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Financial Deja Vu All Over Again

The chart of Washington Mutual tells the tale. We are headed for a 1990 style bear market in financials and the leader of the pack is WaMu.

In 1990 to 1994, the banking system saw several banks fail. The crisis resulted from a real estate crash that stemmed from an increase in the capital gains tax that reduced the market values of all real estate holdings – this is a lesson that the congress seems to have forgotten as it prepares to raise capital gain taxes in coming years.

The 2007 to ???? banking crisis also started in real estate. It had nothing to do with taxes, but with lending standards being to easy – too many people were allowed to borrow that were not able to pay back the loans. We are seeing significant levels of defaults on home loans, and write downs of mortgage loan portfolios and mortgage-backed bonds on banks books.

Back in the 1990 crisis, banks bottomed out at single digit P/E ratios and 0% dividend yields (since dividends were cut to preserve capital after the write downs of loans beyond reserves). We are headed there again. Don’t believe all these people that say its a good time to buy banks because they are yielding nicely and you will be paid to wait out the crisis. Many of the banks yielding over 5% will cut their dividends and their stock prices will get crushed as income investors sell their shares.

From what I’ve read, it seems WaMu is headed for extinction – someone will swoop in with an opportunistic merger that their board can’t ignore. It will be either merge or close, and merging will be the only option.

Mark