While some people close to the discussions hope a deal could be struck within days, one stumbling block is that a straightforward sale of WaMu would require the buyer to absorb the company's troubled assets.
With WaMu expecting losses of $19 billion on its mortgage portfolio during the next 2½ years, some would-be bidders favor a government-assisted takeover, people familiar with the matter said. One scenario is that the Federal Deposit Insurance Corp. would seize control of WaMu's banking unit and then sell its deposits to another bank.
Now this misses the point entirely. WaMu has 8 billion or so of pre-tax income. Its not growing and capital needs are falling (along with capital). If it has only $19 billion of losses on its mortgage portfolio over the next 2.5 years then hey - its gonna be good. It should of course reserve for the losses now (because well - they are coming). And that reserving would make them insolvent.
But it will reserve them over the next 18 months - and that is tolerable. Every other bank has been spacing its loss reserving - so why not WaMu?
The problem is not $19 billion in losses. That makes it a no-brainer - just buy WaMu at $1 a share and be done with it.
The problem is the possibility that it is $30 billion or $40 billion. That is possible but I believe it unlikely however many readers of this blog have the opposite opinion.
But then of course the Paulson Plan to buy mortgages will save WaMu entirely - if of course they are well connected enough to get Comrade Paulson to buy the mortgages from them rather than whoever buys them.
I guess if Citigroup can get Comrade Paulson to buy the mortgages then Citi can buy WaMu at $1 a share.
What is really funny is that for a bank with adequate capital buying WaMu at $1 a share is a no-brainer. The problem is that there are not three banks with adequate capital to create an auction. That is the state of American banking. You would never know that from Friday's price spike. But that is the smoke-and-mirrors in this game.