Washington Mutual shares sink below $2 on capital worry

NEW YORK (Reuters) – Washington Mutual Inc (WM.N: Quote, Profile, Research, Stock Buzz) shares sank below $2 for the first time since 1990 as anxiety grew about the largest U.S. savings and loan’s mortgage losses, capital needs and survival prospects.

Its shares were down 17 cents, or 7.3 percent, at $2.15 on Thursday on the New York Stock Exchange, but fell to $1.75 earlier in the session. The stock has plunged 44 percent in the previous two days.

Wall Street is worried that Washington Mutual, like Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research, Stock Buzz), may not have time to right itself, and that new the chief executive, Alan Fishman, will not find a buyer or raise enough capital for the Seattle-based thrift.

Washington Mutual has said mortgage losses could reach $19 billion through 2011. The company, with $309.7 billion in assets, raised $7 billion earlier this year from investors, led by private equity firm TPG Inc TPG.UL. But the falling stock price could make further capital raising prohibitively expensive.

“Unfortunately, their options have narrowed significantly, even over the past two days,” Sean Egan, manager of the ratings desk at Egan-Jones Ratings Co, said in an interview.

“What is ideal is an investment well in excess of $10 billion, probably closer to $15 billion or $20 billion, with the hope of additional investments over time,” he added. “Few investors can write a ticket that large, and even fewer have the ability to move quickly.”

Egan-Jones, in a report, called “solvency” the “major issue” for the thrift.

Washington Mutual spokesman Brad Russell declined to comment.

Fishman is a former chief executive of Brooklyn, New York’s Independence Community Bank Corp, which was bought by Sovereign Bancorp Inc (SOV.N: Quote, Profile, Research, Stock Buzz) in 2006.

He became Washington Mutual’s chief executive Monday, replacing Kerry Killinger, who was ousted by the board after 18 years at the helm. The 52-week high for Washington Mutual shares is $39.25, set last September 19.

REGULATORY SCRUTINY

Washington Mutual said this week it entered into a memorandum of understanding with its main regulator, the Office of Thrift Supervision (OTS), to improve risk management. It said the agreement does not require new capital or bolstered liquidity.

Richard Bove, a Ladenburg Thalmann & Co analyst, suspended his “neutral” rating on Washington Mutual Thursday, citing uncertainty about what the OTS ordered the thrift to do.

OTS spokesman William Ruberry said: “We’re fully aware of the situation, and we’re monitoring it.”

Last quarter, Washington Mutual lost a record $3.33 billion, including a loss in its credit card unit, which the thrift created in 2005 when it bought card issuer Providian Financial Corp, which served people with imperfect credit.

Analysts have said Washington Mutual may also be starved for buyers because of an accounting rule that will be effective in December. The rule will force buyers to write down assets of targets to market prices, perhaps requiring them to raise costly capital.

JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) is said to have approached Washington Mutual early this year about a merger, but Killinger rejected the overture.

It’s unclear how customers are reacting.

Fishman said Monday there had been “no dramatic movements” in deposit flows at Washington Mutual. The thrift ended June with $181.9 billion in deposits.

Egan said: “There has to be concern about how well WaMu can retain its deposit base, which is the lifeblood of the institution.”

It cost $4.45 million up front plus $500,000 annually to protect $10 million of Washington Mutual debt against default for five years, Markit Intraday said Thursday. The upfront payment edged down from $4.53 million on Wednesday.

(Additional reporting by Dena Aubin in New York and John Poirier in Washington, D.C., editing by Maureen Bavdek/Jeffrey Benkoe)

By Jonathan Stempel
Thu Sep 11, 2008 3:04pm EDT

Source: Reuters

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