Nerves return to financial sector as investors dump shares in WaMu

The fear and the speculation that has plagued the financial sector since the start of the credit crisis returned with a vengeance yesterday, with investors dumping shares in one of the country's largest mortgage lenders.

Washington Mutual, the Seattle-based savings and loan company, tried to calm nerves, saying it was well capitalised, following a research report which said that many of its creditors had been quietly pulling their money out.

Gimme Credit analyst Kathleen Shanley made the claim following a review of the small-print in the company's financial results statement on Tuesday. Since that statement, shares in WaMu – as the company is affectionately known – have lost almost a third of their value.

The private equity firm TPG and a consortium of other investors pumped in $7bn (£3.5bn) in April to shore up WaMu's balance sheet, after it suffered billions of dollars of losses on sub-prime mortgages. The company is one of the most recognisable brands in US banking, thanks to its coast- to-coast branch network, and it was the nation's sixth-biggest mortgage lender in 2007.

In a response to Ms Shanley's report, WaMu said it funds all of its business through its banking operations and does not rely on commercial paper sold in the credit markets. On Tuesday, chief executive, Kerry Killinger, said the cash infusion earlier this year meant it had enough capital to get through the housing downturn.

Gimme Credit is an independent research house serving corporate bond investors. Ms Shanley said Tuesday's results from WaMu showed a decline in federal funds purchased and commercial paper to $75m from $2bn over six months. Securities sold under agreements to repurchase dropped to $214m from $4.1bn at the end of 2007. She concluded: "We won't use the phrase 'run on the bank', but we would be remiss if we did not observe that many creditors have quietly been pulling funds."

Investors are still reeling from the collapse of IndyMac, a big regional lender, which was the third-largest banking failure in US history. Discussion of banks' financial strength has become acutely sensitive in the current febrile environment, because even a perfectly solvent bank could be ruined if depositors are panicked into withdrawing their cash.

Earlier this week, Dick Bove, one of the most prominent US banking analysts, was sued by BankAtlantic Bancorp, a US lender, after he published a note entitled "Who Is Next?"

After two days of strong gains for financial company shares, investors slammed into reverse gear yesterday, with big losses across the sector. A report on the housing market showed existing home sales were down 2.6 per cent in June on the previous month, with average selling prices about 6.1 per cent lower than in the same month last year.

Both figures were worse than Wall Street had expected, and undermined hopes that the US housing market might soon find a bottom.

Until then, it will be impossible to value trillions of dollars of home loans and mortgage-derivatives held throughout the financial system, which use US houses as their ultimate collateral.

At the same time, the number of new unemployment claims last week was at a three-year high, it was reported, adding to the economic gloom. The Dow Jones Industrial Average closed last night down 283.1, or 2.4 per cent, at 11,349.