WaMu Capital Infusion: Now That's Dilution

Washington Mutual’s (WM) shareholders must feel like they’re sitting at the tip of an auger, ground farther down with each unremitting turn of the screw.

Between WaMu’s enormous first quarter net losses and dilutive capital raises, the stock trades at $11.81, 74% below its 52-week high of $44.66. And while yesterday’s $7.7 billion capital raise reduces the risk that this unwieldy thrift may fail, accelerating credit losses make it foolhardy to conclude that the company is past its crisis.

By selling new common shares at $8.75 per share, the capital raise is highly dilutive to legacy shareholders, stripping more than 50% of their ownership interest and reducing by 25% estimated first quarter tangible book value, to $11.60 from $15.55 at year-end. Its noteworthy that David Bonderman, a founding partner of Texas Pacific Group, beat out a competing $7 billion bid from J.P. Morgan. Perhaps TPG’s bid was more friendly, with fewer adverse implications to WaMu’s management team. Bonderman was an investor in American Savings Bank, which WaMu purchased in 1996. He rejoins a board on which he last served in 2002.

Its credit outlook is worse. In yesterday’s press release, WaMu disclosed that credit losses accelerated in the first quarter. It estimates a $3.5 billion provision for loan losses (compared to $1.5 billion in fourth quarter) and $1.4 billion in net charge-offs, up from $747 million the prior quarter. The company doesn’t say, but its large home equity ($57 billion and about 26% of outstanding loans) and subprime residential mortgage loan ($20 billion) portfolios are the likely sources. If credit losses rise much beyond 4% of loans, WaMu may again find itself short of sufficient regulatory capital.

In short, the Killinger-led management team that has visited this catastrophe on WaMu’s shareholders keeps its job, giving up remarkably little. The credit outlook remains precarious. This stock remains too dear, in my opinion, and is likely to trade soon at a steep discount to its tangible book value.

Comments

[venividivici:]

The management at WaMu would have to win some sort of award on Wall Street. They have looked after their own interests magnificently in the face of a total catastrophe for the company and they still all have their jobs, undoubtedly with bigger bonuses to come. Maybe they should get an inaugural "Gordon Gecko" award. Then again, it would be incredibly competitive.

2008 Apr 11 07:29 AM

[Joe E:]

WaMu is in deep doodoo. I think we can blame management for focusing with laserlike tightness on the growth objective and ignoring basic banking skils like credit analysis. However, holding on to your job at a failing S+L is not as much fun as many believe, especially when you have to continually come up with new reasons why it wasn't your fault.

2008 Apr 11 09:07 AM

[jackooo:]

For the money the management team is making I could come up with reasons it wasn't my fault forever.
Just keep buying the shares......

2008 Apr 11 12:11 PM

[RWCMom:]

As a shareholder, I, sadly, must make a decision on whether to approve the proposals to increase the number of shares (or not). I'm inclined to vote against to send a message that I'm not happy with management; I hope others do the same.
Claire

2008 May 28 06:57 PM

[muley101:]

I have been making good money day trading WAMU by selling into any pitiful rally the stock tries to muster. It's easy, just watch the money flow, volume, and &R start to rise. Then, buy and set your profit exit at 1%. WAMU is a money tree financed by the fools who believe the stock will recover.

2008 Jun 05 10:00 PM