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Lightning Strikes At Four

Written By Brian Hicks

Posted December 11, 2007



If you’ve been watching the markets as long as I have, then you have to know that when lightning strikes the Street it usually shows up right on time—at four o’clock on the dot after the close.

Yesterday, of course ,was no different. That’s when this story on Washington Mutual hit the streets.

It’s about the usual stuff these days….big layoffs…huge writedowns… and dividend cuts ect.

But I have to tell you the biggest shocker of them all was buried near the bottom.

Read on.

From Bloom berg by Elizabeth Hester: Washington Mutual Shares Fall After $1.6 Billion Writedown

"Washington Mutual Inc., the biggest U.S. savings and loan, fell 9 percent in early New York trading after the company said it will write down the value of its home- lending unit by $1.6 billion and cut 6 percent of the workforce.

Washington Mutual, led by Chief Executive Officer Kerry Killinger, also slashed the quarterly dividend to 15 cents a share from 56 cents and forecast a loss for the fourth quarter, according to a statement yesterday from the Seattle-based bank. Provisions for bad loans will be $1.5 billion to $1.6 billion, more than the $1.3 billion the company previously predicted. It plans to shutter 190 of 336 home-loan centers.

“They’re clearly concerned the industry will stay in a negative mode for an extended period,” said Richard Bove, an analyst at Punk Ziegel & Co. in Lutz, Florida. “The fact they’re laying off so many people indicates they’re concerned this is not just a one-time event.” He rates the stock “market perform.”

Washington Mutual said it would eliminate 2,600 jobs in its home-loan unit, or about 22 percent of that division. The remaining job cuts will come from corporate and support staff. The reductions will cost the bank about $140 million in the fourth quarter, according to the company’s statement."

Washington Mutual offered a bleak assessment of the mortgage market, estimating that industrywide home loan originations will probably shrink 40 percent in 2008 to $1.5 trillion, down from about $2.4 trillion this year. (Emphasis mine) The company said it plans to cease lending through its subprime mortgage channel, and predicted its provision for bad loans in the first quarter of next year will be $1.8 billion to $2 billion."

Of course, while those job losses and dividend cuts made for good headlines, the much bigger story here was Wamu’s 2008 forecast which is emphasized above.

I say the that because while the other parts of the story are certainly interesting, Wamu’s forecast that loan originations will shrink by 40% industry wide in 2008 is absolutely mind blowing.

And if you haven’t read it more than once, do yourself a favor and read it again because that’s how important that "little" bit of information is.

40% fewer originations industry-wide ????!!!??!!!

That’s huge.

So that means that not only will Wamu have to fight all of those losses from its bad mortgages that continue to pile up, but it will have to do it while its revenues from new originations are practically cut in half.

Needless to say that’s about as bad as it gets.

But its not just Wamu here by a long shot. That’s the situation industry-wide and it’s getting uglier.

And by the way, if your still wondering how its possible for home prices to fall by 30% in the future there is your answer, buried in the details.

People that don’t borrow money don’t buy homes.

It’s as simple as that.