By BW Staff, Associated Press, and S&P MarketScope
Two more big-bank executives are taking the fall for their mortgage losses. Wachovia (WB) Chief Executive Ken Thompson was pushed out as head of the nation's fourth-largest bank, and Washington Mutual (WM) said it is replacing Kerry Killinger as chairman. He remains CEO of the nation's largest savings and loan.
In its June 2 announcement, Seattle-based WaMu said independent director Stephen E. Frank will take over July 1 as chairman. The company described the move as one of several measures to strengthen corporate governance and return to profitability. But Killinger, 58, has been under mounting pressure over his bad bet on risky adjustable-rate mortgages. During the first quarter, WaMu lost more than $1.1 billion and set aside $3.5 billion to cover defaulted loans. Frank is 66 and has served on WaMu's board since 1997.
Wachovia's Thompson joins Stanley O'Neal at Merrill Lynch (MER) and Charles Prince at Citigroup (C), who both presided over huge losses from exposure to bad mortgages and were subsequently forced from their perches at the top of Wall Street institutions. The board of the Charlotte (N.C.)-based bank said it asked Thompson, 58, to retire and replaced him on an interim basis with Chairman Lanty Smith. Smith replaced Thompson as chairman last month in a move the bank said "strengthens independent leadership" at the company.
A Sign of More Bad News to Come
Wachovia shares sank 4.4% in mid-morning trading on June 2, to $22.75. WaMu fell 1.2%, to $8.91. The shakeups renewed investor jitters about the U.S. financial sector after a period of relative calm. The S&P Diversified Banks index dropped more than 2% in mid-morning trading. The unease spread to the broader stock market, with the blue-chip Dow Jones industrial average down 150 points, or more than 1%, to 12,488.
"We view Wachovia's announcement this morning to remove CEO Ken Thompson as a sign that more bad news will be forthcoming [when the company reports second-quarter results]", wrote Morgan Keegan analyst Robert Patten in a June 2 note to clients. "We would not be surprised to see some more changes among the top ranks at Wachovia over the coming months."
Smith said Monday there were no other senior management changes planned. He said Thompson's exit was precipitated by no single event, but rather a "series of previously disclosed setbacks." Wachovia posted a $393 million first-quarter loss and a 41% cut to its dividend. The longtime bank executive's credibility was damaged further when he said the bank's roughly $25 billion purchase of home lender Golden West Financial, a deal he made at the height of the nation's housing bubble in 2006, was on solid footing.
A Long and Respected Tenure
Thompson later acknowledged the timing of the deal "was not the best," and Wachovia was forced to set aside $2.8 billion earlier this year to cover losses with problem loans. Meanwhile, Wachovia's share price has tumbled from its 52-week high of $54.95.
In a conference call with reporters on June 2, Smith said, "It's been our hope and expectation that Ken would serve for several more years. We certainly wanted Ken to succeed. This is earlier than any of us wanted or chose." In a statement issued by the bank, Thompson said, "It has been an honor to serve this great company for 32 years and to lead it for the past eight years." Smith has been a director since 1987, a lead independent director since 2000, and served as chairman of Wachovia's executive committee. He is chairman and CEO of Tippet Capital, a merchant bank in Raleigh.
Early Leader in Adjustable Rates
At WaMu's annual meeting on Apr. 16, Killinger had urged shareholders to show some "faith" in the struggling thrift. But WaMu's shares have plunged 35% since the start of the year. In January, the bank reported a loss of $1.87 billion for the fourth quarter. The company cut its dividend, slashed thousands of jobs, and sought additional sources of capital. In early April, WaMu announced it was getting out of the business of home lending through independent mortgage brokers and said it had lined up a $7 billion cash infusion from private equity firm TPG.
WaMu, which has 2,500 banks nationwide, began life as a lender in Seattle in 1889. It made its first home loan, for $700, the following year. Under Killinger, WaMu made dozens of acquisitions, including such large regional lenders as New York's Dime Savings and California's Great Western Financial. The 1999 acquisition of Long Beach Mortgage made WaMu a big player in the risky business of making subprime loans to borrowers with poor credit histories.
WaMu was an early leader in the industry's push to offer adjustable-rate mortgages, in particular ones that gave borrowers the option to roll a monthly interest payment on top of the principal of the loan. Once the second-largest mortgage lender in the U.S., the company fell to sixth place overall last year as it began throttling back on mortgage loans. Killinger announced plans to focus more on credit-card lending and banking services for small businesses.