Archive for the “Washington Mutual” Category

The year of 2008 will likely be remembered as the year subprime mortgages and corporate scandals changed the face of Wall Street. Buried under the weight of the subprime crisis, financial institutions took nearly $800 billion in writedowns and losses. The value of stocks worldwide plummeted by more than $30 trillion. Goliath investment houses like Bear Stearns fell apart. State, municipal and corporate pension funds reported massive losses from investments tied to faulty valuation models and high-risk mortgage-backed securities and their derivative spin-offs, collateralized debt obligations (CDOs).

Then there’s the near financial collapse of mortgage giants Fannie Mae and Freddie Mac and American Insurance Group (AIG), which required a financial intervention courtesy of the U.S. government. Lehman Brothers, the fourth-largest investment bank in the United States, filed for bankruptcy protection in 2008. Washington Mutual and IndyMac, along with some 20 other banks were forced to close their doors. Government bailouts reached an astronomical $9 trillion. And as a final nod to 2008, investors lost some $50 billion in a Ponzi scheme orchestrated by the former Nasdaq chairman, Bernard (Bernie) Madoff.

For investors, 2008 is the year that went from bad to worse. It began with the collapse of the auction-rate securities market in February and continued with credit default swaps and structured investment products. For the first time since the 1930s, the Dow Jones Industrial Average experienced losses of more than 30%, closing the year at 8,776.39. By comparison, the Dow finished out 2007 at 13,264.82. Bank stocks in particular took a beating in 2008, with Bank of America and Citigroup losing nearly 70% of their value. As for shareholders, they saw about $7 trillion of their wealth wiped out.

In the world of ultra-short bond funds, 2008 provided the lesson that ultra short does not translate to “ultra safe.” A number of supposedly safe and conservative ultra-short funds got into trouble in 2008 by investing in risky mortgage-backed securities and collateralized mortgage obligations (CMOs). When losses in those toxic assets began to skyrocket, investors lined up to pull their money out in droves, sparking a wave of fund redemptions.

As a result, several fund managers were forced to liquidate their funds’ assets. State Street Global Advisors’ SSgA Yield Plus Fund began liquidating in May after the fund fell 19%. It turns out more than 50% of the fund’s assets were tied to mortgage-related securities funds. One month later, the Evergreen Ultra-Short Opportunities Fund liquidated, as well, when its assets plunged more than 20% in value. Finally, there is Charles Schwab’s YieldPlus Fund. Marketed to investors as a safe alternative to cash, the fund suffered the most losses of any ultra-short bond fund in 2008, losing more than 40% of its value.

Investors, meanwhile, are suing all three funds, charging that they investments were represented as conservative “cash alternatives” and similar to money-market funds. Far from safe or conservative, the funds were heavily concentrated in risky mortgage and asset-backed securities. And, in the case of Schwab’s YieldPlus Fund, several investors who have filed lawsuits claim various Schwab executives and fund manager Kimon Daifotis committed “acts of gross misconduct” by encouraging investors to hold on to their YieldPlus shares, while simultaneously dumping millions of YieldPlus shares from the portfolios of Schwab’s other mutual funds.

Capping out 2008, of course, is the Bernie Madoff scandal. The disgraced hedge fund manager was arrested Dec. 11 by federal agents on charges of securities fraud for scamming $50 billion from investors. Meanwhile, the Securities and Exchange Commission (SEC), the supposed protector of investors and their investments, apparently turned a blind eye to Madoff’s subterfuge over the years by ignoring red flags that signaled problems with his funds and their “too-good-to-be-true” returns.

For investors, the Madoff affair may well be the final nail in the coffin when it comes to confidence in Wall Street. Already shaken from a year that was punctuated by the subprime crisis and corporate scandals - including the implosion of Bear Stearns, the collapse of the auction rate securities market, the bankruptcy of Lehman Brothers and inept accounting practices by Fannie Mae and Freddie Mac and other institutions - Wall Street has its work cut out in 2009 as it tries to renew investors’ faith once again.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

One more bank has bitten the dust. In yet another deal orchestrated by the U.S. federal government, Wachovia Corp. will be bought by Citigroup for approximately $2.1 billion. According to a statement issued by the Federal Deposit Insurance Corporation (FDIC) on Sept. 29, Citigroup will absorb up to $42 billion in losses on Wachovia’s most risky mortgages, with the FDIC taking on any losses beyond that amount. In exchange, Citigroup will hand over $12 billion in preferred stock and warrants to the FDIC.

The government’s deal with Citigroup is similar in structure to the agreement that it put together in March, when the Federal Reserve provided financial backing to JPMorgan Chase for the takeover of the 85-year-old investment firm of Bear Stearns.

For months, Wachovia’s financial picture has been in a downward spiral, the root of which was connected to its 2006 purchase of Golden West Financial. California-based Golden West specialized in optional adjustable-rate mortgages (ARMs) - mortgages that offered low payments at the beginning of a borrower’s home loan, followed by much higher payments later on.

With its portfolio burdened from massive losses on these optional ARMs, Wachovia’s stock plummeted more than 80% in value this year.

The final outcome for Wachovia illustrates the increasing toll that subprime problems have levied on the nation’s banking industry. In July, there was the collapse of IndyMac Bank. And, just last week, Washington Mutual - the country’s largest savings and loan – had been teetering on the brink of bankruptcy before its seizure by the government and subsequent sale to JPMorgan Chase.

In order to buy Wachovia, Citigroup must sell $10 billion in common stock, as well as slash its quarterly dividend - the second time it has done so this year - in half to 16 cents.

Once the deal with Citigroup has been finalized, Wachovia will remain a public company, with two main divisions: its brokerage arm, Wachovia Securities, and its investment management business, Evergreen Asset Management.

Interestingly, it was just two years ago that the Federal Reserve had imposed a ban on Citigroup from making any major acquisitions because of the bank’s inadequate risk-management controls and regulatory problems. Earlier this summer, Citigroup agreed to buy back some $7.3 billion in illiquid auction-rate securities from individual investors, charities and businesses, as well as pay a hefty fine of $100 million to settle potential fraud charges by New York Attorney General Andrew Cuomo over auction-rate securities sales and destruction of subpoenaed documents.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Alan Fishman’s rein as CEO of Washington Mutual - a position he inherited on Sept. 8, along with a $7.5 million signing bonus and a $1 million salary - was short lived. Late Thursday evening, Sept. 25, federal regulators seized the nation’s largest savings and loan and quickly orchestrated a deal to sell the bulk of the troubled bank’s assets to JPMorgan Chase for $1.9 billion. It is the biggest bank failure ever in United States history and the 13th bank failure so far this year.

WaMu’s descent this year has been swift. The Seattle-based institution was a major originator of subprime and other risky residential mortgages. Of the $182 billion in single-family mortgages that WaMu had on its books as of June 30, nearly $53 billion were optional adjustable-rate mortgage (ARMs) - a flashy and potentially dangerous loan option that allows borrowers to pay less in the beginning of their mortgage followed by payments that can increase dramatically if interest rates go up during the loan’s tenure. In addition to the ARMs, nearly $17 billion of WaMu’s loans were subprime mortgages.

After becoming increasingly burdened from massive mortgage and credit card losses, WaMu’s shares lost nearly 90% of their value this year. On Sept. 8, Washington Mutual fired its CEO Kerry Killinger, replacing him with Fishman. By June 30, following credit rating downgrades to junk status, the bank had posted $6.1 billion in losses.

In taking over Washington Mutual, JPMorgan will pay the government $1.9 billion, and assume WaMu’s loan portfolio of $307 billion in assets. In total, JPMorgan is expected to write down approximately $31 billion of bad loans and raise some $8 billion in new capital.

As for shareholders and some bondholders, the deal means they will be wiped out. JPMorgan will not acquire any of WaMu’s liabilities nor claims by shareholders and senior debt and subordinated bond holders. WaMu’s customers’ deposits will be secure, however, according to federal regulators.

WaMu’s final curtain call and 119-year existence as an independent company came much like the scene depicted in the 1946 film, It’s a Wonderful Life, in which a run on the bank nearly forced the collapse of the fictional Building & Loan. In the end, of course, the Building & Loan survives. Sadly for Washington Mutual, real life was not so kind. In the past 10 days, depositors had withdrawn nearly $17 billion of their money, signaling a potential collapse that would have been devastating on the Federal Deposit Insurance Corp.’s insurance fund.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Years of egregious actions on the part of Wall Street - from corporate arrogance, to incompetent accounting principles, to lax regulatory rules and oversight, to blatant criminality - are now taking their toll on the nation’s financial markets, and it’s Main Street paying the ultimate price. With the bankruptcy of Lehman Brothers Holdings, the fall of Fannie Mae and Freddie Mac, the IndyMac Bank failure, and now an $85 billion government bailout for insurance giant American International Group (AIG), investors and consumers alike are growing increasingly concerned about what lies ahead.

And they have good reason. The insanity happening on Wall Street means borrowing just went up in price. Financing a new car, paying for college, starting a business, building a hospital - all are likely to become more challenging in the months, even years, ahead.

Then there’s the psychological effect of Wall Street’s meltdown. As the financial crisis deepens and taxpayer-supported bailouts apparently becoming more commonplace, more investors - already distrustful of Wall Street and whose very existence they deem synonymous with greed and excess - will be prone to jump ship entirely, dumping their stocks, halting contributions to 401Ks and liquating mutual funds and other securities for safer investment vehicles.

Investors’ need to “do something,” anything, in the face of a crisis is warranted. At the same time, the ramifications of letting emotions guide decisions can often lead to even more uncertainty - in this case, for individual investors and the economy at large, say a number of financial experts.

“It’s like planning a road trip to California but then jumping in a car and heading east,” says one UBS broker, who requested anonymity. “Everyone is running to do something - which is understandable given the state of the markets and the 24/7 media coverage on the subject. Clearly, though, the ‘something’ that people need to do should be given much more forethought.”

Surprisingly, it’s not retirees who seem to be panicking, but rather younger 40-somethings, according to this UBS broker. “The older investors have been through this before,” she explains. “They remember the events of the past.”

Cases in point: On Oct. 19, 1987 - otherwise known as “Black Monday” - the Dow Jones Industrial Average was down 22.61% in a single day. On Oct. 26, 1987, it fell 8.04%; Oct. 13, 1989, 6.91%; Sept. 17, 2001, 7.13%.

By comparison, the Dow fell 4.4% on Sept. 16, 2008.

Still, when news that 158-year-old Lehman Brothers, one of the most established and respected investment firms on Wall Street, has filed for bankruptcy or that major money market funds - long considered to the safest of investments – are breaking the buck and falling below $1 a share, it’s almost impossible for investors not to feel powerless.

What’s Next?

Now the question on everyone’s mind is how do we get out of this mess? As reported Sept. 19 in a Wall Street Journal commentary by William Isaac, former chairman of the Federal Deposit Insurance Corporation, fixing the current financial crisis obviously will be a long-term process, but nonetheless contingent on a radical facelift for Wall Street.

Isaac contends that the financial problems gripping the country today are a direct result of something called Fair Value Accounting practices. Simply put, Fair Value Accounting means financial institutions that have financial instruments to sell - i.e. mortgage-backed securities - must mark those assets to market. “But what do we do when the already thin market for those assets freezes up and only a handful of transactions occur at extremely depressed prices,?” writes Isaac.

So far, says Isaac, the answer from the Securities and Exchange Commission (SEC) and the federal government has been to mark the assets to market even though no meaningful market exits.

Indeed, in his speech to the National Black MBA Association on Sept. 19, Bank of America CEO Kenneth Lewis strongly urged federal regulators to radically restructure the operating environment of Wall Street investment banks, instituting more of the oversight, capital requirements and business restrictions that are imposed on commercial banks today.

Short Selling

Another culprit behind the nation’s financial crisis: short selling, an act that until recently, the federal government has been exceedingly lax in regulating.

Short sellers make money when a company’s shares go down in price. They “borrow” shares from brokers and then resell them. When the share price on the stock becomes lower, short sellers give back the shares at the lower price and keep the difference.

While legal, critics of short selling say the method is at least partially to blame for the downfall and financial troubles of several Wall Street mavericks and other banking heavyweights in recent months, including Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual and Morgan Stanley.

On Sept. 18, New York Attorney General Andrew Cuomo announced that his office would be launching an investigation into the practice of short selling and, specifically, into the activities of short sellers regarding shares of Lehman Brothers and American International Group (AIG).

The SEC is cracking down on short sellers, as well. On Friday, Sept. 19, the regulatory agency issued a temporary ban on short selling in shares of 799 financial institutions. The ban will be in effect until Oct. 2, and could be extended pending market conditions.

Meanwhile, also on Friday morning, Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke unveiled a series of billion-dollar rescue plans aimed at salvaging the nation’s financial markets. Among the initiatives: creating a temporary asset relief program that would remove illiquid mortgage securities from the balance sheets of financial institutions and a federal guarantee on assets in money-market mutual funds whose values fall below $1 a share.

Officials are still working out details of the overall plan, and expect to meet with various members of Congress this weekend.

Keep in mind that Paulson’s plan - while no doubt a much-needed move in light of the current financial crisis - is a taxpayer-funded plan. Its cost doesn’t come cheap. The anticipated price tag: a whopping $1 trillion.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

At the beginning of 2008, five independent investment banks were doing business on Wall Street. Two remain: Morgan Stanley and Goldman Sachs. Now the question is for how long?

With the nation’s financial crisis reaching a fever pitch and markets here and abroad reeling from losses on subprime-related write downs and the credit crunch, it’s become a survival of the fittest for Wall Street. Now, financially troubled Washington Mutual, the country’s biggest savings and loan, is said to be looking for a buyer, while Morgan Stanley, the No. 2 biggest independent securities firm in the United States, reportedly may merge with Wachovia Corporation after its shares plummeted more than 40% amid news of Lehman Brothers’ bankruptcy.

The latest upheaval in the financial world underscores the severity of the credit crisis - and investors’ fears that more is to come. In the course of a week, the nation’s oldest investment firm, 158-year-old Lehman Brothers, goes bankrupt with debts totaling $613 billion. Merrill Lynch, fearful it might suffer a similar fate, is acquired by Bank of America. The Dow Jones Industrial Average loses more 500 points, its biggest drop since the Sept. 11 terrorist attacks seven years ago. Then, the U.S. Treasury Department, which previously said it would no longer put taxpayers’ money at risk by bailing out troubled companies, announces an $85 billion rescue for American International Group (AIG).

Even more unsettling to investors is the fact that some money market funds - a $3.5 trillion sector and once considered to be safe as cash - are losing money. In a rare “break the buck” scenario, the Reserve Primary Fund revealed on Sept. 16 that it had reduced the value of customers’ shares to below $1 to 97 cents.

And now reports surface that Seattle-based Washington Mutual is aggressively looking for a deal to save itself. WaMu’s biggest shareholder, TPG Inc., announced yesterday that it is willing to accept a dilution of its stake in the bank if it is sold. Both Wells Fargo and Citigroup have been rumored to be potential buyers.

Stung by heavy losses from adjustable-rate mortgages, Washington Mutual has seen its shares fall to their lowest levels in nearly two decades this year. Earlier in the month, Kerry Killinger, the bank’s CEO, was fired and replaced by Alan Fishman. Making matters even worse, the bank was cited by the Office of Thrift Supervision (OTS) for poor risk management practices.

Meanwhile, Morgan Stanley is dealing with problems of its own. Its shares dropped more than 40% on Sept. 18, amid concerns that it was the next investment bank to close up shop. CNBC first reported that the firm was considering a merger with Wachovia, the fourth-largest bank in the United States, on Wednesday night.

Stay tuned. The events of Wall Street are changing by the hour.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Facing $19 billion in bad home loans and falling stock prices, Washington Mutual is engaged in a full-on fight to allay investors’ fears that it can weather the latest financial storm. In the past week, the nation’s largest savings and loan has seen a 46-percent drop in its stock, its CEO Kerry Killinger fired, been put on probation by the Office of Thrift Supervision for poor risk management and compliance practices and had its credit ratings reduced by Fitch Ratings and Moody’s Investors Service to below investment grade.

The financial health of the Seattle-based bank apparently is so bad that it could be looking for a buyer. According to a Sept. 12 story in the American Banker, Washington Mutual has entered into “advanced discussions” to sell itself to JPMorgan Chase. The article says that while a deal has not been struck, “negotiations are ongoing at the highest levels of both companies, including James Dimon, the chairman and chief executive of JPMorgan, and Alan Fishman, the newly installed CEO of Wamu.”

This isn’t the first time JP Morgan has expressed interest in Washington Mutual. In March, JP Morgan tried to strike a deal to buy the bank, but was put off when WaMu received a $7 billion capital infusion from TPG Inc., a Fort Worth, Texas-based private-equity firm.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Washington Mutual’s new chief apparently has done little to restore investor confidence in the nation’s largest savings and loan. Its shares plummeted to an 18-year low on Sept. 11, falling for the first time since 1990 to below $2. In the past year, the bank’s stock has lost an astonishing 95% of its value.

WaMu’s troubles have been rampant this week. On Monday, its CEO, Kerry Killinger, was fired by the bank’s board of directors and replaced with Alan Fishman. The bank also was placed on “probation” by its chief regulator, the Office of Thrift Supervision (OTS), which is requiring WaMu to drastically improve its risk management practices, as well as provide a forecast for earnings, asset quality and capital.

Like a number of financial institutions, Seattle-based Washington Mutual has been hammered by subprime defaults over the past 12 months. Adjustable-rate mortgages account for more than half of WaMu’s prime loans. In July, the company reported that losses tied to subprime loans could total $19 billion over the next two years.

Moving forward, the future for Washington Mutual remains uncertain. As reported Sept. 11 on Bloomberg.com, the cost to protect the company’s debt is at an all-time high. Credit-default swaps, which are a way to hedge against the risk of a borrower defaulting on debt, have been trading at levels that suggest a more than 80 percent chance the bank will default in the next five years.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Washington Mutual’s CEO Kerry Killinger joins a growing list of executives to receive the pink slip because of company losses tied to rising mortgage delinquencies and the ongoing credit crunch. Among those on the roster: Citigroup’s Charles Prince, Bear Stearns’ James Cayne, Wachovia’s Kennedy Thompson, Merrill Lynch’s Stan O’Neal, Daniel Mudd of Fannie Mae and Freddie Mac’s Richard Syron.

Succeeding Killinger is Alan Fishman, a veteran of the financial industry who most recently served as chairman of New York-based Meridian Capital Group.

Seattle-based Washington Mutual is the nation’s largest savings and loans provider and one of the biggest subprime lenders. WaMu’s mortgage business also is heavily concentrated in risky adjustable-rate mortgages, which allow borrowers to set their own monthly mortgage payment.

Killinger joined Washington Mutual in 1982 and quickly rose through the ranks, eventually becoming president, CEO in 1990 and chairman the following year. He’s also largely blamed for allowing the company to take on massive amounts of mortgage-related risk over the years. In July, Washington Mutual disclosed a second-quarter consecutive loss of $3.33 billion - the biggest quarterly loss in its corporate history.

As of June 30, WaMu had lost more than $6 billion, with its shares down nearly 85% this year. The financial wreckage has forced the company to cut dividends twice, and lay off more than 10% of its workforce.

On Sept. 8, Washington Mutual announced that it had signed a letter of understanding with the Office of Thrift Supervision to improve its risk management and compliance practices.

Meanwhile, the person at the center of WaMu’s financial mess - Kerry Killinger - is leaving the company a very wealthy man. Analysts say the former CEO could walk away with an executive payout package worth more than $20 million.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.