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WAMU/Morgan: Behind the Numbers

Written by Subject: Economy - Economics USA
(Please note: all figures in this article are based on publicly-available data. Actual numbers may vary, but since I can't have a look at the books of the respective companies and don't have the staff of 75 that JP Morgan dedicated to this problem, they are the numbers I have to work with.)

JP Morgan Chase is purchasing Washington Mutual assets and deposits for a one-time payment of $1.9 billion to the FDIC. Morgan expects immediate income from the acquisition and 70 cents per share by 2011. No one seems to be asking, however, how Morgan can generate revenues from the purchase of a collapsing bank.

As of June 30, 2008, WAMU had $310B in assets, including $7B cash and $231B in loans ($8B allowance for bad debt). The bank had $283B in total liabilities, including $182B in deposits, leaving $26B in equity. Just since September 15, depositors have withdrawn $16.7B and the bank was facing a $19B writedown on the loan portfolio for the quarter.

Therefore, a guess at WAMU's books today puts assets at $291B, liabilities at $264B and equity at $27B, hardly a dire position. However, Morgan intends to write down an additional $31B of the loans, meaning their estimate of equity is -$4B, a guess the FDIC seems to agree with, thus today's seizure.

According to Bloomberg, Morgan is only taking $176B of the loan portfolio, leaving $55B to the FDIC. Since WAMU was going to write down $19B of that, we can safely assume the FDIC will be left with less than $36B in loans with which to satisfy all WAMU liabilities other than the deposits which Morgan is taking on.

So, with just the loan portfolio (valued by Morgan) and bank assets ($23B), and using only the drop in deposits since September 15, JP Morgan is receiving equity of $3B for the low, low price of $1.9B. Nothing says, “we're cutting the fat hog in the ass,” like a billion dollar profit at closing.

But, wait, there's more! As of June 30, WAMU had $283B in liabilities, but Morgan's only taking somewhere around $164B. Who is going to cover the other $119B? If you guessed, “ME!”, you're right. $119B, less the $17B already withdrawn, less $36B (WAMU estimated) in loans not taken by Morgan leaves $66B that you (me, we) get to pay for. Even if the FDIC repudiates the debt, we get it in the long run.

So, when Jamie Dimon supports the $700B bailout, go ahead and tack an extra $66B on the price tag. It'll help pay for Alan Fishman's 17 days of work at $441,000 per day.

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