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Posts Tagged ‘Washington Mutual’s lending practices’

Let’s Look Under the Washington Mutual Rock

Posted by Larry Doyle on May 28th, 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. (more…)






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