Washington Mutual raising $7 billion

April 8, 2008 2:14:31 PM PDT
Washington Mutual Inc., hit hard by rising delinquencies and defaults on mortgages, said Tuesday it will receive $7 billion in new capital from an investment group led by private equity firm TPG but will post a wider-than-expected loss for the first quarter. The Seattle-based thrift said it will lose $1.1 billion during the first quarter and take a provision for loan losses of $3.5 billion - $1.5 billion more than previously expected. Wall Street had forecast a loss of $344.3 million, according to Thomson Financial survey of analysts.

Separately, the country's largest savings and loan said it will get out of the wholesale lending business, close all remaining standalone home loan centers and lay off 3,000 workers.

Washington Mutual will sell equity securities to an investment fund managed by TPG Capital and to other investors in order to raise the funds. Washington Mutual did not disclose the names of other investors, though the bank said they include top institutional shareholders.

TPG founding partner David Bonderman, a former WaMu director, will also rejoin Washington Mutual's board as part of the agreement.

"I think it's enough capital to get them all the way through," said D.A. Davidson & Co. analyst Jim Bradshaw, citing the cash raised Tuesday, the company's plan to cut its dividend and $2.9 billion raised late last year in a stock sale.

But, he said, "I suspect the company is going to be smaller a year from now, maybe dramatically smaller."

Bradshaw said he now expects the company to have to set aside between $10 billion and $12 billion this year to make up for bad loans - significantly more than the $8 billion the company had indicated.

In return for the $7 billion, investors will receive 176 million shares of common stock for $8.75 per share, a 33 percent discount to Monday's closing price of $13.15. Washington Mutual also issued about 55,000 shares of preferred stock at a purchase price of $100,000 per share. After certain approvals, the preferred stock can be converted to common shares.

To further shore up its capital position, WaMu will cut its quarterly dividend to 1 cent from 15 cents, saving about $490 million a year.

Shares of Washington Mutual fell $1.31, or 10 percent, to $11.84 on Tuesday. They had soared more than 29 percent Monday on news that a capital deal was near. WaMu's stock tumbled nearly 70 percent last year.

The federal Office of Thrift Supervision helped clear the way for the capital injection on Monday by approving TPG's request that the deal not be considered a legal "change in control" of the company. The regulator agreed with TPG's argument that it is acquiring Washington Mutual securities "for investment purposes only" and not to control the management.

The mortgage and credit crises have forced leaders of other troubled financial institutions to step down, but so far Washington Mutual Chief Executive Kerry Killinger's job seems secure.

Killinger, at the helm since 1990, received compensation valued at $14.4 million last year, despite the thrift's struggle with the fallout from a weakening mortgage market, especially among subprime mortgages, or loans given to customers with poor credit history.

"It sounds like new shareholders are comfortable with him in the leadership spot," Bradshaw said, as the company seeks stability for now. In the long term, though, he said he wouldn't be surprised if the company revamped its entire strategy - along with its management.

WaMu joins along list of companies that have raised capital in the wake of problems in the mortgage market, including Countrywide Financial Corp. and Thornburg Mortgage Inc. Countrywide agreed in January to sell itself to Bank of America Corp. for about $4 billion. Earlier this month, Thornburg said it raised $1.35 billion to shore up its capital base and avoid bankruptcy.

Merrill Lynch & Co. in January said it would take $6.6 billion from three foreign investment funds. Morgan Stanley sold a portion of itself to China Investment Corp., an investment arm of the Chinese government, for $5 billion in December. And in November, Citigroup Inc. took $7.5 billion from the Abu Dhabi Investment Authority in exchange for up to 4.9 percent of its equity.

Washington Mutual is one of the first retail banks to seek outside cash. Bradshaw said others, such as Bank of America or Wells Fargo might follow, but for a different reason - to snap up assets that Washington Mutual can no longer afford to buy.

As Washington Mutual looks to improve its credit quality, the bank said it will no longer purchase mortgages from brokers and close all its freestanding home loan offices. Those moves are expected to be completed by the end of the second quarter, and result in the loss of about 3,000 jobs.

The bank will instead focus its mortgage-originating efforts in its retail bank branches and Web site, and by expanding its call center operations.


AP Business Writer Stephen Bernard in New York contributed to this report.