WaMu, Wachovia Resort To Desperation

Once the bread and butter of Washington Mutual's core business, negative amortization loans are going the way of the dodo bird, the company announced last week.  In a brilliant PR move, the announcement to discontinue negative amortization and "flexible payment" loans was buried in the ninth paragraph of a press release WaMu issued on June 18th touting an additional $1 billion assistance fund for troubled mortgage borrowers.  The press release did not indicate what the company planned to offer as assistance to its credit card account holders.  Through its ill-timed purchase of Providian Financial, WaMu entered the business of credit card lending to questionable borrowers in 2005 at the peak of the bubble, and has aggressively increased its credit card accounts since.  No surprise that WaMu has the highest proportion of overdue loans among the top 15 providers.  Given how lousy WaMu's timing has been, I suppose it is also not surprising that it took WaMu a year into the credit crisis to figure out that maybe, just maybe, it should stop offering negative amortization mortgages.

Meanwhile, Wachovia has apparently given up trying to solve its own "pick-a-payment" mortgage problem and has hired Goldman Sachs as an adviser.  I imagine that Goldman may take one look at Wachovia's loan portfolio and immediately short the stock.  Wachovia's hiring of Goldman has started the rumor mill once again that some white knight will come along and rescue Wachovia.  JPMorgan is always considered a likely contender, but I'd bet against it.  Wachovia, after all, is still a $17 stock.  When it gets to $2 and comes with a $50 billion loan guarantee from the Fed, maybe Jamie Dimon will start negotiating.  

Goldman was more than likely tapped by Wachovia not only because it has managed to avoid damage suffered by its competitors, but possibly also for arranging the restructuring of Cheyne Finance, the $7 billion SIV that collapsed last year.  If any bank knows what to do with a bunch of underperforming assets, it should be Goldman Sachs.  More than likely, Goldman's solution for Wachovia will mirror what they just pulled off with Cheyne.  Just spin it all off into another investment vehicle and make sure that Goldman gets paid a portfolio management fee after marking the assets down significantly.  Nice gig if you can get it.