US taxpayers could be on the hook for as much as $24 billion to rescue embattled Washington Mutual, the country’s No. 1 savings and loan, a top banking analyst is warning.
The jaw-dropping tab would come in the form of federal mortgage loss guarantees needed to coax a buyer into purchasing WaMu, according to Landeburg Thalmann’s Dick Bove, whose view on the need for a federal backstop is shared by an official with the Office of Thrift Supervision, WaMu’s regulator.
Bove, in an exclusive interview with The Post, said the crushing $32.5 billion in mortgage defaults he is estimating WaMu will face over the next five quarters will force the federal government to guarantee as much as $24 billion in losses on defaulted option-ARM and subprime mortgages and home-equity lines of credit, or HELOCs.
After crunching numbers on WaMu’s balance sheet, Bove said a sale price for the Seattle-based bank could be in the neighborhood of $2 a share. The possibility that WaMu will be sold, he said, increased recently.
“Killinger was fighting to shrink the balance sheet and keep the bank independent,” Bove told The Post. “By adding Fishman, who’s known as a guy who can get a bank ready for a sale, they removed an important obstacle.”
Bove was referring to the ouster last week of Kerry Killinger, the longtime WaMu CEO, who had steadfastly balked at selling the thrift. Alan Fishman, the new CEO, was in charge of Independence Savings Bank when it was sold to Sovereign in 2006.
WaMu shares have fallen 80 percent this year under the weight of a balance sheet that held:
* $52.9 billion in Option ARM mortgages.
* $60.4 billion in HELOC loans.
* $16.1 billion in subprime mortgages.
Killinger fueled WaMu’s rapid expansion by pressing hard into the dicey areas of the negative amortization mortgage business.
Bove estimates that 25 percent of WaMu’s holdings in these three products – or $32.4 billion could be a loss by the end of 2009.
An OTS official, speaking on the condition of anonymity, agreed with Bove’s loss rates but saw even higher loss rates, at 35 percent on some regions.
With its mortgage assets crumbling, WaMu has been working hard to maintain its deposit base – $181.9 billion as of June 30 – by offering some of the best interest rates in the sector.
The move seems to have worked as WaMu reported last week that the deposit base held steady.
One veteran mergers and acquisition-focused banker who has recently reviewed the bank’s books described Washington Mutual’s predicament as one of the most challenging he’d seen.
The potential acquirers of WaMu include Wells Fargo, HSBC and Royal Bank of Canada and the Royal Bank of Scotland.
Bove thinks Wells Fargo would benefit the most from savings in combining similar operation costs, and is the most viable candidate for a WaMu buy. Wells Fargo has told analysts they continue to look for acquisitions in banking that have fill-in opportunities. It refused to comment further.
While taxpayers are likely to take a hit on WaMu, TPG, the private equity group that recently invested in the thrift at $8 a share, will get back 100 percent of its investment if there is a change of control in WaMu within 18 months.