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If you thought Bank of America was bad, with their 32% profit hit last quarter, check out Washington Mutual’s meltdown: a 72% drop in quarterly net income. The cause? Come on now! Mortgage related losses of course! From the Wall Street Journal (h/t Calculated Risk):
Washington Mutual Inc. third-quarter net income plummeted 72%, as the company took a bruising hit to cover home-loan losses.
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“We’re disappointed with our third quarter results but they reflect the increasingly difficult market conditions that are challenging the banking industry,” said WaMu Chairman and Chief Executive Officer Kerry Killinger.
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WaMu also had a $147 million write-down on mortgage loans it planned to sell but were instead were moved to the company’s investment portfolio due to the summer’s credit-market seizure that essentially dried up demand for mortgage-related securities.
This is scary to me, and I’m not even a WaMu depositor. WaMu has one of the smallest loan loss reserves out of all the major banks; meaning they are at a higher risk to future system shocks. Further, they are incredibly reliant on deferred interest income - that is equity collected from negatively amortizing loans booked as income (which is insane to begin with). This thin loan loss reserve coupled with imaginary profits puts the bank’s cash position in a very precarious place, especially when it comes to credit-crunch scenarios.
Check out the chart in this post that we’ve looked at in the past to see WaMu’s loan loss exposure compared with the other big players.
Not surprising given they were one of the biggest pimps of option ARMS. Oh, I am sorry, they are a FDIC insured mortgage bank. They don’t sell toxic mortgages.
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