Is WaMu the Next Countrywide?

Not very "conservative"..... But it is getting very dangerous when you combine this with the percentage of earnings that is coming from capitalized interest and add the unpaid principle to the mix..... It should be clear that Washington Mutual is also using the latest accounting innovation "Mark-to-Make-Believe Gains" ( at least the increase is modest compared to Wells Fargo.....)

Das ganze scheint nicht sonderlich konservativ.....Wenn man aber dazu noch die Auswirkungen des sog. "capitalized interest" hinzunimmt wird es halsbrecherisch. Unter dem Begriff versteht man die Tatsache das bei den Krediten mit negativer Tilgung die nicht gezahlten Zinsen einfach der G+V der Bank zugeschlagen werden (als wären diese Gelder tatsächlich geflossen ). Zudem wächst dank der negativen Tilgung die Kreditsumme weiter an und erhöht so das Risiko. Es ist geradezu selbstverständlich das Washington Mutual auch die neueste Errungenschaft der kreativen Buchführung "Mark-to-Make-Believe Gains" für sich entdeckt hat. Immerhin ist das Ausmaß nicht ganz so üppig wie bei Wells Fargo

wamu credit quality....and capitalized interest up 300%. January 2007

Capitalized interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $1.07 billion and $292 million for the years ended December 31, 2006 and December 31, 2005.

The total amount by which the unpaid principal balance of Option ARM loans exceeded their original principal amount was $852 million, $681 million, $474 million, $298 million, and $160 million at December 31, 2006, September 30, 2006, June 30, 2006, March 31, 2006 and December 31, 2005. ( up 432%!!!!!)

An analysis of the largest 20 banks and thrifts by TheStreet.com Ratings shows that four institutions are under-reserved for possible credit losses, a red flag as the economy slows and mortgage defaults rise.

Perhaps more troubling, the numbers show that one of those institutions -- Washington Mutual -- could join Countrywide in facing serious liquidity problems as worries about the housing and mortgage markets multiply. Meanwhile, another big lender, National City , could see its earnings and dividend come under pressure as a result of its low reserve levels.

With the financial sector under increasing stress, TheStreet.com Ratings checked two key ratios to measure the strength of big banks' balance sheets: loan-loss reserves as a percentage of nonperforming loans, and nonperforming assets as a proportion of core capital and reserves.

Banks and thrifts walk a fine line in setting their quarterly loan-loss provisions, which add to their reserves against future losses. If they reserve too little, they can be seen as taking on more risk in the event of a decline in credit quality and padding their earnings for the current quarter (since the loan-loss provision lowers net income). If they reserve too much, investors, analysts and regulators may see the institution as over-reserving -- so it can manage earnings by under-reserving at a future point when earnings would otherwise weaken.

> This should hurt overall banking earnings for years to come....

> Das sollte die Bankgewinne noch Jahre belasten......

A good benchmark for loan-loss reserve coverage is 100% of nonperforming loans, which are loans past due 90 days or more. If a bank is forced to charge off loans totaling more than its loan-loss reserves, the losses eat into capital. That can hurt earnings if loan quality continues to deteriorate.

Another thing to consider is headline risk. As we have seen with Countrywide, any bad news in this environment can cause depositors to flee -- every bank's worst nightmare

Looking at the largest 20 banks and thrifts, it is clear that four are under-reserved and two have an alarming level of capital exposure to nonperforming loans. Here's a look at the four cases.

At Washington Mutual, as at the other institutions, credit quality is in decline, and reserves appear somewhat skimpy. Given those trends, in a worsening economic environment liquidity -- as well as the bank's dividend -- could come under pressure.

The bank reported nonperforming assets comprising 1.40% of total assets as of June 30, double the level from a year ago. The thrift's net income rose 9% from a year ago in the second quarter, but its ratio of reserves to nonperforming loans dropped to 43.4% -- its lowest level in more than five years.

Meanwhile, Washington Mutual's ratio of nonperforming assets to core capital and loan-loss reserves was 19.17% -- a very high level for a large bank. Most banks and thrifts we surveyed showed a number well below 10%.

If we assume that when disposing of a repossessed home a bank is likely to recover 70% of the remaining loan balance, the institution would still be comfortably well-capitalized, with a risk-based capital ratio of 11.76% (it needs to be 10% to be considered well-capitalized).

OK so far, but what if a significant portion of the loans past due only 30-90 days are eventually foreclosed? Loans past due 30-89 days totaled $2.9 billion. Addressing the expectation of a continued decline in credit quality, CFO Thomas Casey revised the holding company's guidance for reserves for the second half, saying the company would set aside $900 million to $1.1 billion for reserves during the second half of 2007. This will have a major impact on earnings.

If banking industry conditions deteriorate, Washington Mutual's divdend could come under pressure. The company paid out 60% of its second-quarter earnings to shareholders. This payout ratio is high, considering that the thrift is under under-reserved -- so it is conceivable that the dividend may have to be reduced in coming quarters, if asset quality continues its dramatic decline.

Liquidity is also a major concern. A high percentage of Washington Mutual's deposits are in non-retirement accounts with balances exceeding $100,000. We call these large, partially insured deposits "hot money." Washington Mutual's hot-money ratio was 37.6% as of June 30. As we saw last week with Countrywide Bank, these deposits can fly quickly in a time of uncertainty. ....

Mortgage LendersSweeten Savings Rates from the WSJ (free)

Last week, Washington Mutual Inc. raised rates on online six-month CDs to 5.5% from 3.9% and, in recent weeks, began promoting special rates on shorter-term CDs in its branches and through its call centers

Average rates on six-month, one-year and five-year CDs are 3.55%, 3.75% and 4.03%, respectively, according to Bankrate.com.

> Fits perfect to the overall picture.......

> Paßt hervorragend in das Gesamtbild.... Nie ein gutes Zeichen wenn deutlich erhöhte Marktzinsen gezahlt werden müssen...

Disclosure: Short KBW Mortgage Finance Index (including WM)