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Moody’s Cuts WaMu Senior Debt to Junk; Bank May Sell Branches, Deposits

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Washington Mutual, which has long looked wobbly, is moving beyond the point where it can survive in its current form (cynics might say in any form). Moody’s lowered the bank’s rating on its deteriorating financial condition and the difficulty of raising sufficient capital on viable terms.

From Reuters:

Washington Mutual Inc. was downgraded to below investment-grade status by Moody’s Investors Service, after the largest U.S. savings and loan projected a $4.5 billion third-quarter increase in reserves for bad loans but said it has more than enough capital.

Moody’s cut the Seattle-based thrift’s senior unsecured debt rating two notches to “Ba2,” its second-highest “junk” grade, from “Baa3,” with a “negative” outlook. It also lowered its rating for the banking unit to “Baa3″ from “Baa2.”

“Washington Mutual’s access to the debt and equity markets remains severely constrained,” Craig Emrick, a Moody’s senior credit officer, said in an interview….

Washington Mutual said it expected the third-quarter increase in loss reserves to decline from $5.9 billion in the second quarter, when its overall net loss was $3.33 billion.

It also said it expects net charge-offs, or loans it does not expect to be paid back, to be roughly $2.7 billion in the third quarter, up from the second quarter’s $2.17 billion….

Fitch Ratings on Thursday cut its credit rating to “BBB-minus,” the same level as Standard & Poor’s, and those agencies’ lowest investment grades.

The thrift expects to report full results on October 22.

About $3.4 billion of the reserve increase is expected to come from residential mortgages. Credit card reserves would rise by $600 million from the second quarter as the thrift moves securitizations back onto its balance sheet, not because credit quality is deteriorating, a spokesman said…

Investors remain worried about the thrift’s capital even after Washington Mutual raised $7 billion this year from investors led by private equity firm TPG Inc TPG.UL.

“Unfortunately, their options have narrowed significantly, even over the past two days,” Sean Egan, manager of the ratings desk at Egan-Jones Ratings Co, said in an interview. He said the thrift may need to raise well over $10 billion

Bloomberg reports that the bank may resort to desperate measures in a last-ditch effort to survive:

Washington Mutual Inc., facing up to $19 billion in bad home loans and slammed by a 34 percent drop in its stock this week, may sell parts of a nationwide 2,300-branch network to raise capital.

“The only real asset they have that’s worth anything to other banks is the deposit base, because of their branches,” said L. William Seidman, chairman of the Federal Deposit Insurance Corp. from 1985 to 1991. Seattle-based WaMu can probably sell branches in New York and Chicago, said Bert Ely, president of Ely & Co. Inc., a bank consulting firm based in Alexandria, Virginia.

Alan Fishman, WaMu’s new chief executive officer, may have to shed branches that hold $143 billion in deposits. The biggest U.S. savings and loan is headed for its fourth straight quarterly loss. Suitors have walked away because of potential damage to their earnings and WaMu’s chief regulator, the Office of Thrift Supervision, has told it to boost risk management and compliance….

Without most of its branches and deposits, WaMu would be limited to businesses that include credit cards and mortgages — neither a guaranteed moneymaker in the current economic climate….

Other capital-raising options are limited because the market for preferred securities dried up since a government takeover of Fannie Mae and Freddie Mac. The thrift raised $7 billion in April from TPG Inc., the Fort Worth, Texas-based private-equity firm run by David Bonderman.

The TPG deal itself may thwart investors. If WaMu is sold for less than $8.75 a share or is forced to raise more than $500 million in equity within 18 months, it must compensate TPG for the difference, according to filings with the U.S. Securities and Exchange Commission.

“TPG is probably at a loss-mitigation stage at this point,” Ely said. “Given how much they have invested, it probably makes sense to double down and then figure out how to get out of this investment.”…

The OTS could place the bank under its control and sell off assets, but it has little incentive to do so because WaMu is the regulator’s biggest customer, Ely said.

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9 comments

  1. Puntino

    “TPG is probably at a loss-mitigation stage at this point,” Ely said. “Given how much they have invested, it probably makes sense to double down and then figure out how to get out of this investment.”…

    Double down, THEN figure out an exit strategy? Hmmm. And the best way to get out of a hole is to carry on digging.

  2. Dean

    It looks like the emotionl crescendo is rising. All kinds of financial/bank issues coming to the surface, Ike in the mix; it surely looks to me like change in the investment sentiment.

  3. doc holiday

    The only reason we have a little footwork by the rating agencies, is because they have a dream to stay in business, and this helps maintain that illusion for them! The fraud and corruption that they have all been a part of for the last 10 years is a pattern linked, backed and structured to payoffs which are almost due to expire for this era, thus doing a little obvious PR here makes sense, as the election apparently hangs in balance.

    WaMu could have been any of a thousand mis-rated corporations that thrived on deceit — deceit and fraud from Enron to Krispy Kream & Worldcom and the very, very long list of CDOs, SIV, bonds and every rubber stamped security attached to this retarded game.

  4. doc holiday

    Re: " … the best way to get out of a hole is to carry on digging.

    >> I like that, and it probably helps to have a bigger shovel for more dirt! Snark…

  5. doc holiday

    Re: " … the best way to get out of a hole is to carry on digging.

    >> I'm told this is also a strategy of undertakers and as we all know, that game has no moved on to the more efficient methods and mechanisms of cremation…

    Also, a big howdy to Wyatt

  6. Steve

    Yeah, WaMu could try to sell some branches and hope to get 4%-5% of the value of the deposits transferred. And shrinking its deposit base would make the regulators happy. However, there are two little problems. First, WaMu is paying some of the highest rates in the country, which makes a deposit sale less likely. Second, WaMu’s only source of funds now outside the government is deposits.

  7. RK

    According to Bloomberg, TPG is waiving it’s right to
    compensation in the event of a capital raise below it’s
    $8.75 acquisition price, removing a stumbling block to a sale.

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