Could Mortgage Crisis Take Down WaMu?

Sept. 11, 2008— -- As investment bank Lehman Brothers fights for its survival, some wonder whether the U.S. mortgage crisis will take down another major financial institution: Washington Mutual.

WaMu "is the next most likely candidate to have major issues and run into a Lehman-type situation," said Jaime Peters, an analyst with Morningstar in Chicago.

"They got into subprime lending, they got into ARMs [adjustable-rate mortgages]. Their home equity book is quite large, and these losses are building and building and building on their balance sheets and they simply do not have the capital to absorb these easily," Peters said.

In July, the bank reported a $3.3 billion loss for the second quarter. Since April, the bank's share price has plummeted some 75 percent from $13.15 to under $3 by the end of the day on Thursday. That closing share price, however, was up 22 percent from the day before.

In a statement released late in the day on Thursday, WaMu said it expects to see fewer loan losses in the third quarter. The statement, which detailed WaMu's expectations for its third-quarter performance, said the bank "continues to be confident that it has sufficient liquidity and capital to support its operations while it returns to profitability."

Though WaMu refused an interview request on Wednesday, bank spokesman Brad Russell highlighted a statement in a report by the credit rating agency Standard & Poor's. The report, released Monday, said that the bank has a "strong regulatory capital cushion."

The S&P report, however, also downgraded WaMu's outlook from "stable" to "negative."

"This outlook revision is due to the increasingly challenging housing and mortgage markets and their related impact on WaMu's core mortgage franchise," the report said.

WaMu is especially vulnerable because many of its mortgage investments are in places with the weakest housing markets, said Lawrence J. White, an economics professor at New York University's Stern School of Business.

In a statement Monday, the bank's new chief executive Alan H. Fishman said he was intent on "returning the company to profitability as quickly as possible." Fishman, whose appointment was announced on Monday, replaces longtime WaMu CEO Kerry Killinger.

Peters said that Morningstar is reserving judgment on whether WaMu's new chief will succeed in turning the company around.

"Alan Fishman has a very strong resume, but he's never faced the size or depth of problems that Washington Mutual has," she said.

Douglas McIntyre, the editor of the financial Web site 247WallSt.com, said that worries about Lehman -- which posted a third-quarter loss of $3.9 billion today and announced strategies to shore up its balance sheet -- will hurt Washington Mutual.