Is WaMu in Danger? Stock Reaches Junk Status

Over the past few weeks, there has been a lot of talk about whether or not Washington Mutual will fail or not. If it fails, it would be one of the largest. Heck they advertise in areas where they don't even have branches. Hundreds, maybe even thousands of people (including myself) have signed up for banking services over the internet. In fact, I use the related debit card as my "Dave Ramsey" grocery envelope.

As investment bank Lehman Brothers fights for its survival, some wonder whether the U.S. mortgage crisis will take down another major financial institution: Washington Mutual.

WaMu "is the next most likely candidate to have major issues and run into a Lehman-type situation," said Jaime Peters, an analyst with Morningstar in Chicago.

"They got into subprime lending, they got into ARMs [adjustable-rate mortgages]. Their home equity book is quite large, and these losses are building and building and building on their balance sheets and they simply do not have the capital to absorb these easily," Peters said.
- ABC News

So what is the problem?

In July, the bank reported a $3.3 billion loss for the second quarter.Since April, the bank's share price has plummeted some 75 percent from $13.15 to under $3 by the end of the day on Thursday. That closing share price, however, was up 22 percent from the day before.
- ABC News

Although WaMU is trying to put a positive spin on it, by saying that they (WaMu) expects to see fewer loan losses in the third quarter. However, is that, just a denial of reality by a company that doesn't want to worry the public or admit that their business practices is less then perfect? Maybe. The S&P report, downgraded WaMu's outlook from "stable" to "negative."

"This outlook revision is due to the increasingly challenging housing and mortgage markets and their related impact on WaMu's core mortgage franchise," the report said.
- ABC News

OK, so the S & P isn't persuaded, but who should we believe?

Douglas McIntyre, the editor of the financial Web site 247WallSt.com, said that worries about Lehman -- which posted a third-quarter loss of $3.9 billion today and announced strategies to shore up its balance sheet -- will hurt Washington Mutual.

"Anytime that one of these institutions either fails or it does a bunch of things and does not get 'better' in the eyes of the stock market, psychologically it does some damage to the other weak sisters," McIntyre said.

McIntyre said that WaMu could recover if the housing slump eased. Until then, the bank, he said, could buy time and cover its losses if it raises capital from new investors, such as sovereign wealth funds or investment entities owned or controlled by individual countries.

But McIntyre and Peters agreed that finding new, willing investors for WaMu would be tough.

Because of Lehman's woes, "we're getting a very up and close and personal example of just how much difficulty troubled companies are having raising capital," Peters said.

The chances of WaMu finding a "white knight," she said, are "getting lower by the day."

Even if WaMu is able to secure more investments, Peters said, most shareholders can still expect to see their holdings plummet.

And if WaMu is unable to weather the mortgage crisis, she said, then the Federal Deposit Insurance Corporation would step in to take over the bank just as it has with other failed banks.

But McIntyre said that a WaMu takeover might be too big and expensive a job for the FDIC alone. The corporation, he said, would likely receive support from the U.S. Treasury Department.
- ABC News

So really, we as the general public don't have any real answers, but if the bank fails, will we still have our accounts? Or will we have to shop around for another bank to serve our needs? Perhaps, I should consider pulling my money out now, and find a local bank to serve as my grocery envelope. I don't want to, because of the great interest rate, but I also can't wait several weeks or months to get a check from the FDIC, if they can't find another bank to swallow WaMu. Then again, maybe all the worry and hype is for nothing, but shouldn't I be proactive? Shouldn't we all?

In fact, as I was putting the finishing touches a new article shows up. Reuters reports:

Washington Mutual Inc shares fell on Friday after the largest U.S. savings and loan projected another big write-down for soured loans and was downgraded to "junk" status by a leading credit rating agency.

At least four analysts cut their price targets for the thrift, though Goldman Sachs & Co raised its rating to "neutral" from "sell."

Washington Mutual shares were down 16 cents, or 5.7 percent, to $2.67 in pre-market trading. Through Thursday, the shares had fallen 34 percent this week and 92 percent in the last year.

As I add a few extra paragraphs, and change the title of this post, it appears that the market doesn't believe WaMu.

In an unusual move to quell investor anxiety about its survival prospects, Seattle-based Washington Mutual late Thursday released third-quarter projections six weeks early and said it had ample liquidity. The thrift has said losses from home loans could reach $19 billion through 2011.

But Moody's Investors Service lowered Washington Mutual to below investment-grade status, citing "reduced financial flexibility, deteriorating asset quality, and expected franchise erosion." Fitch Ratings also downgraded the thrift.

Apparently though, according to the same Reuters article,

Washington Mutual said it expects to set aside $4.5 billion for loan losses in the third quarter, down from the second quarter's $5.9 billion. It also said it expects about $2.7 billion of loan write-offs.

The outlook suggests that Alan Fishman, Washington Mutual's new chief executive, will next month report the thrift's fourth straight quarterly loss.

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go ahead share your thoughts with me now.

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