April 11 (Bloomberg) -- Washington Mutual Inc.'s 2008 loss will be wider than first estimated, according to Goldman Sachs Group Inc., which recommended selling the shares short.

Goldman analysts including James Fotheringham increased their estimate for Seattle-based Washington Mutual's full-year loss to $3.30 a share from $1 after the company's ``highly dilutive'' share sale, the securities firm said today in a note to investors. Goldman helped arrange the $7 billion transaction earlier this week at 33 percent below the market price.

Washington Mutual, the biggest U.S. savings and loan, almost doubled the shares outstanding in return for capital from a group led by David Bonderman's TPG Inc. The sale helped ease investor concern that losses on subprime mortgages threatened the lender's survival. Goldman's report today said the company may still face another $23 billion in mortgage-related losses.

``They're in the eye of the storm in terms of the credit markets,'' said Brian Horey, president of Aurelian Management LLC, who has sold Washington Mutual short. ``We're seeing the underlying credit problems come to the surface and there is no obvious way to fix.''

Washington Mutual, known as WaMu, dropped 47 cents, or 4.1 percent, to $10.95 at 4:15 p.m. in New York Stock Exchange composite trading. The lender fell 72 percent in 12 months, leaving the company with a market value of about $9.7 billion.

First-Quarter Loss

Washington Mutual will set aside $3.5 billion to cover expected losses on home loans, the company said April 8 as it reported a $1.1 billion first-quarter loss. The company will stop making loans through mortgage brokers and close 186 home-lending offices amid the worst housing slump in a quarter of a century.

``WaMu is most exposed to states where we forecast severe home price depreciation, and subsequent mortgage credit deterioration,'' the analysts wrote. Goldman expects mortgage- related losses between $17 billion and $23 billion, the analysts said. Washington Mutual may have a $14 billion provision charge in 2008, the analysts said.

Washington Mutual sold 176 million shares to investors led by Fort Worth, Texas-based TPG at $8.75 apiece, the company said. The transaction also included convertible preferred stock and warrants. Chief Executive Officer Kerry Killinger, who had been struggling to reassure investors the lender has enough capital to stay afloat, rejected a bid by JPMorgan Chase & Co., the third- largest U.S. bank, that valued the company at about $8 a share, a person familiar with the talks said.

`Strong Barriers'

Goldman spokesman Ed Canaday said the firm has ``strong barriers'' between the research division of which Fotheringham is a part and its business of managing share sales.

``This proves that there are clear divisions, or clear separations, between divisions that should be separate,'' Canaday said in an interview.

Spokesman Owen Blicksilver didn't have a comment on behalf of TPG.

Washington Mutual risks more losses on consumer lending, the Goldman analysts said. ``WaMu leads its peers with respect to recent growth in credit-card delinquencies,'' they said.

Fotheringham advised Goldman's clients to sell short, which is the sale of stock borrowed from shareholders. People who sell short hope to profit by repurchasing the securities later at a lower price and returning them to the holder.

Goldman reiterated its ``outperform'' rating on Washington Mutual bonds and credit-default swaps.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

Last Updated: April 11, 2008 17:24 EDT