better bet. I won't second guess them here (they've got access to much better information than I do), but my gut feeling (as always) is that stretching this adjustment out makes it worse. The USG and Fed have screwed up the economy to the point where simple falls in asset values have devastating effects on people and the real economy. The Fed and USG have acted as "arsonists", and now the foolish population is grateful for their stepping in as "firemen".

This AIG loan is being made at LIBOR + 850, and it's secured! This essentially spells the end of AIG, and the Fed is no doubt in liquidation mode. It is not possible to repay this loan at credit card rates and stay in business IMHO. Watch for some of the worst stuff to be bought by the taxpayer ultimately, but otherwise my opinion is that the Fed will act as bankruptcy court receiver here. (It may take a year or so to liquidtae all this junk.)

The Fed technically gets the authority to do this under Section 13(3) of the Federal Reserve Act - the same "exigent" circumstances loophole that basically allowed them to funnel cash to Bear Stearns shareholders through a "backstop" loan to JP Morgan.

NVJ, if you want to monitor daily Fed injections of repo cash, look at this site:

http://www.gmtfo.com/reporeader/OMOps.aspx

Under the "net add" column, you can see that on 9/15 (the morning of the Lehman fiasco) the Fed added $65B in short term repos to stabilize Fed Funds, and they have been draining that additional "slosh" since. Generally, the media hype the "injection" but never mention the drain a few days later. The Fed is not playing games here, and is showing no signs of interest in monetizing assets. It looks to me that as banks fail and/or are taken under control of the Fed, the banking system is concentrating the entire monetary base of the United States. Once this process is near complete, the "people" will have absolutely no say in what happens, not that they have any real say anyway now!

I hope all that helps!

Posted by: Satchel at September 17, 2008 5:37 AM

Watch for some of the worst stuff to be bought by the taxpayer ultimately, but otherwise my opinion is that the Fed will act as bankruptcy court receiver here.
I just want to point out that "we the people" (or at least the central banking cabal) already own 80% of AIG (just for giving them a freakin' loan). I know this may end horribly, but at least we got some decent terms as the "lender of last resort". Didn't we...?

Posted by: EBGuy at September 17, 2008 11:53 AM

Hmmm... gold and oil up, dollar down. It looks like the system has had all the bailouts it can absorb for the moment. Time for Ben B. to sit back and let deflation crush the real economy a little more and get those number going in the opposite direction before he can do any more significant bailouts.

Posted by: diemos at September 17, 2008 1:17 PM

hey satchel - are you robert?

http://www.haloscan.com/comments/calculatedrisk/6720566151897211212/#590779

if so i'd like some gold coins please

Posted by: enonymous at September 18, 2008 7:08 PM

enonymous,

LOL! That guy DOES sound like me. Almost the same resume! (but I'm a couple of years older)

I like how he's got an offshore gold depository and is burying some gold at hand. Smart guy - he knows his history (safe deposit boxes are ANYTHING but safe!).

OT - nice how Ben B and his merry fools squeezed equities higher. Now, who would have guessed that! Happens every time at options expiry - like clockwork since last September. Ben B and his merry pranksters know how to reward their buddies on the street who can always count on him to engineer a giant move (which is no doubt telegraphed in advance to favored firms and traders). Wall Street has been described as a knife fight free for all, with all the good defebsible spots against the wall reserved for the insiders and those who understand the game!

Posted by: Satchel at September 18, 2008 8:21 PM

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