InsideWaMu

Since the earnings call when the bong-hitting analysts blew it and failed to ask Kerry or Tom about post-IndyMac deposit runoff, I’ve been begging WaMu on the blog to publicly disclose just how much deposit runoff they’ve seen so we can assess WaMu liquidity.  I’m sure my miniscule blog had nothing to do with it but fortunately yesterday WaMu did the right thing and announced a very strong $50B in excess liquidity as of Friday.

To refresh everyone: as of June 30, WaMu had $40B in excess liquidity.  With expectations of ~$5B in deposit runoff in wake of IndyMac we would have expected WM to now have $35B in excess liquidity.  That would have been somewhat tight especially in this nervous environment, but as I explored in my previous post, not yet enough to cause alarm.  Still though every day WaMu did not address its liqudity position, more rumors and bogus “analyst” reports sprung up causing uncertainty in the market.  And as we all learned from Benjamin Graham, Mr. Market does not like uncertainty.  This has played out with the enormous volatility in WM stock the past two weeks.

This latest news on $50B is fantastic because in my mind this means liquidity is simply not a problem in the near term.  And from the recent earnings release, we also know capital is not a near-term problem.  To refresh: WaMu currently has an $8.5B reserve plus $7B in excess capital (current tangible ratio is 7.79% vs target of 5.50%) + $1.1B in excess capital they will get by shrinking the balance sheet $20B by 12/31/08 (freeing up that 5.50% capital minimum x $20B) + ~$3B in operating cash flow that they will earn over last two quarters of the year.  That gets me to $19.6B WaMu could conceivably chargeoff in Q3 and Q4 2008 and still meet the bare-minimum of being well-capitalized as of December 31.

Compare that $19.6B in potential vs the $2.2B in actual chargeoffs in Q2 2008.  That number will surely rise in Q3 and Q4, but it’s almost inconceivable that WaMu will run out of capital near term.  Now that we also know WaMu will not have a liquidity problem in the next few months, the near-term survival of WaMu should no longer be in question.  It will survive. 

The real focus now should be on our long-term prospects.  Once the mega-provisions stop and WaMu starts trading on P/E again instead of tangible book value the stock will rise significantly.  Not to $46/share again - remember they diluted half the shareholder base with recent capital raises - but its conceivable stock could be back in the high-teens within 18-36 months.  The underlying earnings stream of the last few years (varying between $0.6B - $1B a quarter) is still there.  If the provision ever slows down, that earnings stream translates to a $29 - $48B market cap company at a 12x P/E.  Divided by roughly 2 billion shares (still haven’t seen official post-TPG share count) that equates to a $15 to $24 stock.  Not $46/share, but if you buy now at $4 who wouldn’t appreciate that kind of return over an 18-36 month period?

The only other real question remaining is: if WaMu “should” have been down to ~$35B in excess liquidity by now, and that included moving all unpledged assets for cash at Fed/FHLB/whoever else would swap assets for cash, where did the excess ~$15B in liquidity come from?  Who provided it, and what sort of usurious terms did WaMu have to agree to to get that funding?