One of the basic tenants of a free market economy is that it will find balance. It may find balance in a nice sooth way or it may find balance with a chain saw, a hammer and a guillotine. One way or another, balance will be found. Profiting and preserving capital when the market decides to take few prisoners is a game of wits, played by those ready to win big or lose large. It is a game where nobody knows what the outcome will be. Play the game well and an investor will profit. Play the game wrong and an investor can go home with little or nothing.
Washington Mutual Inc., a Seattle based consumer and small business banking “thrift”, offers financial services to retail customers, credit card customers, commercial customers and mortgage seekers. At the end of 2007, the company reported operating 2,257 retail banking outlets and 233 lending centers in 36 states.
For those not familiar with the current predicament facing financial institutions, loans and credit were extended in recent years by financial institutions and then securitized. In the last year, home values and market conditions changed radically, with borrowers of this extended credit not able to repay it. This was primarily found in the home loan marketplace. Ultimately, so bad was the predicament that major lenders have had to “write off”, as opposed to “write down”, these bad loans to the tune of many billions per financial institution (this is an extremely superficial generalization not indicating causes/consequences in many places.) Generally, this has led the value and stock prices of financial companies to decline substantially. There is still fallout from the mess today, although some are indicating that a majority of the mess has been dealt with, so financial institution’s value may again begin to rise… (or has it and will they?).
Washington Mutual has been mired right in the middle of this mess. Its mortgage exposure was and is high and its recent “strategic” moves have been folly. Some indicate a write down of over $19 billion is likely, with credit card operational costs rising to over $400 million. In a general sense, the company has been having troubles for a long period during its recently replaced (September 8, 2008) chief executive’s tenure – who was more concerned with growth for growth’s sake than value. This, however, is not generally the real issue, as the company is now dealing with staying in existence rather than being turned around. The prospect of the savings and loan disappearing from the market is not a pleasant one, but one that may occur. At present, the emergence of a possible buyer of some of the company’s relatively attractive assets is the hope.
Although the prospect of speculating on this possibility is a solid one for everyday traders (buying and selling into and out of penny rallies), it is not a likely one for the causal investor. For the casual investor, a “wait and see” approach is probably a better plan until some semblance of stability returns. Once that stability can be found, with the likely sale of some part of the company (assuming it stays in existence), investors may find that what remains could actually be worth a nice pile of pennies. In some sort of perverse logic, the investor who picks up “Got Junk” may be the investor who finds one of the only ways to approach investing in the company; through the back door. For a primer, watch what happens to Lehman Brothers in the coming days.
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