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They Love To Be Misled By WaMu


Headline numbers are misleading and credit deterioration should hurt future results...

Despite the headline beat, most of the numbers under the number were pretty negative. Washington Mutual's (WM) operating results were characterized by sizable credit quality deterioration within its home loan, home equity and subprime mortgage portfolios.

What made up for these declines were largely one-time in nature: strong depositor fee growth (largely driven by teaser rates-offering a high short-term rate on deposit and hoping people are too lazy to change banks when that rate expires); exceptionally (unbelievably) large gains on expense controls; and some improved profitability in mortgage banking.

Another one-time, or non-recreatable event: Gain on sale revenue rose $97 million, owing primarily to favorable margins. It's not clear, however, how much of that margin improvement was due to a shift in product mix (so they might have sold the good stuff and be stuck with the crap). Margins should come down in the next couple of quarters, this was about 20 bps higher than normal.

Looking through the numbers, it also appears to us that WaMu released $37 million in loan loss reserves in 2Q, despite increasing delinquencies and rising loss severities. WaMu raised its 2007 full-year loan loss provision guidance by another $200 million, implying about $500 million in expected second quarter losses.
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