As I type this, shares of Washington Mutual are down 1.97 to a measly $10.77 apiece. The stock was in the forties just this past summer. Look at a five year chart:
It's cratering because it got drunk writing mortgages at the peak of the real estate bubble.
One example is all you need to see how stupid this institution is.
I know a guy who owns four properties. He's got $4 million worth of mortgage debt on homes that I reckon are already down to $2.5 million in current market value. He is what they call "upside-down", but to the fourth power.
Get this, two weeks ago, he got ANOTHER home equity loan on one of his underwater buildings for a few hundred thousand bucks from Washington Mutual - a bank that can't claim ignorance because it holds some of his extant mortgage debt.
Who the bleep would ever lend a completely insolvent guy more money? WaMu may just as well flush the money down the drain.
The most incredible aspect of this blunder is the timing. WaMu has just taken billions in writedowns, slashed thousands of jobs, cut their dividend, and seen their stock crater. The handwriting is on the wall - in large boldtype font and they are STILL making ridiculous loans.
Look at this chart below (click to enlarge if need be):
Countrywide is on the cusp of bankruptcy. Greenpoint shut down in August. And WaMu is obviously tracking in the same direction.
GMAC will be the next to go belly up - I've heard as soon as this upcoming May. I actually know an executive at GMAC's mortgage division. He was my wife's boss for a couple years until he bolted for GMAC. Here's a guy who was making probably around 700k per year for his capacity as a chief financial officer. (I am sure GMAC bumped his pay above that.) Anyway, to give you a window into his brain, I will relate what he told me and my wife 2.5 years ago when we moved to Boston.
HighlyCompensatedSavvyFinancialGuy - You guys are renting? You're CRAZY. You just have to buy a house. The market only goes up and you can't stay outside...you'll be shut out forever.
Now mind you that was in June of 2005, the euphoric apogee of the real estate bubble. Remember, I had a landlord who told me he sold a building in less than a hour, sight unseen, over the internet at that time. Websites like condoflip.com were proliferating; it was absolutely crazy.
Since the Boston real estate market has been in free fall from the very day we got here, I reckon that I am actually the savvy financial guy! (albeit "underpaid")
My wife was itching to remind her erstwhile boss of this "advice" he patronizingly lavished on us when we moved but since the guy pulled the strings on her bonus she refrained.
Quite frankly, I think the guy is insane to leave my wife's stable, highly profitable firm to go run GMAC for a slight pay raise. As I mentioned above, GMAC is a ticking bankruptcy bomb. Rule number one is to always work for thriving, flush companies in healthy industries. For example, don't think anybody at the New York Times is getting a raise this year with their dwindling readership and ad revenues.
Obviously, this CFO guy didn't and doesn't have any armageddon-type opinions on the future of real estate - otherwise he may have passed on the GMAC promotion.
However, he is smitten by one end-of-the-world narrative, that of "global warming". He and his Oprah-educated wife were always lecturing his staff on environmental nonsense. Even I would bite my tongue and endure these sermons. After all, 30% of his staff's pay came in the form of discretionary bonuses.
For sure, workaholic corporate types haven't time enough to contemplate larger trends or phenomena outside their field. But as WaMu and this rockstar exec demonstrate, they are not even guaranteed to understand their own businesses. It's not just day traders who "momentum trade"; corporate executives also do their share of wave chasing - their share of "buying high" and "selling low". Their own business successes generate operational momentum. When a bank like WaMu has made all its money by writing subprime, adjustable loans, then it's just not one day going to change course. Like Countrywide, the entire company became oriented towards aggressive lending. If a salesman wasn't pushing these fanciful loans hard, he was eliminated. There are testimonials from former employees confirming this on the web.
Likewise, if a guy has only been buying homes for the past 15 years, we might forgive his ignorant conclusion that "real estate only goes up". It's very hard for untutored men not to get swept up by the momentum of their own personal experience.
It's also pretty hard for busy successful executives to realize that they might not know a single thing about the age-old politicization of weather patterns - after all, if they were dumb, they wouldn't have so much money, right?
4 comments:
C,
That's a great little anecdote. He sounds like that moron Mike Norman who is always on Fox Business News trying to tutor people in economic theory when he is as clueless as they come and is so blinded by his "patriotism" that he'll be denying the existence of a bear market even in his padded-cell at the crazy house. Probably re-double his efforts at that point.
There are many more, humongous losses coming for WaMu and these other financial companies and banks. People think it's ugly now but they don't know the half, or even the quarter of it.
I convinced my dad to liquidate his position in C and I'm looking over the rest of his portfolio right now trying to figure out what else needs to go and what he needs to bring in to prepare him for a deflationary recession. I'm not going to claim victory before the fact on any of the recommendations I have, am and will give him on these matters, but I feel pretty confident in saying that he'll be thanking me later for getting him out of C when I did.
Too bad I wasn't studying the markets when I was thirteen or fourteen, I probably would've had him out of AOL and all that crap, too! I remember him coming home everyday from working talking about what a killing he was making on the stock, explaining to me how it was splitting and all of this and how he didn't want to pull out yet... now he talks wistfully about the loss he took on AOL when he finally liquidated.
Oh well, easier to listen to than a friend of mine who starts saying "I knew I should've bought Apple at $50!" (or some number much lower than it is right now) anytime you mention the stock market to him.
Pride precedes a fall. The not-so-savvy investment guy is in for a rude, painful awakening.
- Sir Padgett
taylor,
I've grown to dislike the blanket terms "inflation" and "deflation" but I would lean against expecting a "deflationary recession". That is, unless by deflation you were referring strictly to financial asset prices.
C,
I'm not sure what you mean by "grown to dislike blanket terms" or why you even feel this way.
I thought we'd discussed what inflation/deflation are and are not before, but to answer your question I am NOT referring to prices. Changes in aggregate prices are consequences of inflation/deflation, they are not causes of inflation/deflation.
Inflation/deflation occur when the aggregate, economy-wide supply of money and credit increase/decrease. Depending on the overall growth rate/contraction rate of total production in the economy, rising prices/falling prices may follow this process.
Right now, the total supply of credit in the US is contracting fairly rapidly, even while the money supply continues to increase. Because the credit contraction is happening much more rapidly than the inflation of the money supply, deflation is occurring. Asset-prices will most likely fall dramatically over time to reflect this (because there is not as much credit as there once was that people could use to bid up asset-prices to ridiculous heights).
I think all of this contributes to the deflationary recession that we're already in.
Your comments?
Post a Comment