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WaMu Plunges on Lowered S&P Outlook

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Battered bank takes further punishment.

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Washington Mutual's (WM) stock fell about 12.5% in mid-morning trading on Wednesday, to $2.03 a share, amid fears that the battered bank is facing more trouble ahead as adjustable-rate mortgages reset.

The stock plunge followed Standard & Poor's Ratings Services' decision to lower its outlook to "negative" from "stable" after Washington Mutual booted CEO Kerry Killinger. The bank's stock has lost about 95% of its value in the last 52 weeks.

"The outlook revision reflects the increasingly challenging housing and mortgage markets and their impact on WaMu's core mortgage franchise," S&P Credit Analyst Victoria Wagner said in a prepared statement.

Washington Mutual has issued many ARMs to home buyers in hard-hit housing regions such as California, Florida and Hawaii. Interest rates for the many mortgages will reset in 2010 and 2011, creating what may be the next wave of trouble for banks hammered by subprime defaults in the last 2 years. Washington Mutual says ARMs account for about 50% of prime its prime loans.

Washington Mutual is also faced with rising costs. It now pays $4 million upfront plus $500,000 a year to protect $10 million of debt for 5 years, analysts said.

The bank is attempting to attract new deposits by offering higher rates than many competitors. An ad in a New York paper says Washington Mutual pay 5% APY for a 13-month CD and 4% APY for money market savings.

New rules for acquisitions may depress Washington Mutual's value, making it less attractive as a takeover candidate. In February, Bank of America (BAC) said a takeover of the nation's largest savings and loan was unlikely.

Washington Mutual has signed a memorandum of understanding with the Office of Thrift Supervision that, in effect, places the bank on probation. The bank has assured investors that it won't need to raise additional capital and said it plans no changes to its services or products.

The Seattle-based bank will provide the Office of Thrift Supervision with an updated, multi-year business plan and outlook for earnings, asset quality, capital and likely performance of each business segment.

Less than a year ago, Washington Mutual announced that it would leave the sub-prime lending sector, slash its dividend and eliminated about 3,150 jobs.

Standard & Poor's also affirmed its BBB- long-term and A-3 short-term counterparty credit ratings on Washington Mutual. A BBB rating is the second-lowest investment grade rating, and a BBB- rating is one cut below that - just above "junk bond" status. This will increase borrowing costs and won't reassure investors.
No positions in stocks mentioned.
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