We have not had time to analyse this in detail yet, so please bear with us. Here’s what we do know:
While acquiring WaMu’s wreckage, JP Morgan (JPM) has taken massive writedowns to WaMu’s loan portfolio. JP Morgan presumably wants to get as much of the bad news out of the way as possible, but the aggressive markdowns could still spell doom for Wachovia (WB), Bank of America (BAC), Wells Fargo (WFC) and other financial institutions carrying similar assets at higher prices.
Some specifics: JP Morgan plans to write down $31 billion of loans and raise $8 billion of capital to offset this. This writedown represents about 10% of the $307 billion of assets on WaMu’s balance sheet. The writedowns provide a new low market price for this type of asset. Although banks are not subject to the same mark-to-market requirements that have buried the brokerage firms–thus allowing them to delay bad news–this writedown suggests that the balance sheets of other banks may be far weaker than they appear.
Last night, a reader weighed in with the following details and estimates. Again, we have not had time to run the numbers or dig into the filings (mid-morning, we hope), so we can’t confirm any of this. But the exercise is certainly worth thinking through:
let’s focus on page 15 of the jpm pre for a minute. if I followed correctly, they marked down the home equity portfolio down by $29.9 billion (or 17.0% of face), then they are reserving for an additional $30.7 billion (or 17.4%). all told, that’s a whopping 34.4% on just the home loan book. the sub-prime piece was basically written off (81% mark-down).
time for extrapolation: if you apply that same maths to just the $122 billion pick-a-pay portfolio of watchovaya, and you have a hole of $41 billion on the low end to $98 billion at the high end. even if you take half of those numbers (presuming they have already reserved something) – on an equity base of $78 billion (market cap of $29 billion) – the feds are going to be busy again in the coming weeks…but who’s left to buy the good assets?
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