Is today the day another bank goes to the wall?
Normally, rating agencies downgrade companies to junk or default status after the company has put itself into bankruptcy, or some such.
It’s telling then that with WaMu - still, apparently, a going concern - Moody’s has downgraded them already. Last night. After US markets closed. To E, which we here on FT Alphaville weren’t even aware existed on the rating scale.
New York, September 22, 2008 — Moody’s Investors Service downgraded the financial strength rating of Washington Mutual Bank to E from D+. Additionally, Washington Mutual Inc. preferred stock was downgraded to Ca from B2. All ratings of Washington Mutual Bank (deposits and senior unsecured at Baa3, subordinate debt at Ba1, short term Prime-3) and Washington Mutual Inc. (senior unsecured at Ba2, subordinate at Ba3, preferred at Ca) were placed under review for downgrade.
The stark line being:
We believe WaMu’s capital is insufficient to absorb its mortgage losses.
Which is rather at odds with stories like this from last week. As that story notes, rating cuts don’t seem to affect WaMu’s share price. The equity market seems happy to swallow the company line:
WaMu shares jumped after the company said Standard & Poor’s decision yesterday to cut the lender’s credit rating to junk, matching a move by Moody’s last week, won’t have a ‘material’ effect.
There has also been plenty of chatter about possible suitors for WaMu buoying the stock. Toronto-Dominion bank is the latest on the cards.
It’s all madness.
No offer has yet been made because no-one wants all of WaMu. And ignoring rating cuts on a bank - rating cuts to E - is just ridiculous. To say that such cuts won’t have any “material” affect is also a bald lie. Notice too that Moody’s bank deposit rating on WaMu is Baa3. The bank deposit rating is the assessment of a bank’s ability to pay depositors.
If Moody’s analysis is correct, the only really viable situation for WaMu going forward will be a good bad/bad bank, with the depositor base being hived off in a good bank to a bidder. Even that is now threatened.
The only way such a deal can really happen would be if the FDIC steps in.
And there’s the catch. The FDIC - as it stands - doesn’t have enough money to bail out WaMu. Here’s the current state of the FDIC reserve:
Due to a significant increase in loss reserves, including reserves for failures that have occurred since June 30th, the DIF balance fell to $45.2 billion at the end of the second quarter, down from $52.8 billion at the end of the first quarter.
On top of which there’s a $30bn line from the Treasury.
Size of WaMu’s depositor base: $143bn.
So WaMu is in a rather uncomfortable nowhere land. Presumably, the FDIC is working on a solution. The sound ongoing operation of one of America’s largest retail banks with an “E” rating is, to be blunt, fantastical.
