Stock lesson VIII: WaMu fiasco

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Think you are unlucky being US tax payer, paying $700 billion to bail out wall street. Think the poor Washington Mutual (NYSE: WM) shareholder and bond holder, they are left with almost nothing.

And yours truely, after been in the US stock market for almost 5 years, is one of the WM shareholders. Looking back, this is a mistake largely self made and I could avoid it if I used more brain a bit more. Here was my rationale and how I did it:

Last Wednesday Sept 23 morning on my way to work, I listened to NPR and heard Citibank along with others are bidding on WaMu. I knew WaMu the stock 5 years ago, and I know it’s in the mortgage trouble these days. But I don’t think the goverment will let it bankrupt like it did to Lehman, because the last thing they want to see is people lining up before the WaMu branches and trying to withdraw money. That could trigger a bank run on other major US banks, and it will shaken people’s confidence on financal institutions. I thought they could do something they did to Fannie, Freddie and AIG: take over with some sort of loan, a life line. So I bought a little WaMu shares, betting the bailout plan will pass congress quickly, and WaMu will get a second chance.

I was wrong. On Thursday evening, the bailout plan stalled. FDIC took over WaMu, and sold it to JP Morgan in a second (refer to this article by Michael Steinberg). Quote Michael:

During the consummation conference call, (JPM CEO) Jamie Dimon disclosed that JPM had unprecedented access to WaMu’s mortgage detail. JPM received computer tapes with the most granular mortgage detail (FICO scores, LTVs, and MSAs) to compare with their own data and develop loss projections. JPM had the time to do a true bottom up analysis.

So, in other words, the shareholders and bond holders of WaMu were robbed by FDIC and JPM. The fall of WaMu also served as another warning to the US congress to pass the bailout bill. It looks like the bill will go at this time Sunday Sept 28. If Wachovia and other troubled banks survived, they owe a big thank you to WaMu.

Lesson learned
1. Don’t speculate on troubled financial companies. Because FDIC, Fed or treasury could take over those institutions. Shareholders will get wiped out in this case.

2. If you really can not resist the fun of speculation, try it in small amount. Or better yet, go to Las Vegas and have some fun while losing the money.

3. Fundamental analysis is still valid here, I am not talking about the warning signs from credit rating agency, I should do my own homework if I want to speculate on other things later on.

What to do from here
The WaMu stock is essentially worthless. It’s not being traded in exchange (NYSE) at this time. I guess it will start trading as pink sheet (NYSE Arca?) sometime in the near future.

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