Sept. 8 (Bloomberg) -- Washington Mutual Inc., the biggest U.S. savings and loan, tumbled as much as 24 percent after ousting Chief Executive Officer Kerry Killinger and disclosing that regulators stepped up scrutiny of the lender's operations.

WaMu signed an accord with the Office of Thrift Supervision that calls for the Seattle-based company to reduce risks and overhaul procedures, according to a statement today. Alan Fishman, 62, of Meridian Capital Group, a New York-based commercial mortgage broker, replaces Killinger, 59, who was CEO for 18 years.

Directors of WaMu turned to Fishman after Killinger failed to halt losses on home mortgages that already total $6.3 billion. The lender has estimated the sum could climb as high as $19 billion in the next 2-1/2 years, raising concern among some investors that WaMu may need to raise cash for a second time this year. The company said today more capital isn't necessary.

The extra federal oversight ``probably means they won't be able to take advantage of some opportunities available to other companies,'' said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California, which owned about 80,000 WaMu shares at the end of June. ``The fact that you have government oversight some people are treating as a negative.''

The lender dropped 15 cents to $4.12 at 4:12 p.m. in New York Stock Exchange composite trading and earlier traded as low as $3.25. The stock, the worst performer in the 24-company KBW Bank Index in the past year, was the only member of that index to fall today.

Subprime Solution

Fishman will have to decide how to deal with the fallout from Killinger's expansion, which led WaMu into subprime mortgages. Those home loans go to people with the weakest credit, and WaMu ranked 11th among subprime lenders in 2006, according to trade journal Inside Mortgage Finance.

Record U.S. defaults on subprime loans helped trigger losses for three straight quarters at WaMu, and the stock has tumbled 88 percent in 12 months.

WaMu also was one of the biggest vendors of option-ARM loans, which let borrowers skip part of their monthly payment and add it to the principal. Such tactics can backfire by increasing the size of a loan even as property values shrink, leaving borrowers owing more than a home is worth.

WaMu's ``memorandum of understanding'' with the Office of Thrift Supervision calls for the bank to improve risk management and compliance. The lender promised to give the agency a ``multiyear business plan and forecast for its earnings, asset quality, capital and business segment performance.''

Regulatory Accord

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 from a group led by buyout firm TPG Inc.

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.

Full terms of the memo weren't disclosed, which is typical in the industry because the accords are considered confidential and frequently aren't disclosed at all. At least 20 other institutions have disclosed some kind of regulatory action, according to data compiled by Bloomberg, and the Federal Deposit Insurance Corp. says its list of ``problem'' banks, which it won't name, has 117 lenders.

WaMu's memo ``could discuss things like capital, asset quality, reserves, management,'' said John Douglas, a partner at Paul, Hastings, Janofsky & Walker LLP in Atlanta and a former FDIC general counsel. ``One would expect for an institution the size of WaMu, given its trouble, it would be pretty comprehensive.''

`Significant Pressures'

While the memo is considered an informal regulatory action and wouldn't require a bank to dismiss any senior managers, it may demand a review of company executives, Douglas said.

The announcement comes a day after the U.S. Treasury took over Fannie Mae and Freddie Mac, signaling the government is taking an increasing role in financial markets as the housing crisis deepens.

Fishman said during a conference call this morning that it's too early to discuss 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.

ContiFinancial

``WaMu seems to have adequate liquidity sources to meet cash needs,'' CreditSights Inc. analyst David Hendler said in a note to investors.

Fishman has experience at savings and loans and turning around subprime lenders. He 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 by deposits. Fishman was CEO of Brooklyn's Independence Community Bank Corp. when it was acquired by Sovereign in June 2006 for $3.6 billion.

Earlier in his career, Fishman became CEO of ContiFinancial Corp. in July 1999 to help turn around 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.

Fishman has an undergraduate degree from Brown University in Providence, Rhode Island and a Master's in economics from Columbia University in New York.

Former Chairman

Killinger had relinquished his title as WaMu's chairman in June after shareholders voted to strip him of that role. Investors such as David Dreman, ranked among the 10 biggest stakeholders, have called for Killinger's ouster. The American Federation of State, County and Municipal Employees wrote a letter on July 22 to WaMu Chairman Stephen Frank demanding Killinger's removal.

``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.''

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.

Shopping Spree

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 WaMu'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. The stock peaked at more than $46 in June 2006 before beginning to slide along with the U.S. housing market.

In California, where WaMu 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.''

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 16:17 EDT