With stock sinking, Washington Mutual appears headed for sale
Thursday, September 18, 2008
Ailing bank Washington Mutual Inc. appeared headed toward a sale Wednesday after a major investor removed a potential stumbling block and nervous banking regulators began approaching the most logical buyers.
The New York Times, citing unidentified people familiar with the matter, said an auction of the bank was already underway, and The Wall Street Journal reported Wells Fargo & Co. and Citigroup Inc. expressed interest in a takeover.
WaMu, Wells Fargo and Citigroup all declined to comment.
A concession by investment firm TPG, which injected $7 billion into WaMu five months ago, may have opened the way to a sale -- or, failing that, made it easier for the bank to raise another round of capital.
TPG could have stymied the process because of protection when it bought its stake in April. A clause in its agreement could have required a buyer or another major investor to pay TPG hundreds of millions, if not billions, of dollars in addition to whatever money was injected into WaMu.
But TPG agreed to waive the clause after concluding WaMu needs all the help it can get.
"It became clear that it would be in the best interests of Washington Mutual and our investors to waive the ... provisions," Fort Worth, Texas-based TPG said in a statement. "Our goal is to maximize the bank's flexibility in this difficult market environment."
The efforts to find a buyer, though, were being complicated by uncertainty about the magnitude of losses still lurking in Washington Mutual's home loan portfolio.
"No one knows what's in their books," said a person briefed on the talks between regulators and banks, speaking Wednesday on the condition of anonymity because of the sensitivity of the matter.
Citing unidentified sources, the New York Post said the potential buyers include JPMorgan Chase & Co. and HSBC Holdings PLC., as well as Wells Fargo. The banks all declined to comment.
Federal regulators would like to sell WaMu to a healthy bank, rather than risk a failure that would drain an already depleted deposit insurance fund. By some estimates, a WaMu failure could cost the Federal Deposit Insurance Corp.'s fund more than $20 billion. At $45.2 billion, the fund is already at a five-year low.
After losing $6.3 billion in the past three quarters, Washington Mutual believes it is slowly healing under a new chief executive, Alan Fishman, who will receive an $8 million bonus if he can keep WaMu alive through 2009.
"I think people do know what is in our books, and we've been pretty transparent," WaMu spokeswoman Olivia Riley said Wednesday, pointing to a financial update the company released late last week. Those figures suggested WaMu's loan problems are becoming less severe compared to recent quarters, giving some analysts hope that the company can still be salvaged.
Nonetheless, analysts still expect the company to sustain a loss of about $1.8 billion in the quarter ending Sept. 30. And investors are showing little confidence in WaMu.
The company's stock fell 31 cents to $2.01 Wednesday, leaving the stock price with a decline of 85 percent so far this year. The erosion has left WaMu with a market value of about $3.5 billion -- down from $43 billion at the end of 2006.
"Something needs to happen soon because WaMu is twisting in the wind," said Bert Ely, an Alexandria, Va., banking consultant. "It's a detrimental situation that has become corrosive to the franchise."
Assuming that Washington Mutual either can't find a buyer or doesn't want to be sold at the price being offered, the thrift could raise more money to fatten its cushion against the losses that are still expected to come. Like TPG did, any investor would be betting that the slumping real estate market will bounce back, allowing Washington Mutual to regain its financial equilibrium and return to the form that enabled it to pocket profits totaling $13.7 billion from 2003 through 2006.
In a Monday research note, Keefe, Bruyette & Woods analyst Frederick Cannon estimated Washington Mutual probably needs to raise at least $5 billion to protect itself from upcoming losses. Cannon thinks Washington Mutual could still be facing as much as $28 billion more in loan losses and other credit-related expenses through 2009.
Alternately, Ely thinks WaMu could sell big chunks of its franchise, which includes $143 billion in deposits and more than 2,200 branches in 15 states. Most of WaMu's branches are in the West, overlapping territory where Wells Fargo and Bank of America are the market leaders.
WaMu's branches in New York and Illinois also could be appealing to buyers if the company is sold in pieces, Ely said. "When you are dealing with a company this big, there are lots of ways you can slice and dice it," he said.
Michael Leidtke reported from San Francisco, and Sara Lepro reported from New York. AP Business Writers Madlen Read and Stephen Bernard contributed to the story from New York.