WaMu tells investors it’s A-OK; bond raters beg to differ
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With financial companies, denying that you have a problem sometimes makes investors even more wary than they otherwise might have been.
But with its stock in a free fall this week, Washington Mutual Inc. may have figured it had nothing to lose: After markets closed Thursday the Seattle thrift issued a statement insisting that it wasn’t facing a financial crisis, and implying that it was confident enough about its outlook to set aside less for loan losses this quarter than in the second quarter.
In an unusual update on its finances, WaMu said it expected its capital levels at Sept. 30 to ‘remain significantly above the levels for well-capitalized institutions,’ and that the firm ‘continues to be confident that it has sufficient liquidity and capital to support its operations while it returns to profitability.’
Yet within hours of the company’s statement Moody’s Investors Service and Fitch Ratings both downgraded WaMu’s credit ratings yet again. (As Clare Booth Luce once said, ‘No good deed goes unpunished.’)
WaMu’s stock has fallen to multiyear lows this week on fears that further mortgage losses could drive the company into insolvency or a forced takeover. The shares fell as low as $1.75 Thursday, but rebounded late in the session (before WaMu’s statement) to close up 51 cents, at $2.83. The stock still is down 34% from last Friday and 79% this year.
The company on Monday ousted its chief executive, Kerry Killinger, after three quarters of losses stemming from surging mortgage defaults. He was replaced by veteran banking industry executive Alan Fishman of Meridian Capital Group.
‘Short sellers’ who bet on falling stock prices have been hammering WaMu: The number of shorted shares rocketed from 274 million in mid-July to 382 million as of Aug. 29, according to New York Stock Exchange data.
In Thursday’s statement, WaMu said it expected to set aside about $4.5 billion for loan losses in the current quarter, down from $5.9 billion in the second quarter. The loss provision, while smaller, would be almost twice what WaMu actually expected to charge off in the period, it said. So its total loan loss reserve should grow to $10.3 billion by Sept. 30 from $8.5 billion at June 30, the thrift said.
As for its capital cushion, WaMu said:
The company’s tier 1 leverage and total risk-based capital ratios at June 30, 2008 were 7.76%, and 13.93%, respectively, which were significantly above the regulatory requirements for well-capitalized institutions. The company expects both ratios to remain significantly above the levels for well-capitalized institutions at the end of the third quarter.
But the market clearly doesn’t trust WaMu -- otherwise, the stock wouldn’t be where it is.
Credit-rating firms don’t have much faith, either. Moody’s on Thursday cut WaMu’s senior unsecured debt rating to the ‘junk’ level of Ba2, from Baa3.
Moody’s said it acted because WaMu faced ‘reduced financial flexibility, deteriorating asset quality and expected franchise erosion.’ The bond-rater said it expected WaMu to report ‘future quarters of large losses.’
WaMu, getting in the last word, then issued another statement saying that Moody’s move was ‘inconsistent with the company’s current financial condition.’