WaMu's Surge Rooted in Overreaction

Washington Mutual (WM Quote) surged 12% after British hedge fund manager Toscafund Asset Management disclosed a 6% stake in the ailing thrift.

But the story the rest of the media is missing is that the majority of these shares owned by Toscafund were probably already purchased back in April.

That month, Toscafund invested $648 million in the $5.5 billion convertible preferred PIPE deal that Washington Mutual issued, according to private placement tracker documents related to the deal. Toscafund was the second-largest investor behind private-equity firm TPG, the documents show.

The offering, which WaMu undertook to raise much-needed capital, allowed investors to convert their preferred stock into common stock at a price of $8.75 per share. If Toscafund had converted its full amount, then it would own about 74 million shares of WaMu today.

The U.K.-based Toscafund, which focuses on financial-services companies, said in a Securities and Exchange Commission filing Thursday that it owns roughly 105 million shares, or 6%, of the common stock of WaMu between two funds.

On the date that the PIPE deal closed, Washington Mutual's stock price was at $10.35, so it's not unlikely that Toscafund converted to common stock -- since conversion represented instant profits. WaMu's stock closed Thursday at $5.33. Had Toscafund averaged down on its investment in recent months, that could explain the larger 105 million share count the firm is reporting.

Toscafund and WaMu could not be reached for comment

Seattle-based WaMu has been faced with hard times as the housing meltdown and credit crisis rocked its large lending business. WaMu posted its third quarterly loss in a row two weeks ago after boosting its loan loss provision.