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WaMu Shores Up Balance Sheet

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Subprime losses cripple mortgage lender.

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The list of banks selling chunks of themselves to stay afloat keeps getting longer.

The Wall Street Journal reports that Washington Mutual (WM) is raising $5 billion to shore up its balance sheet amid ongoing mortgage-related losses.

Private equity firm TPG and other investors will snatch up common and preferred stock in the Seattle-based retail bank, significantly diluting value for existing shareholders. The final terms of the deal are not yet finalized, but The Journal says TPG will receive a seat on Washington Mutual's 14-member board.

As is the case with WaMu, Professor Sedacca expects financial institutions to increase capital raising efforts in the coming months. Leverage has skyrocketed since the credit crunch began, as banks have been forced to bring bad debt onto their books. The value of this debt is eroding, so banks must raise money to remain solvent.

Washington Mutual has been on the leading edge of the subprime debacle since it started. In December of last year, the bank announced a series of cost-cutting measures in an attempt to reverse its fortunes. It laid off employees, tightened lending standards and cut its dividend. In the past few months we've seen many lenders follow its lead.

As of last month WaMu still had the largest subprime exposure of any major bank, at $19 billion.

WaMu was one of the chief issuers of Pay Option ARMs, which allow borrowers to choose between a variety of payment choices. The smallest is less than the monthly interest due, which creates what's known as "negative amortization." Countrywide (CFC) and Bear Stearns (BSC) were also in on the action, and Wachovia (WB), with its 2006 purchase of Golden West, took on over $100 billion of these negative amortization loans, primarily backed by homes in California.

If Washington Mutual is being forced to raise capital, it's only a matter of time until more deposit-holding institutions follow suit. Although many cheer these developments as signs the credit crunch is drawing to a close, this view is based on hope alone.
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