WaMu May Need to Hit the ATM Again

TheStreet.com had pointed out just days before federal regulators took over IndyMac that WaMu, while much better capitalized, faced similar problems with its loan quality.

WaMu responded the same day as the Bove report, emphasizing it raised $7.2 billion in new capital through sales of common and preferred stock and warrants to TPG Partners and other institutional investors in April. The bank pointed out that it remained well-capitalized per regulatory guidelines as of June 30. Still, the damage was done, with shares dropping 35% on the day.

After it raised the $7.2 billion, Washington Mutual said it expected to remain well capitalized through 2008 and 2009.

It had better, at least until November 2009, since under the April 7 agreement with TPG and other private investors, Washington Mutual must pay "an amount sufficient to compensate them for the dilution suffered" in the event the company raises more capital by selling "more than $500 million of common stock or other equity-linked securities" for less than $8.75 per share, or engages in a change-of-control transaction. Reports earlier this year suggested JPMorgan Chase(JPM Quote) was one interested suitor.

With shares closing at $4.65 Wednesday, it's clear how dangerous this agreement was for Washington Mutual and how desperate the company must have been when it agreed to TPG's harsh terms .

So how does Washington Mutual's total exposure look now? The ratio of nonperforming assets, as reported in the earnings release, to total equity capital less preferred stock, was 33.93% as of June 30, down from 38.62% last quarter.

Asset Quality

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Nonperforming assets totaled $11.2 billion as of June 30, an increase of 22% from last quarter. While this is a large increase, the pace of the increase in nonperformers has been slowing.

In the earnings release and conference call presentation, the company also pointed out that the pace of growth of "early delinquencies" -- loans past due between 30 and 89 days that are still considered performing -- had slowed considerably. These loans can provide a leading indication of where overall asset quality is headed. They increased by less than 5% in the second quarter, a considerable improvement from growth rates of over 25% in the third and fourth quarters of 2007.