A private equity fund and a consortium of other investors pumped in $7bn to save Washington Mut-ual, the largest savings and loan company in the US, which had threatened to become the next big victim of the credit crisis.
WaMu, as the company is affectionately known, is one of the country's most recognisable financial institutions thanks to a coast-to-coast branch network, but it was cornered into raising emergency capital after suffering billions of losses on sub-prime mortgage loans.
Shareholders found out yesterday that they will have to take a big haircut to keep the institution afloat. Thousands of employees were told they will be made red-undant. WaMu said it would shut all 186 of its stand-alone mortgage branches and stop offering home loans through mortgage brokers. All lending will now be done at its bank branches, resulting in the loss of about 3,000 jobs. WaMu said it was issuing 176 million new shares at a one-third discount to the prevailing share price to a slate of investors led by TPG, the private equity group formerly known as Texas Pacific, which is putting in $2bn. Some big existing shareholders are also putting in new money to protect their existing investment, but the company did not give details.
WaMu slashed its dividend from 15 cents per share to just 1 cent, to save $490m a year.
Investors and analysts were shocked by the severity of WaMu's problems, and by the onerous terms demanded by its new backers. The revelations renewed fears that many smaller institutions could be forced out of business before the credit crisis is over. Already regulators are pressing several to seek new capital to protect savers' deposits, and Ben Bernanke, chairman of the Federal Reserve, predicted in February that some regional banks would not survive.
With house prices falling and mortgage arrears spiking higher, WaMu said yesterday it had suffered another $1bn-plus loss in the first quarter of the year, much higher than predicted. It had to set aside $4.9bn more to cover loans that are in arrears or already have to be written off.
Kerry Killinger, WaMu's chief executive, hopes that raising money, cutting costs and curbing risky lending will be enough to ensure the 119-year-old thrift can survive. The capital boost announced yesterday was actually $2bn larger than rumoured.
"This substantial new capital, along with the other steps we are announcing, will position us for a return to profitability as these elevated credit costs subside," Mr Killinger said. "With the support of these investors, we have every confidence in our ability to deal with today's conditions."
Some analysts hailed the involvement of TPG as a sign that some of Wall Street's most sophisticated investors now see value in battered financial stocks – a bullish sign for the market.Reuse content