Washington Mutual Announces Major Layoffs and Closings

Years and years ago when the aerospace industry was in a tailspin and Washington-based Boeing was particularly hard hit with cancelled contracts and layoffs someone paid to have a billboard erected on a busy highway that said:

Just can't imagine why that memory surfaced last night as yet another financial institution, this one the nation's largest savings and loan, announced that it too was more massively wounded by its recent enthusiasm for subprime lending than it had previously admitted.

Late Monday, after the market closed of course, Washington Mutual announced that, in an attempt to raise cash, it will conduct a $2.5 billion convertible preferred stock offering. It will also close 190 of its 336 loan centers and sales offices, lay off more than 3,000 employees and set aside up to $1.6 billion for loan losses in the fourth quarter.

The company also announced that it was getting out of the subprime business entirely and would close the division that markets its mortgage-backed securities, relying instead on third-party brokers.

And it is slashing its dividend 73 percent, from $.56 to $.15 for the quarter.

In September WaMu admitted to some potential problems when it announced it was laying off 1,000 employees and curtailing much of its subprime lending. However, as recently as November spokespersons were saying the company had no plans to reevaluate its dividend until after the first of the year.

In the latest round of job cuts 2,600 positions will be eliminated from the home loan category and 550 will come from corporate and support positions. The company hopes that the job reductions and office closings will eliminate $500 million in non-interest expenses.

The company also said that during the first quarter of 2008 it expects loan losses to total $1.8 billion to $2 billion and that its losses will continue to remain high throughout the whole of next year.

In a Form 8-K filing with the Securities and Exchange Commission WaMu said that, from its announced public offering, it intends to contribute up to $1.0 billion of the proceeds to Washington Mutual Bank, its principal bank subsidiary, as additional capital and retain the remaining net proceeds for general corporate purposes.

According to The Wall Street Journal, WaMu's portfolio has the most exposure to risky loans of any of the top five mortgage lenders. 29% of its 2006 loans are in the high-cost category, mostly subprime, and 15% are backed by homes other than the owner's primary residence. Mortgages on second homes and speculative properties are considered more vulnerable to default.

The proposed stock offering came only hours after European mega-bank UBS AG, also battered in the subprime market, said it would sell $11.5 billion in stock to the Government of Singapore Investment Corporation and an unidentified investor in the Middle east. This was only the latest in cash infusions from investors intended to shore up troubled financial institutions. Citigroup recently received $7.5 billion from Abu Dhabi investors in return for 4.9 percent of its value and both Freddie Mac and Fannie Mae have planned or implemented huge stock sales.

The Associated Press said that, while WaMu's offering has not been priced, the company is hardly sitting in the catbird seat when it comes to dictating terms. Citigroup will be giving its Abu Dhabi investors an 11 percent annual yield and Freddie Mac's new stock has a fixed dividend of 8.375 percent - nearly 2 points higher than a previous sale of preferred stock in September.

WaMu closed out the trading day at $19.88, up $.85. In overnight trading the stock lost 10 percent on the Frankfort Market.

Several investor services including Moody's and Fitch downgraded rates for WaMu. Moody's said their action was "based on its view that credit losses from WaMu's mortgage operations will be noticeably higher than previously estimated" and that the company might not return to profitability until 2010.

Within hours of the announcement of cuts and cash raising analysts were speculating that WaMu might be sold.

One wonders who may be left to buy it.