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Let’s Look Under the Washington Mutual Rock

Posted by Larry Doyle on May 28, 2009 1:02 PM |

Many people may think Washington Mutual is just another large financial conglomerate that has since gone into thrift heaven via its takeover by JP Morgan. While WaMu is now part of the JPM franchise, it continues to send very real signs which provide great insight as we navigate the economic landscape.

Thank you to our friends at 12th Street Capital for highlighting a release put forth yesterday by Jamie Dimon, chairman and CEO of JP Morgan. As the Financial Times reports, JP Morgan Warns on Credit Card Woes:   

Jamie Dimon, JPMorgan Chase chief executive, warned on Wednesday that loss rates on the credit card loans of Washington Mutual, the troubled bank acquired last year by JPMorgan, could climb to 24 per cent by the year end.

In the past, credit card loss rates have tracked the unemployment rate but that relationship has been breaking down for more troubled credit card portfolios, such as the $25.9bn in WaMu credit card loans.

At the end of the first quarter, 12.63 per cent of the WaMu credit card loans were deemed uncollectable by JPMorgan. The bank estimates that figure could reach 18 to 24 per cent by the end of 2009, depending on economic conditions.

The initial question begs as to how and why the credit performance of WaMu’s cardholders could be that much worse than the industry as a whole. For those unfamiliar with Washington Mutual, the institution made a failed attempt to penetrate the Wall Street fortress via leveraging its credit origination platform. WaMu was one of the most aggressive lenders across the spectrum of products. As I wrote back on November 12th in The Wall Street Model Is Broken….and Won’t Soon Be Fixed:    

At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans: no income, no asset check). 

Washington Mutual was the poster child for aggressive, if not irresponsible, lending. When their distribution capabilities ceased, the institution was left “holding the bag.” That bag was filled with credit cards now projected by the TOP banker on the street to default at twice the norm. What more can we learn in this process? Let’s dig deeper.

Did JP Morgan make a bad buy in purchasing WaMu? No way! Jamie Dimon has studied the WaMu franchise for many years and salivated over the deposit base and extensive branch network. Dimon and JPM had Uncle Sam (FDIC) absorb a large percentage of the expected losses on the WaMu loan book. Dimon’s no fool.

If WaMu’s credit cards are expected to default at twice the norm, what does that mean for WaMu’s mortgage products? Not good!! There is VERY LIKELY a high degree of crossover between WaMu credit card holders and mortgage borrowers, thus it is not a stretch to think that the default rate on those products (HELOCs, pay-option ARMS, jumbo mortgages, Alt-A) will also default at a rate much faster than the norm. 

Additionally, WaMu had an enormous footprint in the West coast, in general, and California specifically. JPMorgan Chase had NO presence to speak of in that market. As such, WaMu was a very attractive franchise for Dimon, outside of these loans. The weakness in the California and West coast economy spells doomsday for the holders of securities backed by these loans. Who were some of the biggest buyers of these products? The Federal Home Loan Banks!! 

The last point I would like to raise is the comparison between the current rate of default on the WaMu credit cards and the JP Morgan projection. As the FT reported, the WaMu credit card portfolio has a current default rate of 12.63%, which will rise to 18-24% by year end 2009. Assuming it defaults at the midpoint of the range, 21%, that is an increase of a full 66%!!

That is most assuredly NOT a green shoot we’re looking at!!

LD

     

  • Islandcat

    How much did Jamie Dimon pay you to write this article?
    Get the truth! WAMUSTORY.COM

  • Mr. Islandcat,

    I think you overlook the fact that the powers that be at WaMu had opportunities to sell that firm more than a few times before being seized.

    Whether it was seized that day and directed toward JPM or not, it was only a matter of time before WaMU was going down.

    Any comment on the loan performance of WaMu originations?

  • Jim S

    I just recently have come accross this article. Do you realize that JPM went through & cancelled most of Wamu credit card accounts, even cards on members with just “slight” credit defects and some with nothing bad. If they didn’t cancel outright, they raised the interest. People were angry at the way JPM cancelled accounts and/or lowered credit limits. Without warning, your card just “didn’t work”. Many people have complained about being on vacation, plenty of credit available on their account & not having a second/third card because it wasn’t needed. They were at 15% of their balance on Wamu CC & Wamu had always treated them fairly… Until JPM took over, anyway. Could you yourself imagine being on vacation and going to pay for your dinner & having your cc not working?

    When people called in to cardmember services, the people on the phone were rude and just stated “It’s due to something in your credit file” which was apparently a standard reply. Those without much to lose while only having a Wamu CC probably didn’t pay and I don’t blame them… I’d chalk this one up to JPM being an @$$ and let them blame themselves for the losses as if they had sent out letters & gradually lowered credit lines they’d been much better off regarding losses. After this Wamu theft regarding JPM, I have paid off my JPM card & will NEVER use the thing again, I’d rather stick with my local credit union!

    • Larry Doyle

      Jim S….I appreciate your sharing these details. Regrettably, more and more people are indiscriminately having their credit lines cut, often with little or NO warning and with little or NO prior problems with their credit history. It is not just JPM. I recently wrote of the same situation with Citi.

      Any wonder why consumers are increasing their savings and attempting to hoard cash? The banks are doing the same.






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