Both Washington Mutual and E*Trade Financial reported earnings today, and I'm lumping them in with one post -- because both reports stunk, to be very blunt. E*Trade reported a net loss of $58 million, while WaMu said it earned just $210 million during the third quarter of 2007. Increasing loss provisions and write-downs on the value of mortgage-related securities drove the earnings misses at both companies. WaMu booked a loss of $104 million on MBS impairments and saw loan loss reserves hiked way up to $967 million from $372 million in the prior quarter, in what the bank characterized as "a response to higher delinquencies and impacts from recent house price trends." Net income for the third quarter dropped off a cliff as a result -- the bank had reported $748 million, or 77 cents a share, in income during the year-ago period. Not surprisingly, the financial press took turns bashing WaMu's poor performance, with TheStreet.com characterizing the results as "lousy" and the Motley Fool saying the earnings "stank." From the aforementioned Motley fool story:
At this point, hope is a four-letter word, at least for now, because all roads lead downward. Illiquidity in the secondary markets has dried up available credit. Many borrowers couldn't get mortgages even if they wanted to buy homes. Homebuilders are cutting prices dramatically to offload a glut of inventory, and they're competing with foreclosures. According to Washington Mutual's CFO, Thomas Casey, "I have never seen housing credit conditions change so significantly over such a short period of time." In other words, at this point, all bets are off.
My thinking: it's a very good thing there's a depository business to fall back on right about now. As for E*Trade, the quarterly loss is the company's first in five years -- and it can thank the subprime mortgage debacle for its swing into the red zone. Analysts certainly weren't expecting the loss, with most forecasting somewhere in the range of 10 to 11 cents per share in earnings for the quarter. Driving the loss was $186.5 million in loan loss reserves and a $197.1 million loss on the sale of securities. From Bloomberg:
E*Trade has reduced its 2007 earnings estimate four times this year. The new forecast, for 75 cents to 90 cents a share, compares with a September forecast of $1.05 to $1.15 and is less than half the $1.65 to $1.80 projected last December. Jarrett Lilien, E*Trade's chief operating officer, said in an interview that the lower earnings forecast resulted from a decision to sell asset-backed securities that were previously earmarked for long-term investment. Accounting rules required the company to mark those securities down to market prices, some to as little as 28 cents on the dollar. E*Trade is suspending share repurchases at least until next year, to bolster capital in case credit markets get worse, Lilien said.
The fact that we're only just now entering the primary reset cycle for the vintage and type of mortgage loans that are essentially driving much of the earnings drops at places like WaMu and E*Trade should be a strong reason for concern going forward into the fourth quarter.