Sept. 11 (Bloomberg) -- Washington Mutual Inc. rose for the first time this week, rebounding from a 40 percent, two-day slide, after a report that Bank of America Corp. is in talks to buy Lehman Brothers Holdings Inc.

WaMu, the biggest U.S. savings and loan, rose 22 percent to $2.83 at 4:15 p.m. in New York Stock Exchange composite trading. It fell as much as 25 percent earlier after tumbling 30 percent yesterday and 20 percent on Sept. 9.

The Wall Street Journal's report on Bank of America may bolster confidence that U.S. banks hardest hit by falling real- estate values may still be able to find suitors. At least three companies ended negotiations this year to buy either WaMu or Cleveland's National City Corp., two bankers familiar with the matter have said.

``The focus on the stock price should not necessarily cause people to talk about the failure of WaMu,'' said Robert Hartheimer, a former director at a Federal Deposit Insurance Corp. unit that resolves failing banks. ``There are plenty of financial services stocks that are under pressure.''

Separately, WaMu said today it will pay new Chief Executive Officer Alan Fishman a $7.5 million signing bonus and an annual salary of $1 million to return the lender to profitability. WaMu hired Fishman, 62, to replace Kerry Killinger, who was ousted this week after subprime and option adjustable-rate mortgages contributed to $6.3 billion in losses over the past three quarters.

Dilution Concern

Investors pushed down shares of the Seattle-based company on concern their holdings may be diluted if WaMu seeks new capital to cover an estimated $19 billion in losses tied to home lending in the next 2½ years. TPG Inc., the Fort Worth, Texas- based private-equity firm led by David Bonderman, led a $7 billion cash infusion in April.

``TPG will have to come forward again to put more capital into this company,'' Gary Townsend, chief executive officer of Hill-Townsend Capital LLC, said in a Bloomberg Television interview yesterday. ``As new capital comes in, you're likely to be further diluted.''

TPG spokesman Owen Blicksilver declined to comment, as did WaMu's Brad Russell. WaMu's regulator, the Office of Thrift Supervision, is ``fully aware of the situation, and we're monitoring it,'' spokesman Bill Ruberry said.

Data from the New York Stock Exchange showed that bets on a falling stock price, or short sales, rose more for WaMu than any other company in the two weeks ended Aug. 29.

Short sales on WaMu rose by almost 44 million shares in the two weeks ended Aug. 29 to 382.4 million shares, according to the most recent NYSE data available. That represents 26 percent of WaMu's stock available for trading.

Andrew Gray, a spokesman for the Federal Deposit Insurance Co., which insures up to $100,000 per depositor per bank, wouldn't comment.

Suitors walked away from a buyout this year because new accounting rules for devalued loans would saddle them with losses.

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net

Last Updated: September 11, 2008 16:55 EDT