June 2 (Bloomberg) -- Washington Mutual Inc., the biggest U.S. savings and loan, said Chief Executive Officer Kerry Killinger will step down as chairman after shares dropped 80 percent in the past year and the company reported $3 billion of losses during the past two quarters.

Killinger will be replaced by Stephen Frank, 66, an independent director who previously ran Southern California Edison, the Seattle-based lender said today. Washington Mutual shareholders voted in April to remove Killinger as chairman after the company cut its dividend twice and said it may lose as much as $19 billion through 2012 on home loans.

``They're doing the things they've been forced to do as a result of decisions and business practices that they made years ago,'' said Christopher Bingaman, who helps oversee $5.1 billion including 3 million Washington Mutual shares at Diamond Hill Investment Group in Cincinnati. ``We're certainly favorable on the split.''

Killinger, 58, is the latest banking executive to lose a top job because of losses tied to the subprime lending crisis. Wachovia Corp., the fourth-largest U.S. bank, today ousted CEO Kennedy Thompson, a month after stripping him of his chairmanship. Other CEO departures include Citigroup Inc.'s Charles O. ``Chuck'' Prince and Merrill Lynch & Co.'s Stan O'Neal.

Washington Mutual fell 2 cents to $9 at 4:15 p.m. in New York Stock Exchange composite trading. The stock is the eighth- worst performer in the 91-member Standard & Poor's 500 Financials Index over the past year.

Shareholder Feedback

Today's move reflects ``the board's commitment to listening to feedback from our shareholders,'' the lender said in a statement.

Washington Mutual also instituted a rule requiring directors in uncontested elections to receive a majority of votes cast to be reelected, making it easier for shareholders to oust board members.

Killinger in April raised $7 billion from a group led by David Bonderman's TPG Inc. after a first-quarter loss of $1.14 billion. The world's largest financial institutions reported more than $386 billion in asset writedowns and credit losses tied to the U.S. housing slump, according to Bloomberg data.

Washington Mutual has ranked among the largest U.S. subprime mortgage companies. Those loans go to people with the weakest credit, and default rates set records in 2007. Washington Mutual had to write down the value of its home-loan unit by $1.6 billion in the fourth quarter.

``We need to continue to get through this very difficult residential real estate market especially in some of their core Western markets,'' Diamond Hill's Bingaman said.

Streak Broken

Prior to the last two quarters, Washington Mutual had been profitable every period since 1997.

Spokesman Derek Aney didn't return phone calls seeking comment.

Killinger, who has undergraduate and graduate degrees from the University of Iowa, joined Washington Mutual in 1982 through the acquisition of Murphey Favre Inc., a securities firm. Before that, he was an investment analyst with Bankers Life Insurance of Nebraska.

After rising to president in 1988, Killinger was promoted to CEO in 1990 and became chairman a year later. Between 1990 and the end of 2006, Washington Mutual shares jumped almost twentyfold, while the S&P 500 quadrupled.

Washington Mutual's board also announced changes to three committees and started a search for people with financial services experience to serve as independent directors.

Former Starbucks Corp. CEO Orin Smith, a director since 2005, was named chairman of the finance committee, with Bonderman, managing director of TPG, appointed vice chairman. Thomas Leppert, mayor of the city of Dallas and board member since 2005, will chair the governance committee. Regina Montoya, a director since 2006, will lead the corporate relations committee, Washington Mutual 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: June 2, 2008 16:33 EDT