Mortgage crisis still squeezing WaMu

NEW YORK --
Washington Mutual says it will take another multibillion write-down for bad bets on mortgage securities but insists it has adequate capital to fund its operations amid concern about the thrift's financial stability.

The Seattle-based bank expects its provision for bad loans in the third quarter to be $4.5 billion. Of that amount, $3.4 billion is for residential mortgages. Both totals are down from 2008's second quarter.

The company, like many others on Wall Street, has suffered from investments in risky mortgage securities and other assets and has seen its stock price drop about 80 percent this year.

The thrift said it has ''sufficient liquidity and capital to support its operations while it returns to profitability.'' WaMU posted a loss of $3.3 billion in the second quarter.

Its shares staged a late rally Thursday, recouping some of this week's steep losses as investors pumped money back into the banking sector despite ongoing concerns.

The stock jumped 51 cents, or 22 percent, to end the day at $2.83, after earlier falling as much as 25 percent to $1.75. Shares were down in after-hours trading, dropping 11 cents, or 3.9 percent, to $2.72.

Wall Street's edginess over the fate of major financial firms was fanned by Lehman Brothers Holdings's plans announced Wednesday to sell a majority stake in its investment management unit, spin off its commercial real estate assets and slash its dividend. The nation's fourth-largest investment bank also said it lost $3.9 billion during its fiscal third quarter.

WaMu, likewise, has seen its market value wither, as it battles rising mortgage delinquencies and defaults. Its shares have fallen more than 90 percent since early July of last year, right before the rapid erosion in the credit markets began.

Federal banking regulators, who earlier this week ratcheted up their scrutiny of Washington Mutual, are closely watching the thrift's condition.

''We're aware of it and we're monitoring it,'' said William Ruberry, a spokesman for the Office of Thrift Supervision.

`CAN IT SURVIVE'

With losses in its mortgage portfolio expected to peak at $19 billion, the bank could be Wall Street's next casualty, some analysts believe. ''The question becomes can it survive if it has billions and billions of dollars left to write down on those loans?'' Ladenburg Thalmann analyst Richard Bove said. ``What's going to keep it in business, what is going to keep it alive?''

''WaMu made mistakes in loan originations, to be sure, but it also had bad luck in that the bulk of its loans are in California,'' which has suffered some of the steepest declines in home prices and largest number of foreclosures, said Stuart Feldstein, president of SMR Research.

He notes that WaMu expanded in the late 1990s by buying two of the largest thrifts in California, Home Savings of America and its rival Great Western Bank, ``in a mad acquisition spree by ex-CEO [Kerry] Killinger.''

''It was an opportunity for him to grow quickly, but in retrospect -- and hindsight is easy -- they should have had a little more geographic dispersion,'' Feldstein said. ``He had to sit back and cross his fingers that nothing ever went bad in California.''

WIDENING SPREADS

One thing working in WaMu's favor is its valuable deposit base. Bove suspects management is ''scrambling to find a buyer.'' One sign that the bank might be in trouble is its widening credit spreads, evidence that investors think the debt is riskier.

Washington Mutual's spreads are greatly wider than Lehman's -- and Lehman's spreads are already wider than those of Bear Stearns Cos. shortly before its demise in March, according to Len Blum, managing director at investment bank Westwood Capital.

WaMu does not typically comment on share price, market speculation or ratings agency actions, said spokeswoman Olivia Riley. She also said the bank does not generally talk about credit spreads midquarter.

WaMu took a number of hits this week, starting with the removal of Killinger on Monday.