There was never much question that the government would save Fannie (FNM) and Freddie (FRE). But what about all those other banks?
Washington Mutual (WM), for example, hit a new low of $3.23 yesterday, before it propped itself up after hours by saying all was well. Wachovia (WB) is now below $10, a price it last saw in 1991.
Is all actually well at WaMu? No one knows, including WaMu. What matters is what the bank’s balance sheet will look like in six months, when the credit crisis has had longer to play out.
As John Authers notes in the FT, WaMu is now trading as if it is going to fail, at a discount of 85% of book value. What might happen? Two bad scenarios, and a couple of more positive ones:
- Run on the bank, such as the one that killed IndyMac
- Book value clobbered by future writeoffs, which will force the banks to try to raise additional capital at fire sale prices and, if they are successful, dilute the heck out of current shareholders.
If WaMu and other banks do nothing, the best they can hope for is likely scenario two. Alternatively, they can:
- Hope that the market’s fears are just overblown and that the stocks will come roaring back (this will only happen if the future writedowns are limited.)
- Try to persuade Bernanke and Paulson that they’re too big to fail.
Even if they succeed in the latter, however, shareholders will still get hosed.