Minyanville Professor Bennet Sedacca is the brightest fixed income mind I know. Inquiring minds are tuning in to see his take on the Credit Rout for Wachovia, WaMu.

Welcome to the credit market, folks, it is officially closed.

After Lehman, Fannie Mae (FNM), Freddie Mac(FRE), AIG (AIG) and Washington Mutual (WM) debt and preferred holders have been unmercifully tossed under the bus so
Jamie Dimon can be given banks, do you really think many want to get in front of this train wreck.

Me thinks not.

  • For what it’s worth, I was just offered Wachovia (WB) 5.8% hybrids at $0.10 on the dollar, and I passed. A block of 30-year Wachovia paper just traded at $0.35 on the dollar. This is not preferred stock or hybrid, folks, this is subordinated debt.
  • Washington Mutual sub paper? $0.01 on the dollar. This is what a credit rout looks like. And until this ship is righted, watch out. There are others trading similarly, like Morgan Stanley (MS) and, while I have no positions, it’s quite interesting to watch.
  • So the few that can raise capital, like JPMorgan (JPM) and Goldman Sachs (GS) will survive, but many failures lie directly in front of us.
  • Many regional banks are likely next.

Washington Mutual Bond Holders Wiped Out

The FDIC has this announcement that JPMorgan Chase Acquires Banking Operations of Washington Mutual.

JPMorgan Chase acquired the banking operations of Washington Mutual Bank in a transaction facilitated by the Federal Deposit Insurance Corporation. All depositors are fully protected and there will be no cost to the Deposit Insurance Fund.

“For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks,” said FDIC Chairman Sheila C. Bair. “For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning.”

JPMorgan Chase acquired the assets, assumed the qualified financial contracts and made a payment of $1.9 billion. Claims by equity, subordinated and senior debt holders were not acquired.

I am expecting ramifications next week on credit default swaps on Washington Mutual. Someone has to be in pain over this. Those betting on another bank bailout, bet wrong. Those holding Washington Mutual bonds will be totally wiped out.

FDIC May Need $150 Billion Bailout as More Banks Fail

Bloomberg is reporting FDIC May Need $150 Billion Bailout as More Banks Fail.

By the end of 2009, about 100 U.S. banks with collective assets of more than $800 billion will fail, predicts Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California-based firm that sells its analysis of FDIC data to investors.

“It’s not going to be Armageddon,” says Mark Vaughan, a financial economist at the Federal Reserve Bank of Richmond, Virginia and a senior lecturer in economics at Washington University in St. Louis. “But it’s going to be bad.”

FDIC’s Secret List

The FDIC knows which banks are at risk; it has a watch list with 117 institutions. The agency won’t disclose their names because doing so could cause depositors to panic and pull out all of their funds.

It won’t take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue by lending money to the FDIC.

Credit Default Swaps Soar on Wachovia

Bloomberg is reporting Wachovia Credit-Default Swaps Soar to Record After WaMu Failure.

The cost to protect against a default by Wachovia Corp., the fourth-largest U.S. bank, soared to distressed levels after Washington Mutual Inc. was seized by regulators in the biggest U.S. bank failure.

Credit-default swap sellers demanded 35 percentage points upfront and 5 percentage points a year to protect Wachovia bonds from default for five years, according to broker Phoenix Partners Group. That means it would cost $3.5 million initially and $500,000 a year to protect $10 million in Wachovia bonds, compared with $670,000 a year and no upfront payment yesterday.

Seattle-based Washington Mutual was seized after customers had withdrawn $16.7 billion from accounts since Sept. 16. JPMorgan Chase & Co. acquired WaMu’s branch network for $1.9 billion.

Wachovia is an “attractive target,” though “it’s not clear who wants to take them on at this time,” Bert Ely, president of consulting firm Ely & Co. in Alexandria, Virginia, said today in a Bloomberg Television interview.

Wachovia (WB) and National City(NCC) are getting hammered today. Wachovia is down a whopping 30% and National City 25%.

Bert Ely is smoking something. Wachovia is only attractive if there is a government bailout and that government bailout is a handout not something that punishes equity holders.

Kill The Deal

It’s time to Take Back America from those who want to hijack the country at taxpayer expense. Please keep phoning and faxing. The Paulson plan will not create a single job, not a one.

I will have a new campaign later today. In the meantime please click on the above link and tell your Congressional Representative “No Deal, Start Over, The Paulson Plan Sucks”

My alternative proposal can be found in Open Letter To Congress On The $700 Billion Paulson Bailout Plan.

Mike “Mish” Shedlock
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