Another Blow for WaMu

Rushing its quarterly earnings up a week to quell investors' nerves didn't work for Lehman Brothers (NYSE: LEH  ) earlier this week ... will it work for Washington Mutual (NYSE: WM  ) ?

It sure doesn't look like it.

After releasing a mid-quarter update on the health of its books, the besieged bank had its credit downgraded by Moody’s (and later by Fitch), posing yet another roadblock for the bank, which now trades as if it's essentially headed for failure. Credit downgrades will raise the cost of WaMu's capital. That's one of the worst situations it can face after massive write-offs and a neverending blitz of investor worry over its ability to survive.

WaMu's mid-quarter update shed a little light on what investors can expect for the third quarter, and it ain't good. Among the "good" news WaMu announced: Expected charge-offs would grow less than 20% (compare that to the 60% growth in the second quarter), and provisions for loan losses will come in at $4.5 billion, down from $5.9 billion last quarter. Is this good news? It's better news, but let's keep things in perspective: It's still dreadful. WaMu is still saddled with tens of billions of loans made to people who can't afford them, backed by homes worth a pittance of their original loan value. That hasn't gone away, and it won’t until a tsunami of write-offs ensue, or until home prices begin to stabilize -- the former being bad news, the latter being a fat chance.

No matter: WaMu's fighting back over the credit downgrades, reminding investors that it's more than adequately capitalized and has ample liquidity to see it through the storm. In a statement released shortly after the downgrade, WaMu stated, "We believe that Moody’s decision to reduce the ratings of Washington Mutual ... to below investment grade is inconsistent with the company’s current financial condition." It added, "The action by Moody’s appears to reflect the current uncertainty in the markets, rather than a thorough evaluation of Washington Mutual's business, the strength of its national franchise and the steps it is taking to return to profitability."

That may very well be true, but in actuality, WaMu just highlighted its own dilemma. Indeed, the downgrade probably did reflect the market's current uncertainty ... but that's exactly what can bring WaMu to its knees. Uncertainty in the real estate market leads to further declines in home values. Uncertainty in the stock market leads to the inability to raise new capital. Uncertainty in the economy might scare off possible buyers like Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and Wells Fargo (NYSE: WFC  ) . When your business relies on a steady stream of confidence and capital, dismissing market uncertainty is ridiculous; it’s like a politician running for office dismissing the importance of public opinion.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.


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