July 25 (Bloomberg) -- Washington Mutual Inc., the biggest U.S. savings and loan, fell for a third day in New York trading on investor concern that the lender may need to raise cash.

The cost of protecting WaMu's bonds from default reached a record after Gimme Credit LLC analyst Kathleen Shanley said yesterday that unsecured creditors are ``pulling funds,'' citing declines that included commercial paper and securities sold under repurchase agreements, or repos. The Seattle-based company disputed her report yesterday, saying it doesn't depend on commercial paper to fund itself.

Washington Mutual reported a $3.3 billion second-quarter loss this week and increased loan loss provisions 69 percent to $5.9 billion as borrowers fell behind on their mortgages. Chief Executive Officer Kerry Killinger said WaMu has plenty of capital to ride out the U.S. housing slump after raising more than $7 billion earlier this year.

``These guys have not done a stellar job; now they're paying the price,'' said Scott MacDonald, the head of research at Aladdin Capital Management LLC in Stamford, Connecticut, which manages about $17 billion. WaMu's capital remains adequate, MacDonald said, assuming the debate over the company's finances doesn't trigger a bank run. ``It's a dicier environment,'' he said.

WaMu fell 4 cents, or 1 percent, to $3.99 at 2:13 p.m. in New York Stock Exchange composite trading and sold for as little as $3.48. The company's shares have lost 90 percent in 12 months.

Default Insurance

The cost of WaMu credit-default swaps, which reimburse investors if a company doesn't pay its debts, rose 4 percentage points to 18 percentage points, according to London-based CMA Datavision. That's in addition to an annual fee of 5 percent a year, meaning it would cost $1.8 million upfront and $500,000 annually to protect $10 million of the bonds. They rose to as high as 21 percentage points upfront earlier today.

``We won't use the phrase `run' on the bank, but we would be remiss if we did not observe that many creditors have quietly been pulling funds from the bank,'' Shanley told clients in the note yesterday.

Washington Mutual, in a statement responding to Shanley, said it funds the company through banking operations and ``does not rely on commercial paper,'' one of the sources Shanley cited.

The concerns about Washington Mutual's reduction in short- term funding are misplaced, said Ricardo Kleinbaum, a credit analyst at BNP Paribas in New York. The company ended its reliance on commercial paper and repo markets last year, averting the type of squeeze faced last year by Countrywide Financial Corp., the mortgage lender bought by Bank of America Corp., he said.

Retail Deposits

``WaMu derives about 58 percent of funding from core retail deposits and 78 percent of deposit liabilities are insured'' by the Federal Deposit Insurance Corp., Kleinbaum said.

The lender has the capacity to handle some withdrawals from so-called hot-money investors shopping around for higher rates, he said. A run on the bank that included core customers similar to the one that led to the seizure of IndyMac Bancorp Inc. this month ``seems unlikely at this stage,'' he said.

WaMu boosted liquidity by $10 billion, to $50 billion, in the month since the end of the second quarter, financial news network CNBC reported. Calls to Washington Mutual for comment weren't immediately returned.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rising price indicates investors are more concerned about the possibility of default.

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

Last Updated: July 25, 2008 14:15 EDT