WaMu Raises Cash, Skeptical Eyebrows

Yesterday Wamu was up 30% or so (see WaMu Raises Capital: Market Cheers Dilution) and today it gave back a third of that. Details are out today on WaMu's cash raising efforts and they are not pretty.

Reuters is reporting WaMu gets $7 bln infusion, cuts jobs, sees loss.

WaMu raised $1.54 billion from a sale of 176 million shares at $8.75 each. It also sold $5.5 billion of convertible preferred shares with an initial conversion price of $8.75. TPG will buy $2 billion of the securities.

WaMu estimated the transaction would dilute book value per share by about 30 percent. The company's market value was about $11.6 billion after the close of trading on Monday.

Minyan Peter, former treasurer for a large US bank is writing WaMu's $7 billion Share Offering Doesn't Spell Bottom.

Washington Mutual's (WM) capital raising effort is being cited a sign of a healthy bottoming process.

Despite how it may be portrayed by others in the media, this is an all “common” deal. The distinction between common and preferred is solely due to the number of available shares. Once the existing shareholders approve more common shares, the “contingently” convertible will become common at the same $8.75 per share price.

As I have written previously, when things get worse, banks have to issue common stock. Because of how the bank regulations work, preferred stock “credit” for capital purposes is limited by the amount of common stock below it. With its first quarter writedowns, WaMu had no choice. And importantly, many other banks that have been to the straight preferred and convertible preferred troughs recently in size are in the same position.

Big losses increasingly mean flat out dilution. Ask UBS (UBS), ask Societe Generale. That the market is celebrating all this as a sign of the bottom confounds me. Closer to the bottom? – absolutely, but bottoms are when deals don’t happen.

Be careful about the phrase “increased due to investor demand” – a near 30% discount to market is bound to drum up a little interest. Even with the deal’s generous terms, some of the investors were given additional warrants for agreeing to a five year lock up. Don’t underestimate the role of the regulators telling WaMu how much capital the bank needed to avoid action.

Finally, notwithstanding the company’s current $12.00 trading price, $8.75 is now the ceiling for additional WaMu common equity, should the bank need to come back.

I have a lot of respect for the team at TPG and have no doubt that based on their prior experiences in banking crises, WAMU looks cheap, particularly at $8.75. I would emphasize, however, the phrase “based on their prior experiences in banking crises.”

I think the problem for most market participants right now is that the assumption is what we're experiencing looks something like “their prior experiences in banking crises.” And to me that's why we have seen such a big rally over the past two weeks – because, based on prior experience a rally feels very right, right about now.

But for all the reasons I have shared before, this one is different.

For more from Minyan Peter, please see "A" Bottom or "The" Bottom?

Proxy advisory firms seeks to oust several board members

Financial Week is writing WaMu lines up cash, but not backing for its directors.

Washington Mutual, the largest U.S. savings and loan, said it obtained a $7 billion capital injection from private equity firm TPG Inc and other investors.

The thrift also plans to eliminate 3,000 jobs, close its 186 stand-alone home loan offices and stop offering home loans through brokers. The besieged bank will also reduce its quarterly dividend per share to 1 cent from 15 cents, saving $490 million a year. The cut is the second in four months.

WaMu management has little choice but to pare expenses. The S&L’s management said mortgage problems will lead to a $1.1 billion loss in the first quarter.
Washington Mutual, the largest U.S. savings and loan, said it obtained a $7 billion capital injection from private equity firm TPG Inc and other investors.

The thrift also plans to eliminate 3,000 jobs, close its 186 stand-alone home loan offices and stop offering home loans through brokers. The besieged bank will also reduce its quarterly dividend per share to 1 cent from 15 cents, saving $490 million a year. The cut is the second in four months.

WaMu management has little choice but to pare expenses. The S&L’s management said mortgage problems will lead to a $1.1 billion loss in the first quarter

“That Washington Mutual finds itself requiring such a large capital investment only goes to show that incumbent directors have failed to properly oversee risk management," said Bill Patterson, executive director of the CtW Investment Group. "This…should be a clear signal that shareholders need new, independent leadership on this board to protect their investment going forward."

Washington Mutual’s annual meeting is scheduled for April 15. It should be interesting.

More Writedowns at Citigroup

Financial Week is reporting Citi may write down another $17 billion for Q1.

CreditSights estimated that Citigroup will likely report the biggest write-downs for Q1. The write-downs could range from $15.2 billion to $16.8 billion, CreditSights reckons, depending on whether valuation reserves related to financial guarantors are included in the tally. The bulk of write-downs would still be in collateralized debt obligations made of asset-backed securities.

CreditSights estimates that write-downs at Bank of America could range from $8.8 billion to $9.9 billion. At J.P. Morgan, the hit could be around $7.5 billion.

Other Items Of Note

• J.P. Morgan executives stated they would build reserves in the first quarter to reflect substantially higher losses in home equity.
• Fifth Third cited weakness in its home equity portfolio.
• Capital One and Wachovia have indicated that losses on auto loans are rising.
• KeyCorp and Wachovia have recently reported problems selling down their commercial real estate securitization holdings.

Don't forget we are just headed into a recession, not coming out of one. And it's going to be a nasty one. Those looking for a quick rebound will either not get it, or things will quickly reverse back down if we do.

See Case for an "L" Shaped Recession for more details on the length and severity of the recession.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List