InsideWaMu

I’ll blog a more detailed writeup over the weekend after going through the WaMu earnings release, but here are my quick thoughts:

• $5.9B loan loss provision this quarter?  Wow.  Even scarier, the residential provisioning model more or less assumed 20% frequency and 50% loss severity on outstanding residential pool.  This means - unless I’m missing something - 1 in 5 mortgages still in the portfolio will default and half the value of those mortgage will be lost.  Are you kidding me?  How were these loans ever approved in the first place??
• Those trends in the credit attachment sure don’t look good, and show NO signs of an inflection point.  How much money would you pay to see those charts in monthly not quarterly periods though?
• Anyone else chuckle when prepared remarks ran a full 45 minutes of the scheduled hour call?  At about minute 43 I had visions of Killinger going the entire hour without opening the floor to questions and was about to give him a CEO of the year award.  But even though he wussed out minute 45, it was nice to extend the call instead of screwing the analysts and only giving them 15 minutes of Q&A.
• I hear absolutely great things about John McMurray from everyone I talk to but he had a bit of a rough first few minutes on the call.   Anyone out there know if McMurray was involved on Countrywide earnings calls?  Even though it was an honest mixup, saying WaMu is seeing 100% loss severity on first-lien non performing loans is enough to give WaMu leadership and TPG investors a heart attack.  Saying it on an earnings call is even scarier.  Fortunately as we’ll discuss later it seems all of the WaMu analysts on the call were either a) asleep, b) high as study abroad students in an Amsterdam weed bar or c) shockingly compassionate about the mixup (very unlikely though given their behavior on prior calls).  McMurray recovered very nicely though on a later question showing a sense of humor explaining that he didn’t explain things clearly at all the first time.  He also really knew the credit numbers well and in my opinion dodged a question with the skill of a grizzled earnings call veteran on why second-lien loans are being carried as NPA’s vs charge-off even though he’d said earlier second-lien loans are seeing 100% loss severity.  Yes - why indeed?  All in all, we should look forward to hearing from him on future calls.
• My quick math on Tom Casey’s updated earnings drivers got to $4.5B of pretax, preprovision income.  Sounds good until you realize there’s already been $9B of provision through Q2 and unofficially I’d guess at least $5B more rest of the year.  So WaMu will have pretax net income of -$10B this year?  Yikes.  I’m not the smartest with tax laws, but at least they should get 40% of it back as a tax credit this year, or an asset to offset future earnings.
• Anyone else catch Kerry’s freudian slip when asked about his long-term vision for the company?  He stated a few objectives and then said “So we have, I think, a very clear plan for the next 18 … next period of time that we see to get back to the level of profitability that we should have.”  Sounds like KK is on an 18 month timetable to get the company back clicking on all cylinders.  I’m sure that’s not related at all to TPG being locked into their capital infusion for 18 months, then being able to sell a 1/18th stake for each month for months 19-36.  Good news is it sounds like WM will be independent for at least 18 months - provided credit doesn’t completely implode.  Though odds of WaMu being independent past 18 months looks a lot longer.
• Were all of the analysts hitting the bong before the call?  Was there seriously not a single question about Retail?  Only two about card and none on Commercial?  No questions on post-IndyMac deposit runoff?  No questions on how after placing all your eggs in the Retail segment basket you turn around and change retail presidents?
• And speaking of blazed-out analysts, did Louise Pitt of Goldman Sachs at the end of the call really ask if a pending Moody’s downgrade would lead to a cut in WaMu’s dividend?  Hello?!?  Do you realize dividend is only a penny/quarter now?  At a penny a share and ~2 billion common shares outstanding after the TPG capital infusion WaMu’s dividend runs $20MM a quarter.  If we’re ever to point where $20MM in capital will make or break WaMu’s capital/insolvency ratios there’ll be a lot bigger problems to worry about than discounted present value of a $20MM/qtr revenue stream.

Questions?  What did you think of the call?  What were your takeaways?