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WaMu Sale: Deal or No Deal?

WaMu sent CEO Kerry Killinger packing and ushered in Alan Fishman, who once sold Independence Bank to Sovereign.

Washington Mutual's

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ouster of longtime CEO Kerry Killinger may signal that the ailing thrift is struggling to find a buyer and is setting its sights on a rebound.

WaMu announced Monday that banking veteran Alan Fishman, hailed by some industry insiders as a "turnaround artist," would succeed Killinger as CEO. The Seattle-based lender had been rumored to be considering a sale this year as the mortgage and housing meltdown has caused the company to post three consecutive quarters of earnings losses.

Christopher Brendler, an equity analyst at Stifel Nicolaus, speculates that the change in management is because a sale is "increasingly unlikely" and the company is resorting to "plan B," which is figuring out to how to fix the ailing company and return to profitability despite continued deterioration in the markets, he says.

"My opinion is they left

Killinger as CEO because the best option for WaMu then and now is to sell the company," Brendler says. "Why change the CEO if you're going to sell the company?"

Rumors have circled for months regarding whether

JPMorgan Chase

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would finally pull the trigger and acquire a retail banking outfit, notably WaMu, but so far CEO Jamie Dimon has stayed on the sidelines. Yet any potential suitor for WaMu would probably find value in the branch franchise, possibly a foreign company such as



, says Gary Townsend, the president and CEO of private-equity firm Hill-Townsend Capital.

Some say that Fishman was brought in to help close a deal.


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WaMu is a company that is for sale if they can find an appropriate buyer -- appropriate meaning one that's willing to pay enough," Townsend says. Fishman "sold his company to Sovereign and that might be one thing that seems particularly attractive about him to the board of directors at Washington Mutual."

Fishman, 62, was most recently chairman of

Meridian Capital Group

, a commercial mortgage brokerage firm. Before that, he served briefly as COO of

Sovereign Bancorp


after completing a sale in 2006 of

Independence Community Bank

, which he led. Fishman spent 20 years as a senior executive at the former

Chemical Bank

, later bought by JPMorgan.

"Like others in the industry, WaMu is currently facing unprecedented housing and markets conditions," said WaMu Chairman Stephen Frank on a conference call. "At this juncture in the company's history, the board felt that new leadership and a combination of deep industry experience and fresh perspective was the most effective way to lead the company through this difficult period and return it to profitability."

"The board has great confidence in Alan's ability to lead WaMu through its next stage of evolution and return the company to profitability as quickly as possible," Frank added.

In Fishman, WaMu has found a "proven turnaround artist," says Anton Schutz, president of Mendon Capital Advisors and the fund manager to Burnham Financial Services fund.

But that doesn't mean returning WaMu to profitability will be easy.

This weekend's bailout of

Fannie Mae



Freddie Mac


won't do much to improve WaMu's predicament, since its mortgage portfolio consists for the most part of lower-quality loans the GSEs would not have bought anyway.

"I hope he has been in the weight room because he's got a lot of heavy lifting to do," Schutz adds. His firm does not own shares in Washington Mutual.

"WaMu seems to be still focused on beefing up its retail banking franchise for the long term, while trying to manage through its credit quality issues and restore profitability as quickly as possible," CreditSights analysts wrote in a report on Monday. "We felt the sense of urgency from CEO Fishman to recognize and work through WaMu's credit quality problems and return to positive profitability. So we sense that WaMu is looking for a catalyst to put credit quality pressure behind them, and we cannot rule out a solution such as the creation of 'bad bank.'"

CreditSights says separating the healthier retail banking business -- the good bank -- from its problematic mortgage assets could -- the bad bank -- could be difficult, given the "high concentration" of risky assets in its portfolio.

Killinger, who has been CEO since 1990, was the driving force behind WaMu's foray from a sleepy Washington bank into a national retail banking and mortgage powerhouse. But the plan backfired as the housing and credit markets meltdown progressed.

WaMu has been saddled with billions in losses as credit deterioration in its mortgage -- and now credit card portfolio -- has been significant. WaMu enjoyed high returns for making mortgages to lower-credit quality borrowers and then selling them as part of securitization packages.

But the tides turned last year as home prices fell sharply, particularly in states such as California, where WaMu and others like

Countrywide Financial

, which was sold to

Bank of America

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, and struggling


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through its purchase of residential mortgage lender Golden West, have large exposure. WaMu has said that its cumulative losses on all its assets, not just mortgage, could top $19 billion. In addition, its credit card portfolio losses could exceed 10.5%, it said in July.

Killinger was stripped of his chairman title in early June.

Separately WaMu announced that it had entered a memorandum of understanding with its primary regulator, the Office of Thrift Supervision, concerning the firm's risk management and compliance operations, including its Bank Secrecy Act compliance program, it said. Under the agreement, WaMu is required to provide the OTS with an "updated, multiyear business plan and forecast for its earnings, asset quality, capital and business segment performance."

The plan does not require the company to raise capital, increase liquidity or change its products and services at this time, it said.

Several banks, including

National City


are also operating under regulatory agreements.

"Like everyone else in the business, WaMu is facing very significant pressures," Fishman said on the conference call. "And I know I need to hit the ground running and I am prepared to do that. This has been an unprecedented period in the financial services industry. ... WaMu has already taken significant positive steps to manage this, but I am sure that we will have still a great deal of work ahead of us."

Fishman's first priorities are to ensure that employees have the tools and support to continue supporting customers in the current environment while "working on building a winning model for the future," he says.

"The retail banking and the mortgage business will continue to evolve very rapidly over the next few years and this provides a great opportunity," for WaMu to identify how it can "compete effectively in that framework," Fishman says. "The opportunity to create a great national franchise has never been better," Fishman adds. He declined to discuss at length the need for more capital or asset sales at this point.

But the CreditSights analysts say the thrift may have to raise capital beyond the $7.2 billion injection in April from


and other institutional investors, since that WaMu's credit quality may worsen beyond its current forecast.