WaMu's Very Scary Halloween Story

The Ownership Society (AKA Sharecropper Society)... The share of U.S. residents who own their own home fell to 68.1% in Q3, the lowest level in over four years.

Log Jam... Weyerhaeuser Co , a major U.S. forest products company, said its Q3 net income fell more than 50%.

The slump in the U.S. housing market hurt log prices and demand for its wood products, products like beams, roof panels and plywood that are used in housing construction.

H2 DOH! ... PLEASE President Shrub, can't we make MORE ETHANOL, (requires 17 gallons of water to produce 1 gallon of fuel), so WATER & FOOD PRICES can go up some more?

Urinals, fountains and waterfall's without water...

Companies in the Atlanta area have rallied to cut water use in response to the region's most extreme drought since at least the 1920s.

An estimated 14,000 landscaping workers in the Atlanta area have been laid off since June.

Governor Sonny Perdue on Oct. 20 declared a state of emergency in 85 counties, and three days later ordered utilities and water systems to reduce consumption by 10%.

The U.S. Army Corps of Engineers estimates that Lake Lanier, the city's reservoir, may run out of clean water in about 110 days.

Running Dry... New York City Mayor Michael Bloomberg yesterday ordered department heads to freeze hiring and cut spending this year and next in anticipation of less revenue.

State financial officials reduced their estimates for personal tax collections. Budget shortfalls are widening as Wall Street profits plunge and the real estate market cools.

The slowing of the national economy and real estate market has a direct impact on tax receipts.

Credit tightening and losses are expected to cut further into the profits of the financial services sector, further eroding tax revenues.

Up the River (Denial) ... Deutsche Bank CEO Josef Ackermann after $3.2 Billion in Q3 write downs:

"it could very well be that there are further corrections, but I don't believe they will be at Deutsche Bank."

Sales and trading revenue, which accounted for almost half the bank's total last year, slumped 62% after writedowns and trading losses in fixed income and equities.

Mr. Rogers Neighborhood... Jim Rogers, co-founder of the Quantum Hedge Fund with billionaire George Soros...

boosted his bets against U.S. securities firms because of their salary "excesses" and money-losing investments.

YTD Goldman Sachs put out $17 Billion in salaries and bonuses, an all time record.

Rogers on housing and the financial houses: "Market excesses don't clear themselves out in just four or five months; they take years.

Who knows how bad the balance sheets are. They took on gigantic amounts of bad paper.
" Speaking of which...

Kitchen Sink Horror Story... The media has been pushing the Q3 "kitchen sink" write down story.

It goes like this, beaten down financial stocks are a bargin right now because...

all the financial institutions are swallowing large horse pills or clearing the decks and taking "kitchen sink" write downs on bad trades & debt in Q3.

The Nattering One ain't fallin for it, cuz, if it looks and smells like a pile of shit, it probably is. Here's why...

Oct 19th, WaMu announced a 72% drop in Q3 net income, the stock has fallen 15%.

For Q3, WaMu recorded $967 million in loan loss provisions and $421 million in net charge offs. Bringing the company's loan loss allowance to $1.89 billion.

For Q4, WaMu predicted that provisions would be ONLY $1.1 billion to $1.3 billion and that charge offs would increase 20 to 40%.

Neg Am... WaMu has $57.86 billion of option ARM loans, (option to pay interest only or negative amortization) which make up 24% of their loan portfolio.

Now for something really scary... End of 2004: WaMu's unpaid principal balance exceeding the original principal amount on option ARM's was ONLY $11 million.

End of 2005: $71.2 billion in option ARMs with unpaid principal balance exceeding the original principal amount by $160 million.

Sept 30, 2006: $67.14 billion in option ARMs, (16% less than 2005!!) with unpaid principal balance exceeding the original principal amount by $681 million.

Sept. 30, 2007: unpaid principal balance exceeded the loans' original principal amount by $1.5 billion.

From $11 Million to $1.5 Billion in 3 years... and it gets even scarier

Option ARM lenders recognize interest income when customers postpone their interest payments, even though the lenders get no cash.

So, the deferred interest (which WaMu never got paid) from option ARMs boosts WaMu's earnings.

WaMu % of interest income from negative amortization: 2004 = 0.2%; 2005 = 1.8%, lets skip 2006 and go for the gusto, as of Sept 30, 2007 = 7.2% of $14.61 Billion or $1.05 Billion in earnings that never got paid.

It appears that WaMu's Q4 estimate of $1.1 to 1.3 Billion in loan loss provisions, doesn't even cover the $1.5 Billion of loan balances in excess of the original principal amount.

FYI, in Q3 WaMu nonperforming assets rose 128% to $5.45 billion. In other words, the customers aren't paying because they can't afford it and probably never will.

Yet, WaMu books this "interest income" they never received as profit.

What will that do to WaMu earnings when these customers default and the interest income really never gets paid?

There are no "kitchen sink" or deck clearing events here. With $600 Billion in ARM resets through 2008 alone...

we expect the housing and write down debacle to worsen over the next 3 years minimum. Hattip to Jonathan Weil at Bloomberg.

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