Could Mortgage Crisis Take Down WaMu?

Analysts say that the U.S. mortgage crisis could sink the bank.

September 10, 2008, 1:38 PM

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, 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.

"Anytime that one of these institutions either fails or it does a bunch of things and does not get 'better' in the eyes of the stock market, psychologically it does some damage to the other weak sisters," McIntyre said.

McIntyre said that WaMu could recover if the housing slump eased. Until then, the bank, he said, could buy time and cover its losses if it raises capital from new investors, such as sovereign wealth funds or investment entities owned or controlled by individual countries.

But McIntyre and Peters agreed that finding new, willing investors for WaMu would be tough.

Because of Lehman's woes, "we're getting a very up and close and personal example of just how much difficulty troubled companies are having raising capital," Peters said.

The chances of WaMu finding a "white knight," she said, are "getting lower by the day."

Even if WaMu is able to secure more investments, Peters said, most shareholders can still expect to see their holdings plummet.

And if WaMu is unable to weather the mortgage crisis, she said, then the Federal Deposit Insurance Corporation would step in to take over the bank just as it has with other failed banks.

But McIntyre said that a WaMu takeover might be too big and expensive a job for the FDIC alone. The corporation, he said, would likely receive support from the U.S. Treasury Department.

The FDIC protects deposit accounts including checking and savings accounts, money market deposit accounts and certificates of deposit up to the federal limit. The insurance does not cover products such as stocks, bonds or mutual funds, even if they are sold by your bank.

The basic insurance protects up to $100,000 in deposits at each institution for each type of ownership category. That means one individual could be insured for up to $100,000 for a single account and another $100,000 in a joint account with a spouse or somebody else.

There is also a separate $250,000 insurance limit for various types of retirement accounts, including IRAs, Section 457 plans and Keogh plans.

The type of account or bank branch makes no difference when calculating your insurance limit. You do not double your insured amount by opening both a checking and savings account at a single bank or opening accounts at separate branches of the same bank.