Editor's note: Our "On the Brink" series will provide daily insight into the financial firms facing capital shortfalls and the growing pressure from short sellers in the market.
is expressing confidence in its liquidity, but it is clear looking at its efforts to attract new deposits that the struggling thrift's situation is increasingly dire.
long-term deposit and issuer ratings were downgraded Thursday by Moody's Investors Service, after the bank's preannouncement of third-quarter results showed it had "limited financial flexibility."
The ratings downgrade followed Washington Mutual's update on its third quarter financial performance, when the holding company stated that it expected to remain well-capitalized under regulatory guidelines at the end of the third quarter.
A quick look at Washington Mutual's CD rates -- which
says are some of the highest in the country -- offers evidence the thrift is desperate to attract deposits to boost its liquidity:
In addition to Washington Mutual, troubled lenders BankUnited, FSB (a subsidiary of
, and Corus Bank, held by
, are offering very high CD rates.
Washington Mutual said in its preannouncment that it maintained "a strong liquidity position with approximately $50 billion of liquidity from reliable funding sources." There wasn't much further detail in the company's release. However, as we've pointed out before,
capital position cannot continue to withstand similar losses for several more quarters.
Moody's action followed a plunge in
shares driven by a
article early this week, saying that recently-implemented account rule changes requiring distressed loans be marked to market in the event of a sale, caused at least three potential buyers of WaMu or
to walk away.
In its follow-up release on the Moody's downgrade, Washington Mutual stated that none of the holding company's or thrift's unsecured debt was "subject to ratings-based financial covenants that would result in acceleration or early maturity events or defaults."
Way back in August 2007, following a mini-run on deposits at Countrywide Bank (later acquired by
Bank of America
(the largest subsidiary of the thrift holding company), could be forced to cut the dividend on its common stock and face liquidity problems, in light of its declining credit quality and over-reliance on deposits exceeding FDIC insurance limits.
Not surprisingly, the early focus on Washington Mutual was considered an over-reaction by some. Analyst Richard Bove, then at Punk Ziegel & Co. (since acquired by Ladenburg Thalmann), disagreed with our analysis, saying in an Aug. 23, 2007 report, "this company has plenty of liquidity." Bove also stated he saw no reason for the dividend to be cut, and in light of the high yield on Washington Mutual's shares at that time, said "This is why one should buy this stock."
From Aug. 23, 2007 through Thursday's market close, Washington Mutual's common shares returned a negative 92%.
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Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.