Friday, September 26, 2008

The WaMu Wipeout: Who Gets Hit?

(FT Alphaville) Everyone has been so caught up with the largest bailout of all time, that they’ve somewhat missed the US’s largest bank failure of all time (trumping Continental Illinois).

Washington Mutual was taken over by the FDIC last night, and supposedly “bailed out” in a $1.9bn sale to JP Morgan.

It wasn’t really a bailout at all though, but a carveout.

And if you’re an equity or debt holder, a wipeout. TPG is the biggest equity loser. As Dan Primack notes, its stake in WaMu could well be the worst private equity deal of all time (emphasis ours):

Private equity firms have done hundreds of lousy deals over the deals, including such notable duds as Refco and Atkins Nutritionals. But it would be hard to find a single one worse than TPG Capital leading a $7 billion capital infusion earlier this year for Washington Mutual.

As Primack says, only $2bn of that was actually stumped up by TPG, but still… pretty bad.

But forget equity, the real news here is that analysts only expect small returns on the bonds. For more or less all of them. From RBS this morning (emphasis, again ours):

This is an unprecedented destruction of senior bondholders such that bank bond investors may be thinking to themselves “why bother?”

Recovery values look then to be predicated on the USD1.9bn being shared around the senior unsecured and pari creditors. What is not yet clear, as the money was paid to the FDIC and neither WaMu Inc nor WaMu opcos, is whether it will be shared around both holdco and opco senior or just the opcos, as that is what was bought. Either way, recovery values are going to be pretty grim and low to mid-single digit looks to be likely.

There is now a precedent set which is taxpayer friendly and 100% risk asset hostile.

There’s confusion as to which WaMu debtholders may have been saved by the JPM deal. There may be none - there may be some. It all depends on which part of WaMu the debt was issued from and whether JPM has bought that part. It isn’t really clear where WaMu’s $11bn covered bond programme falls, either

As of yesterday, there was around $28bn of WaMu bonds in issuance, from a range of different companies and subsidiaries under the WaMu parent company.

Here is a list of the top WaMu debt holders, and the sizes of their holdings. Lots of insurance companies.

1) Capital Research and Management - $1.5bn
2) Vanguard Group Incorporated - $336m
3) American Life Insurance - $166m
4) Teachers Insurance and Annuity Co - $159m
5) Jackson National Life Insurance - $148m
6) Nuveen Advisory Corp - $124m
7) Genworth Life Insurance - $113m
8) Principal Life Insurance - $97m
9) AIG Annuity Insurance Co - $93m
10) Hartford Life Insurance Co - $91m
11) Metropolitan Life Insurance Co - $88m
12) AXA Equitable Life Insurance - $85m
13) Sun Life Assure Co of Canada - $82m
14) Thrivent Financial for Lutheran - $80m
15) Western Asset Management - $77m
16) Principal Asset Management - $69m
17) Allianz Life Insurance Co of North America - $59m
18) Riversource Life insurance co - $58m
19) Northwestern Mutual Life Insurance - $57m
20) Lincoln National Life Insurance - $56m

Then of course, there’s CDS on WaMu. All of which will have been triggered since most reference the parent company that JPM has left behind.

The collapse might not have as much systemic relevance as that of Lehman - Wamu doesnt have any massive trading positions which may need unwinding - but it’s still systemic. This is exactly the kind of collapse that the Tarp is supposed to be preventing.

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