Washington Mutual Teetering On Financial Edge

Washington Mutual, the nation's largest savings and loan, is up for sale. But would-be buyers seem to be taking a wait-and-see attitude toward the heavily indebted institution. The Bush administration's rescue plan for Wall Street could help it land a buyer.

LINDA WERTHEIMER, host:

Among the financial companies that have collapsed or been bought out in the last few weeks, one name remains in play, Washington Mutual. The nation's largest savings and loan is riddled with bad debt, and it's seen as a potential takeover target. The government's proposed bailout plan could make Washington Mutual more attractive, but would-be buyers are taking a wait-and-see approach. From Seattle, NPR's Wendy Kaufman reports.

WENDY KAUFMAN: Washington Mutual, commonly known as WaMu, made lots of subprime and other risky loans. As a result, it's expected to lose somewhere in the neighborhood of 20 to 40 billion dollars over the next three years. The company maintains it has adequate capital to absorb those losses, but neither Moody's, a major rating agency, nor the federal government think that's the case. So federal regulators who ramped up their oversight of WaMu earlier this month are pressuring the S&L to raise more capital quickly or sell itself to a stronger institution. The latter seems more likely. James Wilcox of the Haas School of Business at the University of California, Berkeley, explains regulators want to avoid another bank failure.

Dr. JAMES WILCOX (Professor of Financial Institutions, Haas School of Business, University of California, Berkeley): All the disruptions that this might cause and the cost that it might impose on the FDIC.

KAUFMAN: The Federal Insurance Fund would have to pay off the insured depositors. Moreover, says Wilcox, the government may want to prevent WaMu from taking on more risk in an effort to save itself.

Dr. WILCOX: The phrase that is associated with that idea is called gambling for resurrection.

KAUFMAN: Washington Mutual has valuable assets, primarily its huge banking business in the West, including the West Coast. It has 2,000 branches and, as of last month, roughly $140 billion in deposits. Senior banking analyst Frederick Cannon of Keefe, Bruyette & Woods says that western presence is very attractive to a number of big banks.

Mr. FREDERICK CANNON (Associate Director of Research and Chief Equity Strategist, Keefe, Bruyette & Woods): The natural purchasers that people look to has always been JPMorgan Chase that has branches almost everywhere else but the West Coast. And Citigroup, also, which, you know, while they have some in the West, they just don't have a real strong presence. So those two names have kind of long been floated.

KAUFMAN: Others who've reportedly shown at least some interest include Wells Fargo, big banks in Canada and Europe, even WaMu's own investment adviser, Goldman Sachs. Another possibility might be that more than one buyer takes over different parts of the company. With takeover rumors swirling, it's not surprising the stock has been gyrating madly, up 40 percent one day, down 25 percent the next. The percentage swings are so large because the stock is worth so little, between three and four dollars a share for most of the past two months. That's about 10 percent of what it was worth a year ago. It is difficult for would-be buyers to figure out exactly what WaMu is worth now. No one knows how big its losses could be. And analyst Jaime Peters of Morningstar says...

Ms. JAIME PETERS (Analyst, Morningstar): We need to find out what the Paulson bailout plan is, because no company who's looking to buy Washington Mutual can do the proper due diligence without knowing what the government could or could not do to help them out in this situation.

KAUFMAN: The government could also assist in the sale of WaMu by guaranteeing that it would pay for WaMu losses beyond a set amount. But right now, with things in so much flux, the potential sale of the nation's largest savings and loan appears to be on hold. Wendy Kaufman, NPR News, Seattle.

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