CitiGroup 2 time loser

Filing Favors J.P. Morgan's WaMu Bid Over Citi's

Excerpt:

Citigroup Inc.'s unsuccessful bid for the teetering banking operations of Washington Mutual Inc. proposed that the U.S. government absorb a majority of the thrift's loan losses and limited Citigroup's financial exposure to $10 billion, according to a document released by regulators.

Terms of the offer by the New York bank previously were kept secret by the Federal Deposit Insurance Corp., which sold the failed banking units to J.P. Morgan Chase & Co. for $1.88 billion in September 2008. The document was disclosed following a Freedom of Information Act request by The Wall Street Journal.

The document appears to weaken claims by Washington Mutual's now-bankrupt parent company that the FDIC bent over backward to give J.P. Morgan a sweetheart deal on Washington Mutual. Citigroup offered no upfront cash as part of its bid and didn't want to assume Washington Mutual's uninsured deposits.

Citigroup also wanted the FDIC to cover 80% of "first losses" on the thrift's loans, including mortgages battered by declining real-estate values. Losses by the New York bank on the remaining 20% would have been capped at $10 billion, the document shows, with the FDIC stuck with any additional loan losses.

In comparison, J.P. Morgan sought and received no loss-sharing agreement from the FDIC. It also took control of all deposits held by Washington Mutual, whose collapse was the largest bank failure in U.S. history. "It would appear from publicly available documents that J.P. Morgan was far and away the best bidder," said Kevin Starke, an analyst with CRT Capital Group LLC in Stamford, Conn. "In hindsight, Citi's bid was too conservative."

J.P. Morgan and Citigroup were the only banks to bid for Washington Mutual as part of the auction process that is customary when insured U.S. banks and savings institutions fail. Under federal law, the FDIC must accept the "least-cost" offer from potential acquirers.

"The FDIC was able to sell WaMu through an unassisted transaction that protected all depositors and resulted in zero exposure to the government," an FDIC spokesman said. "No other bid accomplished this." Citigroup, J.P. Morgan and the Washington Mutual holding company, now in bankruptcy proceedings, declined to comment.

Comment: Also lost out on Wachovia

Lending money to nearly anyone who asked for it

WaMu Built Empire on Shaky Loans

Excerpt:

... one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

...
On one loan application in 2005, a borrower identified himself as a gardener and listed his monthly income at $12,000, Ms. Zaback recalled. She could not verify his business license, so she took the file to her boss, Mr. Parsons.

He used the mariachi singer as inspiration: a photo of the borrower’s truck emblazoned with the name of his landscaping business went into the file. Approved.

....

For WaMu, variable-rate loans — option ARMs, in particular — were especially attractive because they carried higher fees than other loans, and allowed WaMu to book profits on interest payments that borrowers deferred. Because WaMu was selling many of its loans to investors, it did not worry about defaults: by the time loans went bad, they were often in other hands.

...

By 2005, the word was out that WaMu would accept applications with a mere statement of the borrower’s income and assets — often with no documentation required — so long as credit scores were adequate, according to Ms. Zaback and other underwriters.

“We had a flier that said, ‘A thin file is a good file,’ ” recalled Michele Culbertson, a wholesale sales agent with WaMu.

Martine Lado, an agent in the Irvine, Calif., office, said she coached brokers to leave parts of applications blank to avoid prompting verification if the borrower’s job or income was sketchy.

Comment: WaMu is now owned by JPMorgan Chase.

Inside WaMu's "boiler room"

Was There a Loan It Didn’t Like?

Excerpt:

MS. COOPER started at WaMu in 2003 and lasted three and a half years. At first, she was allowed to do her job, she says. In February 2007, though, the pressure became intense. WaMu executives told employees they were not making enough loans and had to get their numbers up, she says.

“They started giving loan officers free trips if they closed so many loans, fly them to Hawaii for a month,” Ms. Cooper recalls. “One of my account reps went to Jamaica for a month because he closed $3.5 million in loans that month.”

Although Ms. Cooper couldn’t see it, the wheels were already coming off the subprime bus.

“If a loan came from a top loan officer, they didn’t care what the situation was, you had to make that loan work,” she says. “You were like a bad person if you declined a loan.”

One loan file was filled with so many discrepancies that she felt certain it involved mortgage fraud. She turned the loan down, she says, only to be scolded by her supervisor.

“She told me, ‘This broker has closed over $1 million with us and there is no reason you cannot make this loan work,’ ” Ms. Cooper says. “I explained to her the loan was not good at all, but she said I had to sign it.”

The argument did not end there, however. Ms. Cooper says her immediate boss complained to the team manager about the loan rejection and asked that Ms. Cooper be “written up,” with a formal letter of complaint placed in her personnel file.

Ms. Cooper said the team manager told her to “restructure” the loan to make it work. “I said, how can you restructure fraud? This is a fraudulent loan,” she recalls.

Ms. Cooper says that her bosses placed her on probation for 30 days for refusing to approve the loan and that her team manager signed off on the loan.

Four months later, the loan was in default, she says. The borrower had not made a single payment. “They tried to hang it on me,” Ms. Cooper said, “but I said, ‘No, I put in the system that I am not approving this loan.’ ”

Brokers often tried to bribe Ms. Cooper to approve loans, she says. One offered to pay $900 to send her son to football summer boot camp if she would approve a loan that had been declined by a host of other lenders. “I told him no and not to disrespect me like that again,” Ms. Cooper says.

Hidden fees meant brokers could easily make between $20,000 and $40,000 on a $500,000 loan, Ms. Cooper says.

...

Ms. Cooper says that loans she turned down were often approved by her superiors. One in particular came back to haunt WaMu.

Vetting a loan one day, Ms. Cooper says she became suspicious when a photograph of the house being bought showed one street address while documents deeper in the file showed a different address. She contacted the appraiser, and recalls that he said that he must have erred and that he would send her the correct documents.

“So then he sent me an appraisal with a picture of the same house but this time with the right number on it,” Ms. Cooper recalls. “I looked the address up in our system and could not find it. I called the appraiser and said, ‘Please investigate.’ ”

The appraiser came back, reporting that a visit to the California property had found everything in order and in agreement with the original appraisal. “I was so for sure that it was fraud I wanted to get on an airplane,” Ms. Cooper says.

The $800,000 loan was approved, but not by Ms. Cooper. Six months later, it defaulted, she says. “When they went to foreclose on the house, they found it was an empty lot,” she recalls. “I remember clear as day this manager comes over to me and asks, ‘Do you remember this loan?’ I knew just what she was talking about.”

Comment: Decisions in rooms like these greased the Mortgage crisis

The end of WaMu

JPMorgan Chase buys WaMu assets after FDIC seizure

Excerpt:

The deal will cost JPMorgan Chase $1.9 billion, and the bank said in a statement it planned to write down WaMu's loan portfolio by approximately $31 billion. JPMorgan Chase, which acquired Bear Stearns Cos. last March, also said it would sell $8 billion in common stock to raise its capital position.

The FDIC, which insures bank deposits, said it would not have to dip into the insurance fund as a result of the seizure. There had been concerns that the fund, which took a big hit after the seizure of IndyMac Bank, could be depleted by a WaMu seizure.

Comment: Its history ... goes back more than 100 years!

Where will WaMu find shelter?

Washington Mutual on the auction block

Excerpt:

Merrill Lynch (NYSE: MER) analyst Kenneth Bruce issued a report Wednesday saying that WaMu is coming under increasing pressure to “seek shelter from the storm through a merger.

“The decision of another rating agency to downgrade (WaMu’s) debt to non-investment grade, and the market disruptions in the wake of the Lehman bankruptcy, are likely to further undermine (WaMu’s) fundamentals,” Bruce said in a note to clients.

The New York Post reported Wednesday that federal regulators have approached healthier banks about their interest in WaMu, including Wells Fargo, HSBC and Chase. None of the institutions have engaged in formal discussions with WaMu, the newspaper said.

Comment: Interesting!

More banking news: FDIC & merger rumors

Federal bank insurance fund dwindling

Excerpts:

Banks are not the only ones struggling in the growing financial crisis. The fund established to insure their deposits is also feeling the pinch, and the taxpayer may be the lender of last resort.

The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation's largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.

Treasury has already come to the rescue of several corporate victims of the housing and credit crunches. The government took over mortgage finance companies Fannie Mae and Freddie Mac, and helped finance the sale of investment bank Bear Stearns to J.P. Morgan Chase & Co.

Eleven federally insured banks and thrifts have failed this year, including Pasadena, Calif.-based IndyMac Bank, by far the largest shut down by regulators.

Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC's insurance fund, said Brian Bethune, U.S. economist at consulting firm Global Insight.

Wachovia merger speculation heats up

Excerpt:

Wachovia, with its dominant Eastern franchise is seen as a promising merger partner for a company with big banking ambitions.

...

Wells Fargo & Co. (NYSE:WFC) has long been viewed as a potential merger partner, given the San Francisco bank’s dominance in the West.

WaMu may seek merger as pressure mounts

Excerpt:

Washington Mutual's stock has lost almost 94 percent of its value from its 52-week high of $39.25 on September 19, 2007, to its close on Tuesday of $2.36, as investors worry about continued losses related to risky real-estate loans.

The company's woes has led to speculation that it is primed for a takeover.

On Wednesday the New York Post reported, citing sources, U.S. federal regulators recently called a number of banks asking if they would consider buying Washington Mutual should it eventually falter.

In recent days federal banking regulators contacted Wells Fargo & Co (NYSE:WFC - News), JPMorgan Chase & Co (NYSE:JPM - News), HSBC (LSE:HSBA.L - News) and several other financial institutions to gauge their interest in a possible acquisition of the largest U.S. savings and loan institution, the paper said.

Comment: A Wells Fargo - Wachovia merger would be a merger of equals (equal in size, not in quality!). Wells / Wachovia would a National franchise à la Bank of America. A Wells Fargo / WaMu deal would be in Wells existing "footprint" - BIG FISH swallowing small fish.

Who will buy WaMu?

Chase seen as a likely suitor for Washington Mutual

Excerpts:

J.P. Morgan Chase & Co. is seen as a likely suitor for Washington Mutual, which is staggering under huge mortgage losses.

Earlier this year, Chase made overtures to WaMu that were rebuffed. The New York bank reportedly offered a stock-swap buyout valued at $8 per share, although other reports put the buyout price at slightly more than $4 per share based on conditions such as contingent payments made based on the performance of WaMu loan portfolio performance. Instead, WaMu went with a $7 billion financing led by TPG Capital, formerly Texas Pacific Group, that valued WaMu at $8.75 per share. TPG structured the deal for its 13 percent stake in WaMu so that it’s made whole if the bank sells for less than it paid within 18 months of the April investment.

WaMu’s shares (NYSE: WM) closed Monday at $2 per share, down 26 percent. Last week, Chase was reportedly in advance talks with WaMu again about a potential deal.

Also fueling speculation on a WaMu sale is the board’s decision this month to oust long-time CEO Kerry Killinger, who resisted selling the thrift. He was replaced by Alan Fishman.

“Killinger was fighting to shrink the balance sheet and keep the bank independent,” Dick Bove, analyst at Ladenburg Thalmann, told the New York Post this week. “By adding Fishman, who’s known as a guy who can get a bank ready for sale, they removed an important obstacle.”

Other banks that have been cited as potential suitors for WaMu include Wells Fargo (NYSE: WFC) and HSBC.

Chase (NYSE: JPM) could be attracted to Washington Mutual’s large branch network in areas where Chase has none. Specifically, key growth markets such as California and Florida. San Francisco bankers have long said it’s only a matter of time before Chase operates branches in the Bay Area.

A sale is looking increasingly likely for Washington Mutual, possibly in a government-assisted transaction.

Comment: I told Kathee on the way into work today ... someone will be buying WaMu.

WaMu credit rating downgraded to junk

WaMu Rating Lowered to Junk by S&P on Mortgage Losses

Excerpts:

Washington Mutual Inc., the biggest U.S. savings and loan, had its credit rating cut to junk by Standard & Poor's because of the deteriorating housing market.

S&P reduced its rating on Seattle-based WaMu to BB- from BBB-, leaving it three levels below investment grade, the ratings firm said today in a statement.

``Increasing market turmoil and the related impact from managing its concentrated mortgage franchise in this troubled housing and credit cycle led to the downgrade,'' S&P wrote. S&P cut its rating on the subsidiary bank to BBB- from BBB.

S&P followed similar announcements last week from Moody's Investors Service and Fitch Ratings. WaMu, which has reported $6.3 billion of losses in the last three quarters because of soured mortgages, said on Sept. 11 that it expects a third- quarter loan loss provision of $4.5 billion.

WaMu tumbled 73 cents, or 27 percent, to $2 at 4 p.m. on the New York Stock Exchange. The shares dropped another 20 cents, or 10 percent, to $1.80 in extended trading. They've lost 94 percent of their value in the past year.

``On a more positive note, we recognize that WaMu's holding company liquidity position is currently solidly positioned to meet all of its fixed obligations through 2010,'' S&P said. ``The bank is operating with adequate capital positions from a regulatory perspective and has demonstrated funding resilience as the deposit franchise has remained stable.''

WaMu slid 36 percent last week alone, a record decline. The lender ousted its chief executive officer and disclosed that its main regulator has told it to boost risk management and compliance. The bank on Sept. 11 said in a statement that retail balances at the end of August, of $143 billion, were ``essentially unchanged'' from the end of 2007.

WaMu's $1 billion of 5.125 percent notes due in 2015 fell 11 cents to 34 cents on the dollar today, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields about 27.9 percent, or 24.5 percentage points more than similar-maturity Treasuries, Trace data show.

Comment: I think Wells Fargo should buy WaMu! Same footprint!