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WaMu Director Resigns Under Pressure

Mary Pugh, chair of the bank's finance committee, was one of the targets of activist shareholder group CtW.

Updated from 4:57 p.m. EDT

Washington Mutual


director Mary Pugh has resigned, the company said Tuesday at an annual shareholder meeting marked by investor anger over the company's alleged missteps in the housing and credit crises.

Nearly 2,500 investors and employees alike shared grievances about WaMu's poor performance and a seemingly disadvantageous capital injection led by private equity group


to shore up the struggling Seattle thrift. CEO Kerry Killinger announced Pugh's resignation early in the meeting.

Pugh, chairwoman of the bank's finance committee and a director since 1999, and fellow Director James Stever, chairman of WaMu's human resources committee, have

come under fire

from investors in light of losses the nation's largest thrift has taken as a result of the mortgage meltdown and housing decline.

As expected, WaMu also on Tuesday

recorded a first-quarter loss

of $1.14 billion, or $1.40 a share, reflecting a higher level of provisioning as steep declines in home values led to further deterioration in mortgage credit markets. It also announced that it had closed the



CtW Investment Group, an activist pension fund investor, and other activist investors had called on shareholders to withhold votes for Pugh and Stever. Ten members of the bank's 12-member board, including Stever, appeared to have been re-elected by a majority vote, the bank said Tuesday. WaMu director Anne Farrell has retired, the company said.

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CtW alleges that as heads of WaMu's committees responsible for risk management oversight and compensation plan design, the two directors "bear responsibility for Washington Mutual's failure to recognize and act in a timely manner on the risks to shareholder value presented by the housing bubble," it said in a March letter to other WaMu shareholders that was also released to the public.

In addition, CtW alleged that the two directors played a part in "attempting to insulate executive bonuses from the consequences of this risk management failure."

CtW Investment also questioned Pugh's independence as a director, since WaMu was a former client of Pugh's fixed-income money management firm, Pugh Capital Management. The CtW letter also said that Pugh's firm had been warning of a housing downturn since early 2006.

CtW works with pension funds associated with Change to Win, a federation of unions representing nearly six million workers in the U.S. The pension funds own approximately 4.6 million shares of WaMu's common stock.

The American Federation of State, County and Municipal Employees union (AFSCME) is also seeking the removal of Stever and others on the Human Resources Committee over the company's executive pay plan that "holds top executives harmless for subprime mortgage losses incurred by the company that have significantly hurt shareholder returns," it reiterated in a letter on Monday to WaMu's board.

WaMu has also come under fire recently for its executive pay practices.

In a March filing with the

Securities and Exchange Commission

, the bank outlined performance metrics for this year's cash bonuses for Killinger and other executives. The filing said that 2008 bonuses for its four top executives will exclude specific targets for loan losses, excluding credit card losses, and that WaMu's board will "subjectively evaluate" the company's performance in credit risk management.

The decision to exclude credit losses from its executives performance-based criteria sparked fury among investors and analysts, particularly as the company has taken huge provisions to protect itself from souring mortgage loans.

WaMu's board of directors have also decided to include "specific credit-related targets" to the performance metrics of the 2008 bonus plans for its top executives, Killinger announced at the meeting.

Investors have been hit hard by WaMu's plight over the past year. Shares have fallen 72%, as the nation's largest thrift has been forced to recapitalize twice in the past four months, culminating in the events of last week, where a consortium of investors led by private equity firm TPG agreed to sink $7 billion into the struggling bank.

Shareholders expressed their anger regarding the WaMu's troubles and at the TPG-led deal at the meeting on Tuesday.

"I think the deal you made was just awful," one shareholder said to management.

"Clearly 2007 was an extraordinarily difficult year for WaMu, but today I feel that we are on the road back

to profitability," Killinger said in prepared remarks to shareholders. "I can tell you that from my point of view the board has worked tirelessly to address the challenges we are facing. ... We do take accountability and we're working hard on turning this around."

But in response to the shareholder unrest, Killinger added that: "I just want people to calm down, have a little faith, I know it's tough.... This is the worst housing market downturn since the Great Depression and we've had to deal with it. And if we just stay with it for a few more quarters ... I expect to stand here next year and say 'April 2008 was a turning point.'"

As part of the TPG deal, WaMu agreed to give TPG's founder David Bonderman a seat on its board of directors. Bonderman was previously on WaMu's board in the late 1990s and early part of this decade after WaMu purchased American Savings Bank, where Bonderman was a director, reports say.

The company took a first-quarter provision for loan losses of $3.51 billion, which was more than double that of the provision it took in the fourth quarter. Net loans charged off spiked 83% over the fourth quarter.

Activists applauded the new of Pugh's resignation.

"Shareholders at Washington Mutual sent an unequivocal message today that they are ready for more independent and accountable directors," CtW Investment Group's executive director William Patterson said in a statement. "We commend Washington Mutual's board for promptly accepting Ms. Pugh's resignation and urge them to also demand the resignation of any other directors who fail to win majority shareholder support."

CtW has or is in the process of waging proxy fights at

Morgan Stanley






Merrill Lynch



"The Pugh resignation is a historic exercise of shareholder power targeted at unaccountable and ineffective directors," Rich Ferlauto, AFSCME's director of corporate governance and pension investment. "It shows that shareowners lay on the door step of directors the failure of oversight for risk management of subprime mortgage problems."