Once a small West Coast savings and loan, Washington Mutual, under the leadership of Chief Executive Kerry Killinger, embarked on an unprecedented raft of acquisitions beginning in the 1990s that transformed the institution into the largest S&L in the nation.
Far removed from its sleepy past, WaMu, as the bank is called, is now the No. 3 mortgage lender in the US and the No. 9 credit-card provider – via its $6.5 billion purchase of Providian Financial Corp. three years ago and the $5 billion purchase of New York’s Dime Bancorp in 2001, among others.
But the pedal-to-the-metal growth has left the bank deeply wounded, as the severe credit crisis and tumbling housing market have wrecked havoc on the WaMu balance sheet.
To many the situation is looking increasingly dire for WaMu, especially in the wake of the stunning collapse of IndyMac Bank last month. WaMu shares have fallen 85 percent in the past year, wiping out some $60 billion in market capitalization.
AND while it’s hard to believe that WaMu will face a similar fate as IndyMac – given its $180 billion-deposit base, its most recent capital-raising initiatives and its mix of assets – many Wall Streeters are uncertain about its fate as conditions continue to worsen in some of WaMu’s key markets in California and Florida.
“I don’t see Washington Mutual failing the way IndyMac did,” said Alexandria, Va., banking consultant Bert Ely at Ely & Co. “But it’s looking less and less likely that they’ll remain independent.”
Plaguing the firm currently is some $240 billion in loans on its balance sheet, made up, in part, by $53 billion in adjustable-rate mortgages, $63 billion in home-equity loans and some $24 billion in credit-card exposures that have all seen disturbing signs of stress under the shaky economy.
Of course the housing market is the most pressing problem – and prices are not expected to bottom out for another 12 months.
Problems in housing caused WaMu to report a $3.3 billion loss in the second quarter and forced it to boost its loan loss reserves by $3.7 billion, bringing its total provision for future losses to about $8.5 billion as of June 30. And Lehman Brothers analyst Bruce Harting, in a recent report, said the Seattle-based bank may need to set aside up to $30 billion for credit losses through 2011.
Making matters worse for WaMu is that mortgage worries that first originated in the market for borrowers with shaky credit has started to creep into the prime, higher-quality, borrowers.
On its behalf, WaMu continues to stress that it is well capitalized even under the most bruising mortgage predictions. Some analysts, like Lehman’s Harting, agree.
Back in April, WaMu successfully raised $7 billion in new capital from a group of investors led by Texas Pacific Group. The thrift also said that it raised an extra $10 billion in fresh capital since the end of June, by borrowing from the Federal Reserve’s discount window, the Federal Home Loan Banking system and open market operations, bringing its total cash to stave off losses at around $50 billion.
Frederick Cannon, bank analyst with Keefe, Bruyette & Woods, says one of his main concerns about WaMu is that the value of the loans they have originated are deteriorating and it’s difficult to accurately assess the value of its loan portfolio. He also sees evidence that the mortgage contagion is spreading to credit cards.
CANNON also worries that WaMu pays among some of the highest interest rates of about 4.25 percent to lure depositors. The average bank usually offers interest on short-term CDs of about 3.5 percent, he notes.
“The problem that blows the company apart is that people can’t pay back the mortgages and the level of foreclosures are increasing,” said Richard Bove, bank analyst at Ladenburg Thalmann. “Housing prices are coming down and they are in the markets where housing prices are coming down the fastest.”
Bank consultant Ely added that WaMu may be forced to sell off assets, including branches on the East Coast, its Providian business and even some branches in southern California in order to raise fresh capital.
However, Cannon believes that a sale of Providian would prove challenging and that offloading its valuable deposit base to buffer against losses could do more harm than good. “The problem that they have with selling is that the only assets they have is their deposit base system,” he notes. “And it doesn’t help a company in WaMu’s shape to trade more capital for less liquidity.”
To be sure, raising capital from new investors might also prove difficult for WaMu. Private-equity firm TPG has seen its initial $2 billion investment when WaMu traded at $8.75 crater by nearly half as the housing market has faltered further.
Doug Kass, managing partner at hedge fund Seabreeze Capital, who has been short on the firm, had particularly harsh words for WaMu’s management:
“The most remarkable thing to me is that [Killinger] is still at the helm of the company,” Kass said. “He presided over an empire-building program that consisted of building this massive bricks and mortar distribution system that was not only antiquated in substance but was also inappropriate in the framework,” he continued.
“The days of sending good money after bad are over,” said Kass, of the possibility of raising new capital. “The sovereign wealth funds have lost their appetite and that’s the real problem.”
A WaMu spokesman declined to comment on management’s moves and reiterated the view that the firm is well capitalized. mark.decambre@nypost.com