WaMu Shares Continue Slide

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.