Big news on the left coast

Yep…UNRANKED Oregon State beat Number 1 USC. USC hasn’t been beaten by an unranked team since the 1980’s. And speaking of records that haven’t been broken since the 80’s…Washington Mutual failed yesterday. WaMu became the largest bank failure in US history yesterday as the regulators shut them down and sold their deposits to JP Morgan. The good news is:

1 - I own JP Morgan stock, and

2 - the problem bank list just got shorter

WaMu had $310 billion in assets…that dwarfs the second place holder (Continental Illinois, 1984) that had $83 Billion in assets in current day dollars according to Bloomberg. WaMu had significant exposure to sub-prime loans. The following quote from Bloomberg news provides a nice snapshot:

“WaMu was the second-biggest provider of option ARMs, behind Wachovia Corp., with $54 billion held in its portfolio in the first quarter, according to Inside Mortgage Finance. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were subprime mortgages. WaMu, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest subprime lender in 2006, according to Inside Mortgage Finance.
WaMu estimated losses of as much as $19 billion in the next 2-1/2 years. Standard & Poor's cut the bank's credit rating twice in nine days as chances decreased that any deal wouldn't be a buyout of the whole company, leaving creditors of the holding company to face substantial losses. “

JP Morgan bought WaMu’s assets for $1.9 Billion. JP Morgan did not take any of the liabilities, and they say all branches will open as usual in the morning and they expect full integration by 2010.

JP Morgan:

- Gets roughly $188 Billion in deposits
- Becomes the largest US Bank by deposits with more than $900 billion
- Is buying all of WaMu’s assets and will take a $31 Billion write-down on those assets

We’ll know more later but this is how the deal stands now. At the moment the market is taking this news pretty well. We’ve said for a while that this market wants to start seeing deals get done via the normal market mechanism. WaMu going down is a big deal but at least the market is doing the deal and not the government. The Treasuries $700 Billion plan is still taking center stage and I can’t see the market doing anything huge until that decision is made final.
Treasuries are up at all points on the curve pushing yields a bit lower. There is not a tremendous amount of volume. It feels like we are in a “wait and see” mode with the market just waiting on Congress.

The Fed Funds Futures market is pricing in a 100% chance of a cut at the next two meeting. There is currently Zero probability assigned to rates staying unchanged or rising.


If you have any questions or if there is anything I can do for you just let me know.

Steve Scaramastro
800-311-0707