Washington Mutual and Wachovia Suffer Losses

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Martin D. Weiss, Ph. D. takes a closer look at the amount of debt that the U.S. has racked up. In this issue of Money and Markets, Dr. Weiss discusses how Washington Mutual and Wachovia are both suffering massive losses.

Martin D. Weiss, Ph. D. takes a closer look at the amount of debt that the U.S. has racked up. Dr. Weiss discusses how Washington Mutual and Wachovia are both suffering massive losses.

According to Dr. Weiss, the U.S. is a debt-addicted society, and weeding out the bad debts is the first step toward true recovery. By far the biggest pile-up of debts is in mortgages at $14.7 trillion, according to the Federal Reserve's latest Flow of Funds report. Among those mortgages, a quarter to a third could go bad: their terms are high risk for both borrower and lender. The overwhelming bulk of the bad mortgages was created to help Americans move into homes that were priced far above their means. The only way to correct this problem is to let natural market forces drive home prices back down to much lower levels.

America's housing marketplace is bigger than any government; its power, greater than any law. It is the single largest asset class in the world. It packs the most powerful forces of supply and demand ever assembled in history. And currently, it's tearing down some of our nation's largest banks.

Washington Mutual, America's largest savings and loan is one of the nation's largest subprime lenders. It appears to be in a downward spiral, losing $3.3 billion in the second quarter, admitting to losses of as much as $19 billion in 2008 and probably on its way to losses of an estimated $26 billion. That estimated loss is over four times its total market value as of July 25th's close, twelve times its yearly earnings in the best of times. It could receive a new capital infusion to stave off failure, but on April 8, Washington Mutual already received an injection of $7 billion from private equity firm TPG Capital.

What's worse, the TPG deal restricts Washington Mutual's ability to raise new desperately needed capital going forward. And further impairing its ability to raise capital, Moody's announced that it is reviewing the thrift for a downgrade to junk status. The big problem is that Washington Mutual has $214.6 billion in residential mortgages on its books. And among those, more than three-quarters are in non-traditional categories: option ARMs, subprime loans, home equity loans and multi-family mortgages. Less than one-quarter is of the traditional, single-family prime variety. Just in option ARMs alone, Washington Mutual has $52.9 billion, one of the biggest such portfolios in the industry. Moreover, 62.5% of its option ARMs are in two of the hardest hit states, Florida and California. Nonperforming assets are growing by an average of 36% each quarter. If they continue to grow at that rate, they could reach a 6.7% of total assets by year-end.

"Wachovia, the nation's fourth largest bank with nearly $800 billion in assets, is also in danger. Its staggering $8.9 billion loss reported last week may be just the tip of the iceberg. Its big problem is acquisition of subprime lender Golden West Financial for $24 billion at the very peak of the real estate market in 2006. The net result for the bank: It's now stuck with option ARMs valued at $122 billion concentrated in California, the state with one of the worst mortgage default rates. Net result for shareholders: Over $55 billion of their wealth has been wiped out since the acquisition, more than double the total purchase price of Golden West. The big problem going forward: Wachovia has $231 billion in residential real estate loans on the books. But only 22% of these are classified as 'traditional mortgages.' Most of the rest are higher risk," Dr. Weiss states.

To read this issue online, please visit:

About Martin D. Weiss & Money and Markets:
Martin D. Weiss, Ph.D., founder and president of Weiss Research, Inc. and a leading advocate for investor safety, is a nationally recognized expert on domestic and international financial markets. With more than 35 years of experience, including many years in Latin America and Asia, Dr. Weiss has helped empower millions of investors to make better financial decisions through his monthly Safe Money Report and daily Money and Markets.

Dr. Weiss' keen understanding of foreign markets and the global economy has earned him a reputation for thoughtful, in-depth analysis that investors can rely upon to make informed financial decisions. Regularly called upon by the media for his independent investing guidance, he has been featured in publications nationwide, including The Wall Street Journal, The New York Times, Chicago Tribune, Investor's Business Daily, and Forbes and has also appeared on CNN and CNBC.

Throughout his career, Dr. Weiss has been an advocate for consumers and investors in the insurance, banking and brokerage industries, dedicating his time and resources providing analysis and data for Congressional testimony, constructive proposals for reforms in the securities industry and legislation for full financial disclosure as well sound accounting and fiscal policy. In November 2004, he launched the Sound Dollar Committee, a nonprofit organization dedicated to building a network of investors seeking to protect the nation's future by demanding honesty in government accounting, a balanced budget and sound economic policy.

Dr. Weiss is author of The New York Times best-seller, The Ultimate Safe Money Guide, which gave baby boomers a road map to grow their wealth safely. It was listed on the New York Times Business, Wall Street Journal, and BusinessWeek best-seller lists, as well as the Barron's Roundup for 2002.

Dr. Weiss holds a bachelor's degree from New York University, a Ph.D. from Columbia University and is fluent in eight European and Asian languages.

Money and Markets (http://www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit http://www.moneyandmarkets.com.


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