Mortgage Crisis Forces Big Cuts at WaMu

The Associated Press
Tuesday, December 11, 2007; 12:51 AM

SEATTLE -- Washington Mutual Inc. has become the latest lender to resort to a massive stock sale to shore up its finances amid turmoil in the mortgage and credit markets.

The nation's largest savings and loan also said it will close offices, lay off more than 3,000 workers, slash its dividend and set aside up to $1.6 billion for loan losses in the fourth quarter.

Word of WaMu's $2.5 billion convertible preferred stock offering came just hours after Switzerland-based UBS AG said it would sell $11.5 billion in shares to Government of Singapore Investment Corp., a sovereign-wealth fund, and to an unidentified investor in the Middle East.

Last month, Citigroup Inc. took a $7.5 billion investment from the Abu Dhabi Investment Authority in exchange for up to 4.9 percent of Citigroup's equity, and government-sponsored mortgage finance companies Freddie Mac and Fannie Mae both recently announced sales of $6 billion and $7 billion in preferred stock, respectively.

WaMu has not yet priced its offering, but increasing the total number of company shares will dilute their value for existing stockholders. WaMu shares fell $1.76, or nearly 9 percent, to $18.12 following the company's announcement Monday.

When WaMu does price the sale, it may have to do so at less than favorable terms, if the other recent deals are any indication. In exchange for its cash, the Abu Dhabi fund will get an 11 percent annual yield from Citigroup. The Freddie Mac offering has a fixed dividend rate of 8.375 percent, almost 2 percentage points higher than its last sale of preferred stock, in September.

After cutting 1,000 jobs and dismantling much of its subprime mortgage operation in September, Seattle-based WaMu will now get out of the business entirely. The company said it will close about 190 of its 335 home loan centers and sales offices, shut down nine call centers and eliminate 2,600 home loan workers and 550 corporate and support jobs.

The company also said it will shutter WaMu Capital Corp. and rely on third party broker-dealers to sell mortgage-backed securities.

These changes, meant to address what WaMu called "unprecedented challenges in the mortgage and credit markets," will save the thrift $140 million in the fourth quarter. But the company still expects to post a loss, due in part to a $1.6 billion charge for the writedown of goodwill associated with the shrinking home loans business.

On top of that, WaMu now expects to set aside between $1.5 billion and $1.6 billion for the fourth quarter, up from the $1.1 billion to $1.3 billion predicted by executives in early November.

For the first quarter of 2008, the company said it expects loan losses to total $1.8 billion to $2 billion. Loan losses will remain high throughout the year, WaMu added.

The company also slashed its quarterly dividend to 15 cents per share from its most recent dividend of 56 cents per share, for savings of more than $1 billion.

Moody's Investors Service downgraded several long-term and short-term ratings for WaMu and said in a statement that the move "was based on its view that credit losses from WaMu's mortgage operations will be noticeably higher than previously estimated." The credit rating agency said it doesn't expect WaMu's profitability to begin to recover until 2010.

Fitch Ratings also downgraded WaMu's credit ratings.

Before the news, WaMu shares rose 85 cents, or more than 4 percent, to close at $19.88 Monday.

© 2007 The Associated Press