WaMu says capital is sufficient to fund operations

Two Washington Mutual customers use the ATM at a branch in Palo Alto, Calif., Thursday, Sept. 11, 2008. Shares of Washington Mutual Inc. continued a perilous plunge on Thursday as anxiety grew on Wall Street over the financial stability of the nation's largest thrift and its options for survival. (AP Photo/Paul Sakuma)

NEW YORK—Washington Mutual Inc. said Thursday it will take another multibillion 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 companies earlier this week.

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.

WaMu's announcement came at a time of heightened anxiety on Wall Street about the well-being of the financial sector, especially those firms with significant exposure to bad mortgage debt.

Wall Street's edginess 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.

WaMu said it expects third-quarter net interest income to fall in line with the second quarter, when it reported $2.3 billion in income from loans and deposits. Noninterest income, or income generated from fees and other charges, is expected to be about $1 billion, up from $561 million in the April to June period.

Retail deposits at the end of August totaled $143 billion, the bank said. It plans to release its third-quarter results on Oct. 22.

WaMu's troubles stem largely in part from its "option" adjustable-rate mortgage loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating the negative amortizing loans in June.

WaMu, which posted a loss of $3.3 billion in the second quarter, has said it expects cumulative losses in its mortgage portfolio to peak at $19 billion.

"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, said Stuart Feldstein, president of SMR Research, which provides research on the lending industry.

He noted that 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."

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