S&P: Washington Mutual Rating Cut to “Sell”

Shocking, an S&P analyst today changed his rating on WM to a “sell.” Considering we are entering into an unprecedented housing downturn and already in the thick of a secondary market liquidity crisis, you would think analysts would have cut ratings on pretty much all major banks, particularly those like WM with nearly 10% in junk housing loans. The next few quarterly earnings reports should take WM lower.

FBR just reduced 2007 earnings estimates by 31% from $3.60 a share to $2.50 on possible loan writedowns.  Credit Suisse announced yesterday that mortgage lending will go from $3.3 trillion in 2005 to an estimated $1.8 trillion in 2008.  Keep in mind that pretty much all remaining mortgage originators are focused on the “prime” sector which they can sell to Fannie or Freddie – with increased competition comes even thiner margins.  Not a good long-term business model.

Disclosure, we have been short (put options) WM since February 2007 and continue to maintain this position.

August 30, 2007 – NEW YORK (AP) — A Standard & Poor’s stock analyst cut his rating on Washington Mutual Inc. on Thursday, citing concerns about the bank’s exposure to the ailing housing market.

Mortgage banking analyst Stuart Plesser downgraded Washington Mutual stock to “Sell” from “Hold,” and cut his target price by $4 to $33. He also lowered his 2007 and 2008 earnings forecasts, to $3.41 and $3.90 respectively.

Plesser noted that about 9 percent of Washington Mutual’s loan portfolio is subprime mortgages, or home loans to people with poor credit histories. He said deteriorating credit quality will likely force the bank to boost its provisions for unpaid loans by more than expected in the second half.

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1987, 1997, 2007

It is certainly interesting that very significant corrections all occurred during late summer or early fall of 1987, 1997, and 2007 (ok, so 2001 doesn’t fit this). This chart from Dealbreaker.com is pretty incredible.


Housing is continuing to unwind as Shiller reports. Once again, the government statistics on new home sales are way off and the nasty figures will catch up at some point soon. The consumer is simply tapped out with consumer bankruptcies up nearly 50% over 2006. This housing cycle does not seem to be close to the bottom yet.


How the Bush Administration Is Turning the US into a Subprime Borrower

August 27, 2007 (Heather Wokusch) – “Our enemies are innovative and resourceful, and so are we. They never stop thinking about new ways to harm our country and our people, and neither do we.” – George W Bush.

Much in the same way that US investors were “steered” into rip-off mortgage loans, the entire country has been “steered” into an economic crisis. The question is how to get out of it.

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Consumer Bankruptcy Filings in First Half of 2007 up 48% from a Year Ago

Similar to the number of business bankruptcies which are up 45% in the first half of 2007 from a year ago, consumers are increasingly tapped out.   This is from the American Bankrupcy Institute:

The total number of U.S. bankruptcies filed during the first six months of 2007 increased 48.23 percent over the same period in 2006 in all bankruptcy court districts, according to data released today by the Administrative Office of the U.S. Courts. Total filings reached 404,090 during the first half of the calendar year of 2007 (January 1-June 30), compared to 272,604 cases filed over the same period in 2006.

“The new upward trend in bankruptcies reflects the economic reality of households under increasing financial stress,” said ABI Executive Director Samuel J. Gerdano.  “We expect bankruptcy filings to continue to rise for the balance of 2007.”

Killer: “Assurances on Buybacks May Cost a Lender”

August 23, 2007 (NY Times) – Expanding rapidly as the nation’s largest home mortgage company, Countrywide Home Loans quietly promised investors who bought its loans that it would repurchase some if homeowners got into financial difficulties.

But now that Countrywide itself is struggling, it may not be able to do so, making it even harder for troubled borrowers to reduce their interest rates or make other changes to their loans to avoid foreclosure.

The possibility that Countrywide may have to buy back mortgages that it sold comes on the heels of its announcement last week that the tightening credit markets had forced it to draw on its $11.5 billion line of credit from a consortium of banks, a move that sent the market plummeting.

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Rating Firms’ Next Subprime Role: Defendant

August 23, 2007 (TheStreet.com) – As the carcasses of subprime mortgage-backed securities lie rotting on Wall Street, the buzzards are circling heretofore untouchable prey: the rating agencies.

Critics say the ratings industry was too late in downgrading mortgage-backed securities, echoing cries after past crises involving Enron, WorldCom and Russian debt, among others. But the current episode comes with a different twist: Rather than merely third-party observers, some sources say Moody’s, Standard & Poor’s and their smaller rival Fitch Ratings played active roles in structuring MBS and related securities. Therefore, they could be deemed underwriters and exposed to legal liabilities for the sector’s unraveling.

“The chances no one is preparing cases [against the rating agencies] is very small,” says Sylvain Raynes, a former Moody’s structured finance analyst and principal at R&R Consulting, which specializes in credit metrics and the structured finance market. Unlike traditional corporate bond offerings, rating agencies “have to be involved in the structuring [of asset-backed securities] because otherwise the deal does not happen. There is nothing before the rating. It would be nonsense if they were not involved.”

Shares of Moody’s and McGraw-Hill are each down more than 25% year-to-date, due to the potential for heightened regulatory scrutiny and a hit to earnings as the “credit crunch” leads to fewer structured deals to rate. Moody’s earned about $3 billion from rating structured deals from 2002 through 2006, and the area accounted for 44% of its 2006 revenue, The Wall Street Journal reported.

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