Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Chinese Tech Stocks CCP Paranoia and Best AI Tech Stocks ETF - 26th Oct 21
Food Prices & Farm Inputs Getting Hard to Stomach - 26th Oct 21
Has Zillow’s Collapse Signaled A Warning For The Capital Markets? - 26th Oct 21
Dave Antrobus Welcomes Caribou to Award-Winning Group Inc & Co - 26th Oct 21
Stock Market New Intermediate uptrend - 26th Oct 21
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Death Spiral Financing at Citigroup, Merrill Lynch, WaMu...

Companies / Credit Crisis 2008 Jul 23, 2008 - 06:48 AM GMT

By: Mike_Shedlock

Companies Best Financial Markets Analysis ArticleReuters is reporting WaMu has $3.33 bln loss, may be cut to "junk" .
Washington Mutual Inc, the largest U.S. savings and loan, posted a $3.33 billion second-quarter loss on Tuesday as souring mortgages forced it to set aside more money for loan losses.

"We are planning for continued softness in housing for the next several quarters," Chief Executive Kerry Killinger said in an interview. "The capital that we have in place is sufficient to manage through this period. We have no plans at this point to raise additional capital."


Washington Mutual said its mortgage unit lost $1.35 billion in the second quarter, while retail banking posted a $2.04 billion loss. Credit cards generated a $175 million loss, while profit in commercial banking fell 29 percent to $87 million.

Washington Mutual also said that Killinger, Chief Operating Officer Steve Rotella and Chief Financial Officer Tom Casey will not receive annual incentive payments under a company bonus plan, in light of its performance in 2008.

What a travesty of justice! It's not easy to lose money in nearly every phase of operations. One might think that such performance would be rewarded. But no! In an amazing superhuman sacrifice the CEO, CFO, and COO of WaMu will all decline bonuses.

Plans To Raise Capital vs. Need To Raise Capital


It is interesting how statements like " We have no plans to raise capital " can get completely distorted from reality.

Check out this bullish Comment about Washington Mutual I found on Yahoo: " No Need to Raise Capital....... Very Bullish. Long till 2012 ".

Here is the reality.

WaMu "Can't Raise Capital"

Please consider Washington Mutual Drop Wipes Out Most of TPG Holding .
Three months ago, with Washington Mutual's shares at $13.15, a group of investors led by Forth Worth, Texas-based TPG agreed to buy $7 billion of stock at $8.75, a 33 percent discount.

As losses mount, a clause in the TPG agreement makes it more costly for WaMu to raise capital or be acquired. If WaMu is sold for less than $8.75 a share or is forced to raise more than $500 million in equity, it must compensate TPG for the difference, according to filings with the U.S. Securities and Exchange Commission.

"We don't know how their investment plays out, but we also don't know how this affects WaMu to the extent they need to raise more capital," said Steven Davidoff, law professor at Wayne State University Law School in Detroit. "They really can't raise equity."

Death Spiral Financing

It is now time to explore the implications of the desperate deal that Washington Mutual made with TPG. Please consider Lack of Transparency = Shareholders Get Ratcheted .

Following are a few highlights from the above lengthy, but well written article. I condensed this down as best as I can but inquiring minds will definitely want to read the entire article.
Even though hundreds of billions of dollars of capital have been raised by the financial sector over the past several months, which of the investors in a financial institution have made money since their initial investment? Answer: Zero.

We can't think of one. They are all underwater. When Abu Dhabi first invested $7.5 billion in Citigroup last November, Citi's stock was $35. Subsequently, when Citi did their $14.5 billion raise in January, the stock was trading at $30. Today Citigroup's stock is under $20... and it keeps falling. Merrill Lynch did a combined raise of $12.8 billion in December and January at $48. Now the stock is under $35… and also falling. Warburg Pinkus made their now infamous $1 billion investment in MBIA at $31 per share. MBIA has fallen over 80% since and is now trading at under $5 per share.

Those who participated in Ambac's $1.5 billion rights issue in March are down a similar amount, 80%, as the stock now hovers under $2. Bank of America made their initial investment in Countrywide Financial last August at $18 per share (rather surprising to us, given that Countrywide looked to be going bankrupt if BofA didn't come to the rescue). Bank of America subsequently made a takeover offer in January. Today Countrywide shares can be got for under $5 per share.

TPG invested in Washington Mutual to the tune of $7 billion at $8.75 per share, a substantial discount at the time to WaMu's stock price of $13. Today WaMu's stock is $6. Last month AIG raised $20 billion when their stock was trading at $37 per share. Today AIG stock is just above $30 per share. Even those who participated in Lehman Brothers' $6 billion equity offering last week at $28 per share are already underwater, with LEH currently trading below $24 (year-to-date Lehman's stock is down over 60%).

Ironically, thanks to full ratchet provisions, this promises to lead to further dilution and even weaker stock performance going forward.

There were at least some smart investors who noted the downward trend and successfully negotiated for downside protection. We know of at least two cases (though there are doubtless others); namely, Merrill Lynch's $12.8 billion investment from Temasek (the Singapore sovereign wealth fund) and Washington Mutual's $7 billion raise from TPG (a private equity firm).

Quite unbeknownst to the general public at the time, downside protection was built into these equity raises to protect these investors. They are called “look back” provisions or “full ratchet” compensation.

We believe it is more accurate to call them “death spiral” securities. They work as follows. The investors in the equity raise would have their investment “protected” by a provision which states that should the bank afterwards raise money at a lower price than what they paid, these investors would be compensated retroactively by having their initial investment priced at this lower price, thereby being issued new shares for free. It doesn't take a mathematician to see how these provisions can result in massive dilution should the bank subsequently raise even a paltry amount of capital. A new offering will trigger a lower price because of the dilution it would cause, which would trigger even more dilution because of the lower price, which would then trigger an even lower price because of the even higher dilution, etc. This is why we call such securities a death spiral.

However, unless the bank goes bankrupt, these investors can't lose. And we already know to what lengths the Fed will go to prevent a banking bankruptcy. It's heads I win, tails I win.

They can even short the stock in the expectation that it will go down and still not lose. At the next financing, which is sure to come, they will be made whole... even making money on the short!

Add Citigroup To Those In Death Spiral Financing

The above article mentioned Merrill Lynch and Washington Mutual in death spiral financing schemes. Add Citigroup to the list. I talked about this way back on January 15, 2008 in Cost of Capital "Ratchets Up" at Citigroup and Merrill .

Is it any wonder that Citigroup is desperate to dump $500 billion in assets? The saving grace for Citigroup is that it has assets to dump. The big question is ho much those assets will fetch. I believe it will be far less that Citigroup thinks. I am still sticking to my estimate that Citigroup will survive, just nowhere remotely close to its current state.

Now take a good hard look at WaMu. It is losing money at nearly everything it does. It is in deep serial trouble over Alt-A loans alone.

With that in mind, many have been asking for an update on the WaMu Alt-A pool I have been tracking. The article has been out for some time. The title is certainly not obvious, and those who missed the update can find it in Fannie and Freddie Waterfalls Are Too Big to Bail .

Desperation At WaMu

Think about the implications of a company either desperate enough or dumb enough to issues $billions in shares at $8.75 when the stock was over $13 at the time. The ratchet provisions made it likely those in the deal immediately shorted it. Even if there were short restrictions, there are ways to execute synthetic shorts (writing deep in the money covered calls for example).

Even if TPG took no action on its own accord, others understanding the implications of the ratchet agreements WaMu agreed to, probably shorted the hell out of it. Any company that desperate or that stupid deserved to be shorted into oblivion.

The CEO, CFO, and COO all ought to get fired for agreeing such terms as well as for not seeing the need to raise capital until shares fell to $13. Then again, those executives paid the ultimate sacrifice of foregoing their bonus for a quarter.

WaMu Is Screwed

Washington Mutual is screwed. It cannot raise capital by equity deals even if it wants to. Those who translated " We have no plans to raise capital " into " No Need to Raise Capital" are sadly mistaken.

WaMu desperately needs to raise capital. However, those death spiral financing arrangements it made means WaMu can't raise capital. And if WaMu can't raise capital, it stands to reason it would have no plans to do so.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in