WaMu Shareholders Left Out in the Cold, Again

We believe that executives at Washington Mutual (WM) don’t do right by their shareholders.

They made bad business decisions by loading up on subprime loans.

When the losses flooded in and the stock plummeted about 75%, they changed the terms of the deferred compensation plan to allow employees (read most of the money was for executives) to take a one-time cash out of the money before 12/31/2007 (note that deferred comp is subject to general creditors of a company).

Then they modified executive bonus plans to reduce consideration of losses due to the bad loans from the ill-conceived subprime strategy that caused the stock to plummet

Then they cut the dividend to shareholders from $0.56 to $0.15. Again no direct pain for executive compensation.

Now they have sold $2 billion of new issue shares to an investor group at $8.75 per share when the market closed the prior day at $13.15; and sold $5 billion of convertible debt that surely has a conversion price that will create a strong resistance price level until the bonds are all converted. And they virtually eliminated the dividend, dropping it to $0.01 per share.

So — capital losses for regular shareholders and a virtual total loss of dividend income from regular shareholders, but no rights offering of shares and convertible bonds to regular shareholders to recapitalize the company at the huge discount offered to an investor group.

Yes, the new investors are shareholders now too. They are taking big chances; but what about the pre-existing shareholders? Shouldn’t they have been given the same opportunity in a rights offering? That would have taken some time, but they have had the last several months to ponder their capital needs.

Yes, this cash infusion is important to survive the company, and we expect the new shareholders will exert strong influence and cause more economically rational management decisions.

However, was it really necessary to leave the ordinary shareholder so completely in the cold? Was it “fair” to enrich executives to implement terribly flawed lending plans, and then protect their deferred comp and bonuses after the crisis nearly killed the company? Was it “fair” to recapitalize the company without any offer to existing shareholders to participate? Was if “fair” to eliminate the dividend for pre-existing shareholders, while issuing interest paying convertible debt to the new investors who have the equity upside too?

What a horrible situation. What an unfortunate example of how companies shouldn’t treat their shareholders.

The shares are trading at about $11.60 to $11.85 right now a few hours after the announcement. Will the new capital cause shareholders to see new value and stabilize or increase the price — or will shareholders react to being $3.00 above the new issue shares and being capped by the conversion price of the bond by trading down?

Institutions are probably mostly out if they plan to be out. Speculators are probably a bigger portion of the shareholder base than normal. The news will be digested by a wider audience tonight and tomorrow will probably tell much of the story — thumbs up or thumbs down. It is not at all clear which way this move will push the chart.

New capital for a bank is good news for the market. A deal like this may be frustrating to investors who may see a major flat spot in the price future, or they may see a bright new future from a low point.

We’re short WM. Time will tell. It could go either way.

The 10-day, hourly chart below tells some of the story.

The stock was anticipating something yesterday, but was somewhat disappointed today — not to the extent that it was unhappy the day before yesterday.

This is the news as reported yesterday by Bloomberg:

April 8 (Bloomberg) — Washington Mutual Inc., the largest U.S. savings and loan, got $7 billion from a group of investors led by David Bonderman’s TPG Inc. after losses on subprime loans ate up capital and erased 74 percent of its market value.

Washington Mutual sold 176 million shares at $8.75 a piece, 33 percent below yesterday’s closing price on the New York Stock Exchange, and $5.5 billion in convertible preferred shares, the company said in a statement today. TPG will buy $2 billion of the shares. The lender also slashed its dividend and announced 3,000 job cuts. The stock fell as much as 13 percent.

Chief Executive Officer Kerry Killinger, struggling to reassure investors the bank has enough capital to stay afloat, said the dividend cut will preserve $490 million annually.

“When a firm has to double its shares outstanding and yet still be under credit-quality pressure, it’s not a particularly comforting move,” said Sean Egan, managing director of Egan- Jones Rating Co. in Haverford, Pennsylvania.

Washington Mutual will stop making loans through mortgage brokers and close its home loan offices, while focusing on its 2,500 bank and small business lending offices. The unit that’s being closed, known in the trade as wholesale mortgage lending, contributed 40 percent of fourth-quarter originations, according to a slide presentation. …

The quarterly dividend was cut to 1 cent a share from 15 cents, the second time it’s been reduced since November 2007 when it was 56 cents.

The infusion, originally planned for $5 billion, was increased because of strong investor demand, according to Washington Mutual spokesman Derek Aney. …

“It’s dilutive for shareholders on a massive basis, so it’s not great for the company, but it’s great for the system that capital can be raised during these stressful times,” Vincent Farrell, a principal at New York-based Scotsman Capital Management LLC, said on Bloomberg Radio.”

Comments

[TIM SULLIVAN]

What about the bond holders? All we hear is how the management screwed their shareholders. These deadbeats at WM were lining their pockets at the expense of the bottom line to the point where the ability to meet their good faith debt obligations became in doubt! They should have cut their dividend AND Exec compensation over a year ago when New Century went under! This deal has created a small windfall for bond holders who thought they were buying investment grade debt. Now they have 90% of their ivestment recovered. Some of this reorganization of SEC & other regulatory agencies should involve providing the debt holders a say in the operation of a company. Debt holders should have a member on these boards of directors to have a look see at whether these company's financials are as sound as their ratings.It is not just the regular "Joe" shareholder that has lost his money. By the time this deal came about most of the shareholders were just stock market speculators. We are not going to cry for those shareholders too much. They allow these abuses by lack of activisim. They understand they have more risk going into the investment. Where are the "Perp Walks"? There has been so little cooking of books in these financials that they are all innocent and there are no usual suspects? As far as dilution goes there is plenty of it at most all banks. WB has floated out 4 new preference issuances to the tune of $7 billion in the last year. The latest is a 10 year call, near 8% yielding adj rate. Their shareholders are last in line for a dividend & will most likely get cut. As soon as C got their Arab cash infusion they floated out their "F" at a near 8% as well. There have been dozens of these across the industry. In times of credit disruption like this no poorly managed industry is going to get funding on the cheap without a proper risk premium. This is bad news for the common shareholders expecting even decent dividends. Too bad for them if they did not or do not understand their risk.

[venividivici]

Monumentally disgusting! The greed and hide of these people take the breath away. But then rule number one of management has always been "management looks after management".

[drmalaka]

I agree that this is a bad deal for a WM shareholder but if you are a WM shareholder you deserve what you get. You have a great opportunity to sell today well above the 52 week low, so do it. Then again, anyone dumb enough to be holding this stock is the same person who thinks that when a bank raises capital it is good news. Step two: perhaps you should figure out why they had to raise capital?????

This is horrible news for shareholders, it is an admission that this bank is in crisis mode.

The risk to the investors is not as great as one would think. They received mostly notes and preferred stock, which if you equate this to the BSC scenario, would be pretty much guaranteed by the government.

So the investors will watch the stock they got stuck with go down as their notes and preferred keep getting paid dividends and interst. Several years from now perhaps the stock gets back up to $10 so overall the investment works out great for them.

Common shareholders beware. This is a cash infusion that is only positive for the new investors. It is horrible news for current investors.