Thursday, September 25, 2008

WaMu Goes Whammo

Goodbye WaMu. It's about time you cleared out. The salient point is actually farther down the article.

"It removes an uncertainty from the market," said Shane Oliver, head of investment strategy at AMP Capital in Sydney. "The problem is that markets are in a jittery stage. Washington Mutual (WM) provides another reminder how tenuous things are."

I bolded the part about uncertainty to make a point about how free markets, when allowed to operate without too much meddling, resolve uncertainties about valuations. The stock market's recent wild volatility is due in no small part to the tendency of institutions like WaMu to hang on in a zombie-like state while well-meaning folks in Washington try to fund unnecessary bailouts. The WaMu solution is in fact the correct one: Liquidate an unhealthy bank, merge it with a healthier one, and start over. Equity shareholders suffer, depostors are (mostly) protected, and bank loan officers rediscover the conservatism of narrower yield spreads and well-documented risk profiles.

And what of the acquirer? Read what JPM's CEO had to say.

"We're in favor of what the government is doing, but we're not relying on what the government is doing. We would've done it anyway," JPMorgan's Chief Executive Jamie Dimon said in a conference call Thursday night, referring to the acquisition. Dimon said he does not know if JPMorgan will take advantage of the bailout.

They would have done it anyway, without a new government liquidity facility providing a shortcut, and they're willing to risk diluting their existing common shareholders by going to the capital markets to raise another $8B. That's how capitalism works. JPMorgan Chase may very well have its own balance sheet problems, but the risk they take in acquiring WaMu is borne by their shareholders, not the taxpayer. I'll admit that they had an advantage over other potential suitors with their existing Fed backstop from the Bear Stearns deal, but if they had passed on this deal it would have been closed by Wells Fargo (WFC) or another bank waiting in line.

Unfortunately, trillion-dollar bailouts will destroy the effectiveness of any natural shakeouts. Please, politicos, no more bailouts! Let the recession run its course and America will be healthier that much sooner.

Nota bene: Anthony J. Alfidi does not hold any position in WM, JPM, or WFC at the time this commentary was published.