Is Washington Mutual for Sale?

Rumors abound the troubled bank will sell itself after losing $5B in deposits.

September 10, 2008, 1:38 PM

Sept. 17, 2008— -- Washington Mutual, a savings-and-loan that has seen tremendous losses stemming from the nation's mortgage crisis, is reportedly on the auction block.

The New York Times, citing unnamed sources, has reported that an auction for WaMu arranged by investment bank Goldman Sachs began several days ago.

WaMu, meanwhile, is staying tight-lipped on the issue.

"We don't comment on rumor or speculation," a WaMu spokesman told ABC News.

Jaime Peters, an analyst with investment research firm Morningstar in Chicago, told that rumors have been swirling about a WaMu sale for months but have strengthened recently because of current market conditions.

Peters said part of what may be forcing WaMu's hand with respect to a prospective sale is the fact that it's seen a dramatic drop in customer deposits. She said the bank reported a total of $148 billion in consumer deposits in its second-quarter earnings report.

But in the third-quarter outlook it released last week, WaMu reported $143 billion in deposits, saying that the figure was "essentially unchanged from year-end 2007."

That means, Peters said, the bank must have gained $5 billion in deposits in the first six months of the year but then lost it two months later.

"About $5 billion of customer deposits," she said, "have flown out the door in July and August."

Customers, she said, are likely losing confidence in the bank because of the negative headlines they've read about WaMu in recent weeks.

Meanwhile, a decrease in deposits doesn't bode well for the bank's ability to cover the losses it sustained from its mortgage business.

"If they're losing deposits, likely their operating earnings will go down, and that means there's less money to absorb loan losses before dipping into the capital base," Peters said, "and the capital base is not strong enough to take all of the losses that are projected without those earnings."

Why WaMu?

Some have said for weeks now that Washington Mutual could be the next financial institution -- after the brokerage firm Lehman Brothers, which filed for bankruptcy protection earlier this week -- to go under thanks to the country's mortgage meltdown.

"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 last week.

In July, the bank reported a $3.3 billion loss for the second quarter. Since April, the bank's share price has plummeted more than 80 percent from $13.15 to just over $2 by the close of markets today. That closing share price, however, was up 22 percent from the day before.

In a statement released late in the day last Thursday, WaMu said it expected 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 last week, 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 early last week, 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 was reserving judgment on whether WaMu's new chief would 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.

FDIC to the Rescue?

If WaMu is unable to weather the mortgage crisis on its own or doesn't succeed in selling itself, then the Federal Deposit Insurance Corporation could step in to take over the bank just as it has with other failed banks.

But Douglas McIntyre, the editor of the financial Web site, 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 an individual's insurance limit. Customers do not double their insured amounts by opening both a checking and savings account at a single bank or opening accounts at separate branches of the same bank.

With reports from ABC News' Dan Arnall.