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Washington Mutual's Stock Rebounds As Wall Street Sweats

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The Associated Press

Published: September 12, 2008

WASHINGTON - Shares of Washington Mutual staged a late rally Thursday, recouping some of this week's steep losses as investors pumped money back into the banking sector despite ongoing concerns.

The stock jumped 51 cents, or 22 percent, to end the day at $2.83, after falling as much as 25 percent to $1.75. Shares were down in after-hours trading, dropping 11 cents, or 3.9 percent, to $2.72.

The Seattle-based company's stock was down nearly 46 percent for the week before staging its turnaround Thursday.

The broader market made a stunning comeback late in the day as investors snapped up some of the financial sector's stronger players. JPMorgan Chase & Co. rose $2.25, or 5.7 percent, to close at $41.65, after falling as low as $37.92. Bank of America Corp., meanwhile, rose 66 cents, or 2 percent, to $33.06.

Wall Street's edginess over the fate of major financial firms was fanned by Lehman Brothers Holdings Inc.'s plans announced Wednesday to sell a majority stake in its investment management unit, spin off its commercial real estate assets and slash its dividend. The nation's fourth-largest investment bank also said it lost $3.9 billion during its fiscal third quarter.

The company, like many others on Wall Street, has suffered from bad bets on mortgage securities and other risky assets and has seen its stock price drop about 90 percent this year.

WaMu, likewise, has seen its market value wither as it battles rising mortgage delinquencies and defaults. Its shares have fallen more than 90 percent since early July 2007, right before the rapid erosion in the credit markets began.

Federal banking regulators, who this week ratcheted up 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.

With losses in its mortgage portfolio expected to peak at $19 billion, the bank could be Wall Street's next casualty, some analysts say.

"The question becomes can it survive if it has billions and billions of dollars left to write down on those loans?" Ladenburg Thalmann analyst Richard Bove said. "What's going to keep it in business, what is going to keep it alive?"

Stuart Feldstein, president of SMR Research, which provides research on the lending industry, said, "WaMu made mistakes in loan originations, to be sure, but it also had bad luck in that the bulk of its loans are in California," which has suffered some of the steepest declines in home prices and largest number of foreclosures.

He said WaMu expanded its business in the late 1990s by buying two of the largest thrifts in California, Home Savings of America and its rival Great Western Bank, "in a mad acquisition spree by ex-CEO Kerry Killinger."

"It was an opportunity for him to grow quickly, but in retrospect - and hindsight is easy - they should have had a little more geographic dispersion," Feldstein said. "He had to sit back and cross his fingers that nothing ever went bad in California."

One thing working in WaMu's favor is its valuable deposit base. Bove suspects management is "scrambling to find a buyer."

One indicator that the bank could be in trouble is the widening of its credit spreads, evidence that investors think the debt is riskier.

Washington Mutual's spreads are greatly wider than Lehman's - and Lehman's spreads are wider than those of Bear Stearns Cos. shortly before its demise in March, according to Len Blum, managing director at investment bank Westwood Capital.

WaMu does not typically comment on share price, market speculation or ratings agency actions, said spokeswoman Olivia Riley.

She also said the bank does not generally make comments about things such as credit spreads midquarter.

WaMu took a number of hits this week, starting with the removal of Killinger on Monday. He was replaced by Alan H. Fishman, the former president and chief operating officer of Sovereign Bank.

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