The Market Ticker

Those of you who have read The Ticker for a while know that I have been banging on the drum of WaMu for a long time - since last April when I first piled onto them following their 1Q 07 report in which I "noticed" that they were paying dividends out of (in part) Capitalized Interest - which, while "booked" profit, isn't cash.

As I always said in my years in business, its first, foremost, and always the cashflow stupid; all else is a nice distraction.

Now swaps on WaMu (protecting against the risk of default) are being quoted not in basis points but in percent up front; yesterday there were reports that it was being quoted at 40% up front.

To put this in perspective this means you pay $4,000,000 to protect $10,000,000 in corporate bonds initially, plus more every year (for a total of five years.)

Does anyone else think this is a particularly bad price for that insurance?  Does anyone else think this is essentially slamming the door on anyone who might want to buy?

To put this in perspective it is similar to what you'd pay for homeowner's insurance (if you could buy it at all) with a Cat 5 hurricane 4 hours from landfall and your home is on the beach and in the direct impact path.

The odds are impact are extremely high, and if you do get hit the odds are near 100% that all you will find when you return is a slab and the water feed pipe to what used to be your house sticking out of the ground.

Now if you're a depositor and have over $100,000 in there, I hope you get it out right now - today. 

The unfortunate reality is that when swaps start being quoted like this the outcome is no longer in material doubt, nor is there anything you (or anyone else) can do about it.

These folks have a horrifying concentration of Pay Option ARMs and HELOCs, with an insane over-representation in California - the worst of the bubble states. 

The Truth is that OTS should have demanded that these clowns eliminate the dividend back in April of 2007 and disgorge this paper, no matter the mark.  I wrote about it back then and said they were toast, and now, with the stock trading at just over $2, it looks like their day is coming.

Oh my how the mighty have fallen.

But this Ticker is not just about WaMu, really, even though from the swap pricing I suspect they are days or weeks away from either being seized by the FDIC or being "worked out" via some sort of shotgun marriage (at FedGunPoint.)

It is about the outrageous regulatory failure that exists in our banking-safety institutions.  The OCC and OTS, FDIC, and The Fed allegedly have "bank examiners" who are supposed to know how to read balance sheets.

If I can recognize that this institution has a zero chance of survival a year prior to them going into a death spiral, then so can these people, if they are doing their damn jobs!

The problem we are seeing now is much more severe than it has ever been before.  Historically, when banks fail the FDIC has taken losses of 3-5% of that bank's assets, because they have come in and found a buyer for the pieces - or the bank as a whole - which means their exposure has been small - and manageable.

But this year we've seen losses of 10, 20, even 30% of total assets. 

Why?

Because when you're in a declining business environment the longer you allow the clowns in management to continue to run the company into the ground the more capital is destroyed as losses, recognized and unrecognized, mount up. 

WaMu is a particularly outrageous example because last April, in 2007, they were paying out more in dividends than they were earning in cash income, which was what raised my ire originally about their bank. 

Anyone who didn't recognize in April of 2007 that these OptionARM loans in California were underwater then and would only go FURTHER underwater, and as such this "capitalized interest" would never be paid, is absolutely unqualified to run a frapping lemonade stand, say much less a Federal Regulatory Agency.

The ugly truth is that since our "regulators" have been so competent as to have ignored this level of deterioration in the balance sheets of our banks, and WaMu is not the only one by far, refusing to force these clowns to take their marks and account for them, they have effectively rolled the dice on a resumption of home price inflation!

I see essentially no chance for the government to avoid having to seize dozens of these banks, and they should do it right now with all of them, because the continued deterioration of asset quality and thus their balance sheets means that the longer they wait the more this costs us all.

And cost it will, in spades. 

This is not going to be a pleasant ride as the FDIC will have to be bailed out by Congress, which means that we will add even more hundreds of billions to our Federal Debt.

Congratulations America; watching American Idol and now NFL Football instead of being responsible citizens and demanding that Congress do their damn job of oversight, instead screaming for bread and circuses means that you have screwed your children and grandchildren by ladling up even more debt on their shoulders - and lots of it.

None of these banks have taken their marks and disclosed their actual exposure.  Every one of them have hidden things in some fashion; the outrage of using "Level 3" asset buckets is just one example.

Our regulators have consistently refused to do their damn jobs and there is no way to stabilize these firms, or the financial system as a whole.  CNBC is out there talking about "bringing the full faith and credit of The Fed" into these firms, but the fact of the matter is that lying is lying and until you stop lying nobody can evaluate who is safe, who is not, and where they can safely park their money.

It is time for all of us as Americans to raise hell and demand that Congress force all of these firms to take their marks and disclose in a fully transparent fashion the trash on their balance sheets.

I loved Rick Santelli this morning, who said:

This (derivatives) mess is like a room full of mousetraps and someone tosses in a few golf balls, causing them to start snapping - do you really think The Fed is going to be able to catch them all?

Uh, "What is No, Alex?"

WAKE UP AMERICA!