Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



WaMu's $7 Billion Hospital Visit

Washington Mutual (NYSE: WM  ) , one of the most battered companies to stumble out of the subprime meltdown, will live to see another day. But it's hardly a time of celebration for the average shareholder.

The Seattle-based savings-and-loan company secured $7 billion in new capital under a deal struck with private-equity group TPG Capital and other investors. WaMu also announced that it would cut its quarterly dividend to a ceremoniously humorous $0.01 per share, down from $0.15, and expects a first-quarter loss of $1.1 billion, loan loss provisions of $3.5 billion, and net charge-offs of $1.4 billion. Ouch.

The need for such a mammoth lifeline doesn't come as a surprise to many. WaMu shares have been taken to the guillotine since the credit crunch began unfolding and have fallen more than 70% from the high they reached last June. Shares had ballooned over the past decade as subprime lending became the rage and land prices soared, but WaMu's overconcentration on the California and Florida markets proved to be a grisly choice. Just as Warren Buffett says, you never know who's been swimming naked until the tide goes out. And WaMu was caught with its swimming trunks down.

Painful medicine
Here's the tough pill that shareholders will have to swallow: $7 billion in new capital, especially at these low share prices, will significantly dilute every per-share calculation, including earnings per share, dividends per share, and book value per share. Existing shareholders will feel the pain long after the current credit woes fade away. Writedowns are one thing -- they're still painful, but at least they're short-lived. Raising new capital, on the other hand, will stick around to haunt shareholders for quite some time. By the time it works through the current mess, WaMu could nearly double its shares-outstanding count.

Citibank (NYSE: C  ) , Merrill Lynch (NYSE: MER  ) , Lehman Brothers (NYSE: LEH  ) , and Wachovia (NYSE: WB  ) , among others, have also raised significant amounts of capital over the past few months, but on a dilutive basis, WaMu's lifeline is noteworthy. With a current market cap of around $10.5 billion, the $7 billion in new capital is like the corporate equivalent of taking a mulligan on every shot on the golf course. "Oops, did we really do that? Our bad. Let's try again."

E*Trade (Nasdaq: ETFC  ) and Thornburg Mortgage (NYSE: TMA  ) have undergone similar headaches in the past few months. Credit issues forced them to raise so much capital that even after the storm cleared, the sun never came out again for shareholders. The real winners of these capital-raising campaigns often ends up being whoever the new investor is. TPG, for example, gets to purchase its new WaMu shares for $8.75, a discount of 25% to where they trade today. When times get tough, being one of the few investors with an armament of cash can pay off handsomely.

The future ain't what it used to be
What lies ahead for WaMu? Shareholders still need to approve the final deal. Odds are, they'll have no qualms about the new capital. Share dilutions aren't fun, but being short on cash in this market can be a fateful mistake. Once the new capital falls into place, WaMu hopes to be a sleeker, less risky company than before. Wholesale lending and all home-loan centers will be axed as part of a plan to reorganize and focus on retail banking, which isn't completely reliant on the real estate market for success.

Like many financial companies currently under distress, not being counted as another corpse seems to be the only bright news WaMu can find. Sure, the new capital will provide the company with more than enough cash to remain liquid and healthy going forward, but it also means the days of record profits and soaring share prices are probably a thing of the past.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. He appreciates hearing your questions, comments, and complaints. Washington Mutual is an Income Investor recommendation. The Fool's disclosure policy is all about investors writing for investors.

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 616651, ~/Articles/ArticleHandler.aspx, 10/24/2016 6:06:00 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,223.03 77.32 0.43%
S&P 500 2,151.33 10.17 0.47%
NASD 5,309.83 52.43 1.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
WAMUQ.DL $0.00 Down +0.00 +0.00%
Washington Mutual,… CAPS Rating: No stars
C $49.58 Up +0.01 +0.02%
Citigroup CAPS Rating: ***
ETFC $28.86 Down -0.64 -2.17%
E*TRADE Financial… CAPS Rating: ***
LEH $0.13 Down +0.00 +0.00%
Lehman Brothers Ho… CAPS Rating: *
MER.DL2 $11.64 Down +0.00 +0.00%
Merrill Lynch & Co… CAPS Rating: *
TMA $0.24 Down +0.00 +0.00%
Thornburg Mortgage CAPS Rating: *
WB.DL2 $5.54 Down +0.00 +0.00%
Wachovia Corp CAPS Rating: **