On Monday it was rumored that a struggling Washington Mutual (WaMu) would be getting a cash infusion of $5 billion from a private equity firm to help it weather the subprime mortgage storm. On Tuesday that amount had morphed to $7 billion in additional capital from the sale of company stock.
The nation's largest savings and loan announced that TPG, Inc and a consortium of other investors were investing that amount in the company. WaMu, however, is far from out of the woods.
The company also announced that it will have a 1.1 billion quarterly loss and will undergo substantial job cuts.
Washington Mutual will close all of its 186 home loan offices and will no longer acquire home mortgages from brokers. The company will continue in the home lending business but all mortgages will be originated through its retail locations. Closing the offices and other cost cutting moves will eliminate 3,000 jobs although some of the mortgage workers will be offered positions in the retail locations.
The company will set aside $3.5 billion this quarter for anticipated loan losses, nearly twice what analysts had projected, and said charge-offs will amount to $1.4 billion. Losses in the fourth quarter of 2007 had totaled $1.87 billion.
The funds were raised through the sale to TPG and its partners of 176 million shares of common stock at $8.75 for a total of $1.54 billion and an additional $5.5 billion of convertible preferred shares with an initial conversion price of $8.75. As part of the deal TPG will also get a seat on WaMu's Board of Directors. The sale will substantially dilute the value of shareholder ownership in the company, but the fresh capital may remove it from the category of "low hanging fruit" for an unfriendly takeover.
WaMu will also reduce its quarterly dividend to a token 1 cent per share from the current 15 cents. This is the second dividend cut in four months; the company slashed its dividend in the fourth quarter of 2007 by 72 percent. The pending dividend reduction will reportedly save the company $490 million per year.
The Wall Street Journal" quoted sources as saying that, unlike last month's bailout of Bear Stearns, government regulators were not directly involved in the TPG/Washington Mutual deal.
However, The Journal also reported that Bear Stearns' "savior," J.P. Morgan Chase had been in negotiations with Washington Mutual to acquire the company, talks that reportedly were suspended last week.
The company's position is still precarious. In addition to its looming losses, The Journal quoted analyst Paul Miller who warned in a research note last month that many big banks are experiencing growing ratios of non-performing assets to risk based capital and that WaMu had among the highest of these ratios, at that time 21.8 percent.
The company, which was among the more aggressive in the subprime lending market, also has a substantial portfolio of no interest and negative amortization loans and faces heavy exposure in Florida and California, states which lead the nation in foreclosures.
The value of WaMu's stock had gone up substantially on Monday based on the capital infusion rumors but dropped on the announcement of even more money coming in. By early Tuesday afternoon the stock was trading at $11.89, down $1.26 from Monday's close.