Washington Mutual, the largest US savings and loan company, Monday said it would slash its dividend, cut jobs and raise $2.5bn to contend with the subprime mortgage crisis, reports the FT on Tuesday.
WaMu will also write down the value of its home lending unit by $1.6bn in the fourth quarter, for which it expects to report a net loss after recording non-cash writedowns.
The lender also doubled its provision for loan losses in the quarter to $1.6bn. In response, Fitch Ratings downgraded WaMu to A- from A, citing “worsening asset quality” and “extremely challenging conditions in the US residential mortgage market”, while Moody’s cut its rating two levels to Baa2, the second-lowest investment grade, from A3.
WaMu said it planned to raise $2.5bn to shore up its capital by selling convertible preferred stock. The company will also cut its quarterly dividend to 15 cents a share from 56 cents. The lender expects the convertible offering and dividend cut will generate about $3.7bn of tangible equity.
The Wall Street Journal, meanwhile, says that WaMu’s announcement raises questions about whether chief executive Kerry Killinger, the “architect of WaMu’s rise from an obscure West Coast savings and loan to a marquee name in banking”, should continue to run the company and if Washington Mutual could be sold outright.
“You just might say now’s the time to take the golden parachute and walk away,” analyst Richard Bove of Punk Ziegel & Co told the Journal.
WaMu’s plan to abandon the subprime market is a reversal from the plan outlined by Mr Killinger a year ago to rejuvenate the company after three years of falling performance, the Journal adds:
In the early years of the decade, the thrift rocketed through a $1bn expansion, growing to more than 2,000 branches and registering exponential profit growth. The high-speed expansion stumbled, however, on poor execution, bad branch locations and problems with integrating acquisitions.
As per-share profits fell in 2006, Mr Killinger’s growth plans included a significant focus on loans to borrowers with blemished credit – a bet on the subprime market now in free fall.
Of the top five US mortgage lenders, WaMu’s portfolio has the most exposure to risky loans, with 29 per cent of its 2006 loans in the high-cost category, mostly subprime, and 15 per cent backed by homes other than the owner’s primary residence, according to the Journal.