More Pain at WaMu

An endgame for the retail banking giant may depend on a federal bailout agreement and help sorting out up to $28 billion in loan losses

The roller coaster ride for Washington Mutual (WM) investors continues. The stock hit a low of $1.50 a share on Sept. 16 before bouncing back to nearly $5 by week's end on rumors that the big Seattle-based thrift might get acquired.

Investors turned skittish again on Monday, Sept. 22, when they pushed WaMu shares down 20%, to $3. Big bank stocks got hit on fears that President George W. Bush's $700 billion bailout of troubled mortgage assets might not be a good thing for banks if they are forced to recognize even larger losses on their mortgage holdings. Also, The Wall Street Journal reported on Sept. 22 that would-be buyers have been looking for the federal government to take over WaMu's bad loans before consummating a merger. CNBC reported the same day that the bank is waiting to see whether the proposed $700 billion bailout effort wins congressional approval before continuing with merger talks. Late Tuesday morning, WaMu's stock was trading up, to $3.34.

There's little doubt WaMu has valuable assets. With some $143 billion in customer deposits, it's the sixth-largest bank in the country. It's hard for banks to open new branches and seize a significant amount of market share in new markets. For that reason, many bankers would love to get their hands on WaMu's network of more than 2,000 branches.

Suitor Suspects

The latest rumors of interested parties include Citigroup (C), Wells Fargo (WFC), and perennial white knight candidate JPMorgan Chase (JPM). JPMorgan Chief Executive Jamie Dimon has said he's interested in beefing up the firm's retail banking operation. JPMorgan lacks a strong presence on the West Coast, where WaMu is one of the top three players.

Once the status of the federal bailout is clearer, an acquirer could move fast. "Necessity leads to a lot of things," says Morton Pierce, a mergers and acquisitions specialist at law firm Dewey & LeBoeuf. "You just have to be big enough to absorb the risk of these things."

Home Loan Lagoon

The stumbling block remains WaMu's loan portfolio. The bank is anticipating $19 billion in loan losses during this housing slump. Analysts say the losses could go as high as $28 billion. A Sept. 19 story in the Orange County Register shows what potential WaMu buyers may be up against. The story chronicled how WaMu loaned nearly $25 million to one family in Anaheim, Calif., which used the money to flip 22 properties, six of which are now in foreclosure.

The uncertain state of WaMu's future continues to put a strain on the bank's customers. Barak Zimmerman, a freelance Web editor who uses WaMu for both his personal and business banking, says he took out $10,000 and put it in another bank just to be safe. "I wanted to make sure I have operating expenses," he says.

On Sept. 11 the bank said its deposits from retail customers were unchanged from a year earlier. But the number was down nearly $6 billion from the end of June, even as the bank offered attractive rates to lure deposits. Lately, WaMu has been offering 13-month certificates of deposit paying 4.5%, at the high end of the industry's offerings.

Christopher Palmeri is a writer in BusinessWeek's Los Angeles bureau

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