Glimmer of hope for Washington Mutual

Published 8:01 pm Thursday, September 11, 2008

NEW YORK — Washington Mutual Inc. said Thursday it will take another

multibillion-dollar write-down for bad bets on mortgage securities but insisted it has adequate capital to fund its operations amid concern about the thrift’s financial stability.

The nation’s largest savings and loan said it expects its provision for bad loans in the third quarter to be $4.5 billion. Of that amount, $3.4 billion is for residential mortgages. Both totals are down from this year’s second quarter.

The company, like many other financial firms, has suffered from investments in risky mortgage securities and other assets and has seen its shares shed about 80 percent of their value this year.

The Seattle-based bank said it has “sufficient liquidity and capital to support its operations while it returns to profitability.”

WaMu’s stock jumped 51 cents, or 22 percent, to end regular-session trading Thursday at $2.83, after earlier falling as much as 25 percent to $1.75. It tacked on another 20 cents, or 7 percent, to $3.03 in after-hours dealings.

On Wednesday, WaMu’s shares fell 30 percent, hitting a 17-year low. They have fallen more than 90 percent since early July of last year, right before the rapid erosion in the credit markets began.

As of June 30, the bank had a capital ratio of 7.76 percent, and a total risk-based capital ratio of 13.93 percent. A company’s capital ratio is essentially a measure of its cash versus debt.

Net charge offs, or loans written off as unpaid, are expected to increase by less than 20 percent, compared with a growth rate of nearly 60 percent during the second quarter, the bank said.

WaMu also said it expects to take an unspecified charge related to its investments in Fannie Mae and Freddie Mac preferred securities, which are now virtually worthless following the government’s takeover of the mortgage finance firms.

Subsequently, Moody’s downgraded the long-term deposit and issuer ratings on the bank to “Baa3” from “Baa2,” and its senior unsecured rating was cut to junk status, or “Ba2” from “Baa3.” The bank’s financial strength rating was downgraded to “D+” from “C-.”

Banks rated “D” display modest intrinsic financial strength, according to Moody’s, and may require some outside support at times, such as tapping capital markets for additional cash.

In response, WaMu said in a statement that it believes the ratings actions are “inconsistent with the company’s current financial condition.”

“The action by Moody’s appears to reflect the current uncertainty in the markets, rather than a thorough evaluation of Washington Mutual’s business,” the bank said.

Fitch Ratings also downgraded WaMu late Thursday, lowering the bank’s long-term issuer default rating one notch to “BBB-,” which is one grade above junk status.

While the provision is less than the second quarter’s, Fitch expects it to translate into a significant loss for the period. “This is very much in line with Fitch’s prior expectations, which do not anticipate WaMu returning to profitability until some time in 2009,” the ratings service said.

Federal banking regulators, who earlier this week ratcheted up their scrutiny of Washington Mutual, are closely watching the thrift’s condition. “We’re aware of it and we’re monitoring it,” said William Ruberry, a spokesman for the Office of Thrift Supervision, the Treasury Department agency that is WaMu’s primary regulator.