Sept. 8 (Bloomberg) -- Washington Mutual Inc., the biggest U.S. savings and loan, removed Kerry Killinger as chief executive officer after he failed to halt losses tied to home mortgages. The stock rose 20 percent in New York trading.

Alan Fishman, 62, of Meridian Capital Group, a commercial mortgage broker, will replace Killinger, Seattle-based WaMu said in a statement today. The company said it reached an accord with regulators to reduce risks and tighten oversight without raising new capital.

Killinger's expansion into subprime mortgages contributed to $6.3 billion in losses in the past three quarters, and the stock tumbled 88 percent in 12 months. Soured home loans have claimed the jobs of bank CEOs including Citigroup Inc.'s Charles O. ``Chuck'' Prince, Wachovia Corp.'s Kennedy Thompson and Merrill Lynch & Co.'s Stan O'Neal, and yesterday the heads of mortgage companies Fannie Mae and Freddie Mac were replaced.

``We've been surprised that it hasn't come sooner,'' Patrick Becker Jr., chief investment officer at Becker Capital Management, said of Killinger's departure. ``He was the architect who put this together. Clearly the foundation of it was not built to withstand the mortgage crisis.''

Becker said his Portland, Oregon-based firm, which oversees about $2 billion, hasn't owned WaMu shares since before the mortgage bubble began to deflate.

Sovereign Bancorp

WaMu advanced 62 cents to $4.89 in 9:36 a.m. New York Stock Exchange composite trading and sold for as much as $5.12. Before today, the stock had been the worst performer in the 24-member KBW Bank Index for 12 months.

WaMu said it signed a memorandum of understanding with its chief regulator, the Office of Thrift Supervision, that calls for the bank to improve risk management and compliance. The lender promised to give the agency a ``multi-year business plan and forecast for its earnings, asset quality, capital and business segment performance.''

The plan doesn't call for more capital or increasing liquidity, WaMu said, which may allay investor concern that the lender may have to seek new cash on top of the $7 billion raised earlier this year.

Fishman said during a conference call this morning that it's too early to discuss potential asset sales. While the lender faces ``very significant pressures,'' there hasn't been a ``dramatic'' change in deposits recently, he said. Publicity about bad loans earlier this year triggered sudden withdrawals at California-based IndyMac Bancorp, which was taken over by federal regulators in July.

Enough Cash

``WaMu seems to have adequate liquidity sources to meet cash needs,'' CreditSights Inc. analyst David Hendler said in a note to investors. The New York-based analyst said deposit behavior is difficult to predict as mortgage defaults rise.

While today's statement said WaMu doesn't have to make changes to products and service under the accord, the Seattle Times reported on its Web site that the company is cutting 1,200 jobs nationwide, including 260 at its headquarters. The workforce currently totals 46,000, the newspaper said.

Financial institutions worldwide have racked up more than $500 billion in credit losses and writedowns. WaMu said in July that rising delinquencies on option adjustable-rate mortgages will contribute to mortgage losses near the top end of its $12 billion to $19 billion range predicted in July.

Fishman was chief operating officer at Philadelphia-based Sovereign Bank before becoming chairman last year of Meridian, a New York-based commercial mortgage brokerage. Sovereign Bancorp is the second-biggest U.S. savings and loan.

Chairman's Title

Killinger, 59, had relinquished his title as WaMu's chairman in June after investors voted to strip him of that role. Shareholders including David Dreman, ranked among the 10 biggest stakeholders, have called for Killinger's ouster. Dreman said in June that the CEO must be held accountable for mounting subprime losses.

The American Federation of State, County and Municipal Employees wrote a letter on July 22 to WaMu Chairman Stephen Frank demanding Killinger's removal.

The shareholders' meeting in April followed a $7 billion cash infusion the same month led by buyout firm TPG Inc., which diluted the value of existing holders' stakes. Analysts including Robert Napoli from Piper Jaffray Cos. and Friedman Billings Ramsey Group Inc.'s Paul Miller said after WaMu's second-quarter report in July that more capital would probably be needed.

Killinger's Career

Killinger joined Washington Mutual in 1982 when the company bought a securities firm. He was promoted to president in 1988 and CEO two years later, assuming control of a company with about $7 billion in assets.

Beginning in 1995, Killinger went on a shopping spree, making at least 14 acquisitions in the next seven years. The $6.9 billion purchase of H.F. Ahmanson & Co., California's largest savings and loan, in 1998 boosted Washington Mutual's assets to $156 billion. That has since doubled to $309.7 billion.

Between 1990 and the end of 2006, Washington Mutual shares jumped almost 20-fold, while the Standard & Poor's 500 Index quadrupled.

Then the subprime rout started and defaults hit a record, as falling home prices and rising mortgage rates left borrowers with the weakest credit unable to repay their loans. In California, where Washington Mutual does half its lending, one in every 182 households is in foreclosure, the second-highest rate in the country, according to July data from RealtyTrac Inc.

``We don't know where the peak is in terms of loss rates,'' said Christopher Whalen, managing director at Institutional Risk Analytics in Hawthorne, California. ``Until then, it's really hard for investors to put any money into the bank.''

Independence Takeover

Fishman was CEO of Brooklyn's Independence Community Bank Corp. when it was acquired by Sovereign in June 2006 for $3.6 billion. Since then Sovereign shares have lost 55 percent, hurt by rising losses on real-estate loans. The KBW Bank Index dropped 38 percent in that period.

Fishman left his post as president and chief operating officer of Sovereign in December 2006 to become chairman of Meridian Capital Group, one of the nation's largest mortgage brokerage firms, four months later. He previously held executive positions at ContiFinancial Corp., Chemical Bank, American International Group Inc., and his own firm, Columbia Financial Partners.

Brown University

Fishman, who has an undergraduate degree from Brown University in Providence, Rhode Island and a Master's in economics from Columbia University in New York, became CEO of ContiFinancial in July 1999 to help the struggling New York- based lender. The company, one of the largest subprime mortgage lenders at the time, filed for bankruptcy in May 2000 after losing $1.1 billion in six quarters. He is also chairman of the Brooklyn Academy of Music.

The new CEO will receive a $10 million signing bonus, the Wall Street Journal reported yesterday, quoting a person familiar with the matter. He gets a $1 million salary and options to buy five million shares. Killinger won't get any extra severance beyond what's in his contract, the person said.

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net

Last Updated: September 8, 2008 09:42 EDT