Washington Mutual shares continue to plunge
Updated Thursday, September 11th 2008, 12:38 PM
WASHINGTON — Shares of Washington Mutual Inc. continued a perilous plunge on Thursday as anxiety grew on Wall Street over the financial stability of the nation's largest thrift and its options for survival.
WaMu stock dropped 26 cents, or 11.2 percent, to $2.06 in afternoon trading, after earlier hitting a low of $1.75. The company's shares plummeted about 30 percent on Wednesday to a 17-year low of $2.32.
Wall Street's edginess over the fate of major financial firms also was fanned by Lehman Brothers Holdings Inc.'s plans announced Wednesday to sell a majority stake in its investment management unit, spin off its commercial real estate assets and slash its dividend. The nation's fourth-largest investment bank also said it lost $3.9 billion during its fiscal third quarter.
The company, like many others on Wall Street, has suffered from bad bets on mortgage securities and other risky assets and has seen its stock price drop about 90 percent this year.
WaMu, likewise, has seen its market value wither, as it battles rising mortgage delinquencies and defaults. Its shares have fallen more than 90 percent since early July of last year, right before the rapid erosion in the credit markets began.
Federal banking regulators, who earlier this week ratcheted up their scrutiny of Washington Mutual, are closely watching the thrift's condition.
With losses in its mortgage portfolio expected to peak at $19 billion, the Seattle-based bank could be Wall Street's next casualty, some analysts believe.
"The question becomes can it survive if it has billions and billions of dollars left to write down on those loans?" Ladenburg Thalmann analyst Richard Bove said. "What's going to keep it in business, what is going to keep it alive?"
"WaMu made mistakes in loan originations, to be sure, but it also had bad luck in that the bulk of its loans are in California," which has suffered some of the steepest declines in home prices and largest number of foreclosures, said Stuart Feldstein, president of SMR Research, which provides research on the lending industry.
He notes that WaMu expanded its business in the late 1990s by buying two of the largest thrifts in California, Home Savings of America and its rival Great Western Bank, "in a mad acquisition spree by ex-CEO (Kerry) Killinger."
"It was an opportunity for him to grow quickly, but in retrospect — and hindsight is easy — they should have had a little more geographic dispersion," Feldstein said. "He had to sit back and cross his fingers that nothing ever went bad in California."
One thing working in WaMu's favor is its valuable deposit base. Bove suspects management is "scrambling to find a buyer."
One indicator that the bank could be in trouble is the widening of its credit spreads, evidence that investors believe the debt is riskier.
Washington Mutual's spreads are greatly wider than Lehman's — and Lehman's spreads are already wider than those of Bear Stearns Cos. shortly before its demise in March, according to Len Blum, managing director at investment bank Westwood Capital.
WaMu does not typically comment on share price, market speculation or ratings agency actions, said spokeswoman Olivia Riley. She also said the bank does not generally make comments about things such as credit spreads mid-quarter.
Standard & Poor's Ratings Services lowered its outlook on the bank to "Negative" on Tuesday, saying the regulatory action "highlights the challenging operating environment the company faces in managing its core mortgage franchise."
However, S&P noted that the bank's capital position remains stable.
"The strong regulatory capital cushion of over $10 billion above regulatory capital measures is considered quite solid," S&P said in a statement. "Also deposit funding trends have been stable and there has been no adverse change to the holding company liquidity profile."