InsideWaMu

One of the most amazing things about the recent credit crunch is how it blindsided nearly everyone in the industry except John Paulson  (who turned a nifty $3.7B profit shorting subprime bonds in ‘07).  CEO’s heads have rolled, bigger banks are starting to fail, and Wachovia just admitted Friday that buying Golden West for $25B was a mistake.

For those of us with pieces of our net worth tied up in WaMu stock we also know all too well that that WaMu management was also caught offguard.  While perusing a recent 10Q I was reminded WM bought back $2.8B of stock in Q1 ‘07 at $45.55 a share at a time when we know they knew NPA’s were starting to climb.  In retrospect this was probably not the wisest allocation of capital.  I went back and tallied up all the share repurchases since 12/31/05 when talk of the housing bubble (and the resulting bubble pop) began to intensify.

Over that period WaMu repurchased $6.5B in stock at average price of $44.18.  Does the $6.5B number sound familiar?  It is fairly close to the $7B in stock sold to TPG & co at $8.75 a share this past April (I’m leaving out the $2.9B in preferred stock issued in December - a separate issue).  So in effect, Washington Mutual purchased 148 million shares for $6.5B (at $44.18/share); then realized less than a year later after the largest purchase, that we now would need the capital to survive, and turned around selling stock to get back $7B in capital (selling at $8.75/share).  By my math this transaction cost WaMu $35.43 a share, and works out to a $5B transfer of wealth from existing shareholders to TPG & co; simply by timing the market wrong and buying high/selling low. 

This is particularly galling on two counts: WaMu should have had among the top 5 best “inside information” and knowledge of the mortgage market by virtue of their market share, reams of data available to them to model potential losses, their internal historical data on mortgage servicing, etc - yet they completely misread the market.

Even more galling, with exception of Kerry being stripped of Chairman title and two board members leaving there have evidently been no ramifications for such a colossal screwjob to the shareholders.  I’m sorry but Ron Cathcart and James Corcoran were not the guys making the calls on balance sheet/capital management.  Unless TPG is playing a much stronger hand in the boardroom than I’m seeing at my level, and with peers in the bank I talk to, by all accounts the same people who made those capital mismanagement calls will be the ones making calls in the near future.  And with that thought I need to go drink. 

If anyone reading this blog was involved with the decisioning back in ‘06 and ‘07 to buy back shares I’d love to hear your side of the story and other considerations people were thinking back then.  Feel free to comment, or email me if you’d like to stay confidential.