THE POWER OF … huh?
In this episode I’ll be trying to say something sensible about a company I’d never heard of three weeks ago. Washington Mutual, now officially  "WaMu", is America’s sixth largest bank and the largest S&L to survive the epic 1980s S&L crisis. It would appear to be a major player among the private label lenders who took so much of Fannie’s and Freddie’s mortgage business once the bubble generated an abundance of sub-prime loans. Recently some funny stories started attaching themselves to the WaMu name (including the one about the name change). Eventually enough pieces fell in place to give a picture of a company in full panic mode. WaMu sees it’s in a trap (too much staff and too many exotic mortgages now that bubble business is shrinking and loan standards are tightening), and is trying escape by shedding big pieces of itself. Whether the result will be that of the European glass lizard shedding its tail, or more like a fox gnawing off its leg is not clear at this point. Either way, the spectacle should provide a good model for other private label lenders caught off-balance by the bubble burst. This week’s subtitle is a play on WaMu’s brand, "The Power of Yes!(TM)". Here at Doom we’re pretty sensitive to things that just don’t make sense. We may not be able to solve the conundrums we find, but you always have the fun of watching us struggle.
During the course of my readings about the sub-prime/Alt-A lenders, the name "WaMu" would flash by from time to time. Therefore, when a discussion topic "Shorting WaMu"  popped up on September 2nd, I had a look. Some commenters were making dire assertions about the harm to the company from their decision to fire their entire in-house appraisal staff (huh?). That seemed a bit extreme, but a bit of digging    yielded at least partial confirmation that that was indeed what happened. Appraisers have been getting a beating recently, and not just on Doom.  Still, these guys are at the very heart of mortgage banking. If WaMu needed to outsource them all, they had a pretty urgent need to cut costs.
But it wasn’t just the appraisers. WaMu was shedding all kinds of stuff. And it wasn’t just WaMu either. First Horizon was also furioiusly cutting staff. In fact, Nouriel Roubini  sees the WaMu reductions as part of the natural cutting back of mortgage industry head-count as the bubble winds down.
"As housing slumps, jobs among real estate brokers and agents will fall; so will jobs in the mortgage finance industry (where, for example, Washington Mutual has already slashed 2,500 jobs related to mortgage finance) and related jobs (residential property managers, offices of real estate appraisers, lessors of residential buildings, direct title insurance carriers, other real estate credit employees)."
So perhaps the situation is not that complicated after all. Market forces are making WaMu cut costs precipitously, but as people leave they take their talents with them, and this creates problems too. A story  last Friday paints a picture of a company that is frankly thrashing a bit as it tries to do what it has to do.
"‘This is a growth company, but we’re a cyclical growth company,’ Killinger said in an interview following the company’s two-day investor conference. WaMu’s goal is to be positioned ‘to really benefit when the interest rate environment improves.’
Washington Mutual is also hoping to boost earnings by cutting expenses, principally in the number of employees it has. For the first half of the year WaMu cut employment by 7 percent off a base of nearly 61,000 at the end of 2005, and that will be cut further as two pending sales are completed.
WaMu also plans to have 7,500 positions offshore by the end of 2007, and it’s been moving other employees to lower-cost places of doing business in the U.S. such as San Antonio and Jacksonville, Fla.
Relying on online banking to deliver customers requires that the service actually be available, which it wasn’t for several weeks recently.
Killinger called the outage ‘disappointing’ and ‘unacceptable.’ ‘On the positive side, we’ve learned a lot,’ he said. ‘We’ve taken steps to reduce the likelihood of that happening again.’"
Finally, here’s one last "huh?" moment for WaMu. On the Sunday of the Labor Day weekend, something a bit odd caught my eye regarding this story.
"The arrival of a US issuer to the European covered bond market could herald a flood of new supply in coming years, which would seriously alter the balance of a market dominated by German and Spanish issuers.
The bonds, which are backed by mortgages or public sector loans and carry an implicit guarantee [???] from the issuing bank, have become increasingly popular in a number of European countries in recent years and the market has grown to a total outstanding volume of about €1,600bn ($2,053bn).
If the launch of a €20bn covered bond programme from Washington Mutual proves a success, there could be up to 10 large US mortgage banks that will seriously consider raising funds in this market, according to bankers. WaMu will begin marketing the first deal, worth more than €1bn, on Monday."
What in the world is an "implicit guarantee" from a bank? Do they explicitly say "we don’t stand behind these bonds", while the market assumes they are only kidding? There is something not right here. Even weirder, the bond raters are expected to give this paper an AAA rating. I see no logical explanation for this and can think of only one possible illogical one. The bond markets are certain that Congress will completely bail out the paper of even America’s private label mortgage lenders. Yee haw!
Notes and References: "Goodbye Washington Mutual, hello WaMu", by Jonathan Stempel, Reuters, August 17, 2006. : "Washington Mutual to Offer Faster, More Reliable Appraisal Services", Business Wire (press release), July 5, 2001. This press release, around the start of the bubble, introduced their new "Optis" automated appraisal support system. Note that it’s the appraisers who get to say "Yes" in the context of "The Power of Yes". : "Shorting WaMu", started by powayseller, User Forum Topic, Professor Pigginton’s Econo-Almanac for the Landed Poor, topic start September 2, 2006. Let’s be really, really careful interpreting this material. The very title of the thread signals the possible presence of posters playing mind-games with the sto
ck price. : "The Power of Yes! WAMU Pulls The Plug On All Residential Appraisal Department Employees", by Jonathan J. Miller, Soapbox: Appraisal Ethics, Ideas and Industry Issues (blog), July 12, 2006. : "WAMU Thanks All Their Residential Appraisers For Doing Such A Great Job And Now Will Let Them Spend More Time With Their Families", by Jonathan J. Miller, Soapbox: Appraisal Ethics, Ideas and Industry Issues (blog), July 14, 2006. : "BrokerUniverse Newsletter for 7/21/2006", on Google Groups. : "You don’t need IT to predict option ARM implosion", by Robert L. Mitchell, Computerworld (correspondent’s blog), August 5, 2006. Corrupt appraisals are critical in facilitating the cited "shady practices" of the brokers. Emphasis in the quotes is mine.
"Now option ARM borrowers are finding that the devil’s bargain is coming due. Here’s the really irritating part: Because many banks have distributed those to investors in the broader financial markets they are unlikely to pay heavily for generating these poorly underwritten mortgage notes. But their customers will pay in two ways – some borrowers will lose everything. But the broader economic damage will come from the housing bubble these practices helped to create. There is no doubt that the housing correction will last longer than it would have had banks not followed these practices.
But banks will also suffer. Some still hold large numbers of these loans in house and may be hurt. But as the defaults come in and gain publicity the loose and shady practices of some independent mortgage brokers in the past few years are likely to give the entire industry a black eye – and could lead to more regulation and new accounting restrictions. Especially in an election year."
: "Washington Mutual to Sell $140 Billion in Mortgage Servicing and Milwaukee Servicing Operations to Wells Fargo", WaMu Press Release, July 19, 2006. : "First Horizon lays off 350 loan officers", by Janel Watson Lacy, Memphis Business Journal, September 8, 2006.
"’The mortgage business, generally, is a commodity-based business. The best price gets the business,’ Reynolds says.
When times are good, fixed costs are high, but the lender makes more money. And when times are bad, it’s harder to make money because of the fixed costs, he says.
‘What management appears to be doing is eliminating some of the cost in the infrastructure,’ Reynolds says. In this case, the costs are people.
He says it’s hard for a mortgage company to manage its business in real time. Staff can’t be cut when signs first appear that business will begin to slow — they’re all wrapped up in current deals, which means adjustments are made after the fact."
: "The Contribution of Housing to Recent U.S. Employment Growth: 27% to 40%", by Nouriel Roubini, RGE Monitor – Nouriel Roubini’s Global Economics Blog, September 4, 2006. : "WaMu cuts expenses, eases off home lending", by Bill Virgin, Seattle Post-Intelligencer, September 8, 2006. : "WaMu set to open door to European opportunities", Financial Times (London), September 3, 2006. : "Washington Mutual plans euro covered bond – lead", Reuters, August 21, 2006.