It is becoming more apparent that the cost of banking is weighing heavily on the financial sector. The continuing list of firms requiring capital injections rises by the week. Whilst some would have you view this as banks “strengthening” their capital base, I would view it as bailouts, begging – pure and simple. These bailouts are not free, either debt has been issued with high interest rate servicing costs or the shareholders value is debased by new equity issuance. Or both.

Latest in the growing list of Beggar Banks are Washington Mutual and Wachovia, both facing large losses and requiring capital injections.

Last week WaMu announced Q1 losses of $1.1Bn, cut its dividend and announced layoffs for up to 3000 staff. Wa Mu also announced a provision for losses on loans for the quarter of around $3.5Bn and charge offs at around $1.4Bn. Shareholders got stiffed with a loss of dividend amounting to $490Mn over the year.

So lets say $6Bn in losses, around $500Mn in savings and a we have a shortfall of $5.5Bn. Not exactly heathly books from where I am sitting. So how do you try and make this look good? This, from Bloomberg:

• “SEATTLE–(BUSINESS WIRE)–April 08, 2008 Washington Mutual, Inc. (NYSE:WM) announced today that it entered into definitive agreements to raise an aggregate $7 billion through direct sale of equity securities to an investment vehicle managed by TPG Capital (TPG), and to other investors, including many of WaMu’s top institutional shareholders. TPG’s investment vehicle, as anchor investor, will purchase $2 billion in newly-issued WaMu securities. With the proceeds of the offering, the company’s capital ratios are expected to remain well above its targeted levels during the period of elevated credit costs in its loan portfolios in 2008 and 2009. At the same time, the company will continue to grow its leading, national banking franchise.”

I suggest the instead of trying to “grow” its way out of this mess, WaMu would do better by trying to consolidate and sort out the toxic waste in its vaults. What I find dangerous for the consumer is the direct targeting of their assets. WaMu is in trouble, so they need money, lots of it and here is how they want to raise it:

• “an increase in total deposits of approximately $6 billion, including an approximate $8 billion increase in retail deposits”

Nice move, borrow $7Bn by diluting the shareholding and then raise cash from the consumer to cover it. I just hope consumers make WaMu pay for the privilege of borrowing their assets.

Next up is Wachovia who reported an “unexpected” loss of $393Mn apparently due to its sub-prime holdings. Seems strange to me considering it has already had “unexpected” losses since the credit crash started. So what’s the solution for the Wachovia shortfall? They intend to raise $7Bn from a share sale, cut the dividend and cut 500 jobs. The shares are offered for (fire) sale at $24 each with a convertable preferred offering paying 7.5% interest, with a swap price at $31.20. The dividend cut is large, expected to save $2Bn and by chance, makes the return on the preferred offering much more attractive. or is my cynicism showing?

Lest we forget, Wachovia has already raised $6Bn for capital injections, its about time they recognised that the credit crash isn’t a flash in the pan event. Its one thing to get surprised, its another to have to realise further losses without management seeming to have addressed the problems. The exposure to California resulting from the rather rushed and badly thought out buyout of Golden West, amounts to well over half of Wachovia exposure of $120Bn in adjustable rate mortgages. Late payments for option ARM loans are running at 3.1%. This is an ugly picture, this from Bloomberg:.

• “Wachovia set aside $422 million more for credit losses because of “rapid deterioration” in consumer real estate and auto loans, especially in California and Florida, where prices are falling and foreclosures are increasing. Those factors, along with “unprecedented consumer behavior,” prompted Wachovia to increase its assumptions about how many of its option-ARM home loans will go bad.”
  

Why do I get the feeling Wachovia will be going back to the markets to raise capital in the near future…

Market Snippets

Johnson & Johnson is scheduled to report earnings 15 April, while IBM will follow on 16 April. Merrill Lynch reports 17 April, while Citi posts results 18 April. The Sunday Times reported from unnamed sources that Merrill and Citigroup will announce least $15 billion more of subprime losses this week. Here are 3 to look at:

Commentary by Mick Phoenix

on behalf of An occasional letter from The Collection Agency

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. The views in the article are for informational purpose only.