WaMu Results and More Thoughts on Wachovia

Wow. As I indicated in my last post, I though WaMu was going to miss earnings. I had no idea that it was going to be this bad. They lost $3.33B, or $6.58 per share! That is more than the entire value of their current market cap. Compare this to the $1.05 expected loss and you see how out of the blue this was. The market initially dumped after hours, then was up as much as 16% from the close and now is down about 5% from the close. I think it is fair to say that this reaction effectively throws the efficient market theory out the window! I can't imagine how the stock can only lose 5% on this news, I guess we'll see what happens tomorrow. Bulls might say that they would have made $3.34 per share had it not been for the write downs and that they cut their dividend. SO WHAT? They had $10 per share in write downs, with only $7 of it anticipated. This stock is toxic and in a market where reactions were a little more rational I would short it and ride it right to 0.

To follow up on my negative comments on Wachovia, I would like to point out that Wachovia is still carrying $15B in goodwill on their balance sheet stemming from the buyout of Golden West, a mortgage dealer with a large proportion of their loans concentrated in California. Now as I have yet to sift through their report and conference call transcript, I have read that none of this was written off this quarter. I wonder how they are going to justify not writing that down next quarter... If they do, that potential write-down represents almost 250% of this quarter's $6.1B writedown.

Another interesting tidbit I came across relates to Wells-Fargo, a widely touted bank who beat expectations. Apparently they extended the days a mortgage can be delinquent before it is internally considered non-performing from 120 to 180. That represents a 50% increase and 2/3 of the most recent quarter. A move that definitely masked the true volume of the writedowns they should have taken. How much they will ultimately have to write down is a figure we will eventually find out. Hmm I just finished a class on Financial Statement Analysis and I think that this move would certainly fall under the classification of "creative accounting" to improve financial results.