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WaMu Shares Continue Slide

Laurie Kulikowski

Washington Mutual (WM Quote) briefly hit a new 52-week low on Wednesday as concerns continue to mount about the big thrift's potential mortgage losses and the bank gets ready to convert certain preferred stock.

WaMu shares are down 50% since the bank announced a $7 billion capital injection led by private-equity firm TPG and other large investors in early April. But worse, the stock is down more than 20% just from Thursday's closing price, the day before a Wall Street Journal report that said regulators were probing another hard-hit bank from the housing downturn, National City(NCC Quote). The report, confirmed Tuesday by the Cleveland-based bank, has investors worried regulators are looking at other troubled banks.

The bank issued a statement late on Thursday saying that while commenting on market rumors was not its policy, "recurring speculation about regulatory activity" led it to act.

"Neither our primary federal regulator, the [Office of Thrift Supervision], nor any other bank regulatory agency has taken any enforcement action against WaMu that we have not previously disclosed," the statement read. "Further, the company is not currently in such discussions with any regulatory agency."

Much of the damage, however, had already been done. Shares of WaMu hit a new 52-week low of $5.75 at one point on Wednesday, as investors became even more jittery about the stock over potential losses and whether the bank would have to raise even more capital. Such concerns were amplified as news broke that Lehman Brothers(LEH Quote) may be looking for foreign investors, even after announcing plans to raise $6 billion through preferred and common stock offerings.

WaMu closed down 9.3% to $6.06.

"It's clear that this is the bank with the most at risk," one equity trader says. "I doubt anyone is looking to build [a sizeable] long-term position right now."

On Monday, UBS analyst Eric Wasserstrom predicted that the Seattle thrift will suffer $21.7 billion in mortgage losses through 2011, ahead of the company's guidance of $12 billion to $19 billion over a similar timeframe. Total losses across all asset classes could near $27 billion, Wasserstrom wrote in a note on Monday.

As a result, Wasserstrom expects the company to post earnings losses through the first half of 2010. Still, the analyst writes that WaMu's capital is sufficient for now and does not think the thrift will need to raise additional equity.

"For the mortgage assets, we base our loss expectations on original balances and the associated loan characteristics; however the remaining balances are likely to have characteristics that are weaker," Wasserstrom wrote. "The other consumer assets, particularly credit card loans, are highly sensitive to unemployment; our current estimate for unemployment to reach 6% by year-end [2008], but the current economic outlook limits visibility into this metric."

Another reason the stock has sold off is that WaMu is preparing to convert preferred shares sold as part of the TPG-led capital injection into common stock. Investors are taking what little profit they can get now, before their stock is further diluted from the conversion, observers say.

In April, WaMu sold approximately 176 million shares of common stock and 56,570 shares of convertible, perpetual non-cumulative preferred stock with a liquidation preference of $100,000 per share. The convertible preferred stock will automatically convert into the company's common stock at an initial exercise price of $8.75 per share, it said at the time. It also issued warrants to certain investors to purchase shares of common stock.

WaMu is holding a special meeting on June 24 in which shareholders will be asked to approve the conversion proposals and approve a proposal to "increase the number of authorized shares of common stock to permit the conversion and exercise of these securities," it said in a May filing with the Securities and Exchange Commission.

Once WaMu gets shareholder approval, the preferred stock will convert into approximately 647 million shares of common stock, while the warrants will become exercisable for approximately 68 million shares, the filing said.

"With the proceeds of this offering, our capital ratios are expected to remain well above our targeted levels during the period of elevated credit costs in our loan portfolios in 2008 and 2009," according to the filing. "At the same time, we believe this strengthened capital base will permit us to continue growing our leading national banking franchise."

The company did not immediately return a request for comment regarding the convertible preferred stock and other things.