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Quick Hits: Is WaMu Bailout Next?


Brief scrutiny of today's headlines.


The US government is attempting to organize a buyout of battered Washington Mutual (WM), the New York Post reports.

The sticking point: "No one knows what's in their books," the newspaper said, quoting an unnamed person.

Citing anonymous sources, the New York Post says federal regulators have had discussions with several banks, including Wells Fargo (WFC), JPMorgan Chase (JPM) and HSBC Holdings (HBC). However, the newspaper said that no discussions of a deal between the banks and Washington Mutual are underway.

Washington Mutual has lost about 80% of its value this year amid concerns about its loan practices and growing losses.

In the second quarter, Washington Mutual lost $3.33 billion, or $6.58 a share. The bank set aside about $8 billion to cover bad loans in its mortgage portfolio.

Washington Mutual said loans valued at $2.17 billion weren't being repaid in the second quarter. The bank's non-performing assets rose to 3.62% of total assets in the second quarter from 2.87% in the first quarter.

However, Standard & Poor's says the bank can meet its immediate obligations. Nevertheless, S&P cut WaMu's credit rating to "junk" status, or below investing grade.

Minyanville Staff Contribution:

Meanwhile, the issue for Washington Mutual remains this: will a buyer step up to prevent customers from withdrawing deposits?

According to Bloomberg, WM as of last week had $143 billion in retail deposits, a decline of 4.4% from the previous quarter. Merrill Lynch (MER), in a research report, termed the company's balance sheet "low-quality" and stressed that a buyer will need to emerge soon before regulatory action raises even more customer concern, creating even more retail deposit withdraws.

At what price could an offer take place? Given the deteriorating situation in credit markets, it is very unlikely an offer would come at a premium to the current valuation and may even be offered at a steep discount. The reality, however, is that the board should consider whatever offer comes their way, even if it does come at a discount. Every day without a decision thus far has brought another day of shrinking value.

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No positions in stocks mentioned.
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