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Friday, April 11, 2008

Goldman Recommends Shorting Wamu

We were not at all keen about the TPG-led $7 billion investment in Wamu, and we appear to have company. Note that it’s one thing for an analyst to downgrade a stock, quite another to recommend selling it short. From Bloomberg:

Washington Mutual Inc.’s full-year loss will be wider than first estimated, according to Goldman Sachs Group Inc. analysts, who recommended selling the shares short. The lender declined as much as 6 percent.

Washington Mutual, the biggest U.S. savings and loan, may lose $3.30 a share this year, said Goldman Sachs analysts including New York-based James Fotheringham in a note to investors today. Goldman previously forecast a 2008 loss of $1 a share for the Seattle-based company….Washington Mutual may have $23 billion in mortgage-related losses, Goldman said today. The firm cut its 12-month price target on shares of Washington Mutual, also known as WaMu, by 17 percent to $10.

“Given WaMu’s disproportionate exposure to states” where home prices are forecast to decline, Goldman expects losses between $17 billion and $23 billion, the analysts wrote. Washington Mutual may have a $14 billion provision charge in 2008, the analysts said…..

Washington Mutual is at risk of further losses on credit- card lending, the Goldman analysts said. “WaMu leads its peers with respect to recent growth in credit-card delinquencies,” they said.

Fotheringham advised Goldman’s clients to sell short, which is the sale of stock borrowed from shareholders. People who sell short hope to profit by repurchasing the securities later at a lower price and returning them to the holder.

Goldman reiterated its “outperform” rating on Washington Mutual bonds and credit-default swaps….

The lender on April 8 reported a $1.1 billion first-quarter loss and said it will stop making loans through mortgage brokers and close 186 home-lending offices.

Topics: Banking industry

Email This Post Email This Post Posted by Yves Smith at 9:24 am

7 Comments » Links to this post

7 Comments:

  • Anonymous says:
    April 11, 2008 at 9:52 am

    This is a great way for Goldman to recoup loses on its own off balance sheet and add liquidity to Level 3 assets! Go Goldman!

  • Anonymous says:
    April 11, 2008 at 10:16 am

    The signs of starvation is when they start eating their own.

  • S says:
    April 11, 2008 at 1:45 pm

    NCC: $2B allowance, $130B portfolio of which $7B of broker originated HE and $7B subprime mortgages vs. $5B tangible equity. 650 million shares. Oh wait $35B of commerical exposure. Rising credit costs and deposit trends (?)? Even if you assume they run off the portfolio, reduce the dividend (300% payout) and Add it all up and you get another short bus candidate

    “As described above, originations of broker-sourced home equity lines of credit ceased in August 2007. Broker-sourced lines represented $7.5 billion of the home equity line of credit portfolio at December 31, 2007 with California (29%), New York (10%), Florida (6%), Maryland (5%), and Virginia (5%) representing the top five lending states.” average run-off of this portfolio is expected to approximate $70-75 million per month in 2008

  • Richard Kline says:
    April 12, 2008 at 2:10 am

    In the Bloomberg article on this off of the post on WaMu at Calculated Risk [sorry, I'd link it, but], I read that GS ‘facilitated the $7B placement’ to TPG of new capital for WaMu—and then issued their short call for WaMu’s equity! Absolutely frickin’ unbuh-leeeeeevvable. Take a fee, and _then_ tell the Street they’re garbage? I know it’s a jungle out there, but this level of parasitism wriggles at a slime level down below primordial ooze.

    Oh, and TPG: You don’t eat the Blob, the Blob eats you. Unless you got a crypto-guarantee from the Powers that Be.

    Woo-hoo WaMu?? Whoooooo-EEEEEEE!! Stay upwind, ’s my advice. I live in Seattle, but they’re not _my_ bank. (It’ll be commercial re that gets my bank, more likely. Oh well.)

  • Anonymous says:
    April 12, 2008 at 5:45 am

    Richard,

    Isn’t hedging what the Street does it best? Not that I’m defending the GS’ unethical strategy, but they are the best at hedging each&every possible direction.

    As for WaMu, I think they’re nearly toast, I don’t know if they’d be lucky to find a taker going forward.

    Regards,

    A.

  • Richard Kline says:
    April 12, 2008 at 6:20 am

    To A. Anon, I’ve thought WaMu was gorked since November what with their exposure. If GS was crying “Short” now, I’d agree with the above posts that it was six months late; I feel confident that GS has been shorting them since _before_ November, they know their work. But taking the salt of the WaMu-TPG deal to shore up their position and _then_ kicking their equity price downstairs on the way out the door seems to me well on the wrong side of sharp practice. If that’s par for the course, we’re on a rifle range is how I see it.

  • S says:
    April 12, 2008 at 3:34 pm

    Richard,

    That the stock has remianed ay 11ish suggests something doesnt it? Like this was a brokered deal which lets private equiyty gut it in private and then JP morgan or like to by it fr a nice embeedded gain once the cleanup is done. The equity was done at 8.75 which would in theory put a ceiling on the shares so the short call is kind of like downgrading a stock as the takeout date approaches. Thanks for the heads up!

    The bigger issue is the crying by the ibanks about shorting which is exactly how they hedge themdselves. That no MSM has written an article on the glaring hypocrits (I have LEhman in mind) is mindboggling.

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