Angels come to WaMu’s rescue
Shares of Washington Mutual Inc. soared almost 30% on Monday on news that private investors are close to a deal to pump $5 billion into the battered mortgage lender, offering hope that the financial industry’s fortunes could be turning around.
An investor consortium led by Fort Worth-based TPG, one of the country’s largest private equity firms, is in advanced talks to buy a minority stake in the Seattle-based savings and loan, according to a person familiar with the discussions. A deal could be announced in the next few days. Washington Mutual and TPG declined to comment.
The expected investment demonstrates not only the depth of the problems weighing on the mortgage and banking industries but also the increasingly bold efforts by well-heeled investors to capitalize on that distress.
The willingness of such buyers to commit to several recent deals, including JPMorgan Chase & Co.'s government-brokered purchase of Bear Stearns Cos. -- another victim of the mortgage meltdown -- could signal that the stock market’s deep sell-off since last fall is nearing an end, some analysts say.
However, some investors who during the current crisis bought into financial companies at depressed prices have been burned when the firms’ stocks kept sinking.
Washington Mutual grew into the nation’s largest S&L; through aggressive expansion over the last decade, and is prized for its brand name and extensive branch network, analysts said.
But the company, hobbled by its exposure to sub-prime mortgages, particularly in hard-hit California and Florida, needs money to shore up its depleted capital, and the proposed $5-billion investment could keep it out of the danger zone, analysts said.
“It’s good for shareholders in that the company will not in theory go bankrupt,” said Anton Schutz, manager of a financial-stock mutual fund for Burnham Asset Management.
Washington Mutual shares jumped $2.98, or 29%, to $13.15. Before Monday, the stock had skidded more than 76% since late 2006.
Citigroup Inc., Merrill Lynch & Co. and other large financial players all have received capital infusions, many from investment vehicles of foreign governments, as billion-dollar losses on mortgage-backed securities eroded the capital bases of Wall Street’s giants.
Although the economy may be in a recession and the mortgage crisis may worsen, the buyers are wagering that the long-term prospects of financial companies are bright.
“The mortgage industry is not going away,” said Bruce S. Foerster, president of South Beach Capital Markets, a financial advisory firm in Miami. “It’s the bedrock of America.”
But if a recession becomes severe or the housing downturn intensifies, TPG and other buyers could conclude they bought too early.
Bank of America Corp., for example, sank $2 billion into Countrywide Financial Corp. last August only to watch the No. 1 mortgage lender’s shares keep falling. In January, Bank of America doubled down with a deal to buy all of Countrywide. The pact has kept a bit of a floor under Countrywide’s stock price, but financial shares are trading lower than they were in January, and Bank of America has fended off speculation that it would try to back out of the purchase.
“There’s a ton of cash on the sidelines looking to get in and hit a home run,” said Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance-based financial research firm. “We’ve accustomed ourselves to thinking we’re going to have shallow recessions and a bounce, but what we’re dealing with this time around” is a protracted slump.
If losses further erode Washington Mutual’s capital, the $5 billion could be eaten through before the year ends, Whalen said.