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What's Next for WaMu?

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Boy, what a wild 72 hours we've experienced. After Lehman Brothers' failure, AIG's (NYSE: AIG  ) fallout, and increasing pressure on Morgan Stanley (NYSE: MS  ) and Goldman Sachs (NYSE: GS  ) , thoughts that would have been unimaginable two weeks ago are reality now. The big question on everyone's mind is, who's next?

First, let's be clear: There's no indication Washington Mutual (NYSE: WM  ) is about to fail or file for bankruptcy anytime soon. What is clear is that turmoil in the markets puts every leveraged bank in the spotlight, and WaMu is now one of the top names attracting attention during these sea-changing events. The problem lies with WaMu's share price; as real estate prices get weaker and weaker, the need for WaMu to raise capital gets higher and higher. With a stock price that goes lower and lower, the odds it'll find its way into trouble go up and up. It's quite a mess.

The New York Post reports that the government is now actively seeking a buyer for the bank, and WaMu appears to be cooperating. In a report, a Merrill Lynch analyst says WaMu's board of directors would be open to seeking a merger with another bank, even if it meant sacrificing itself at a fire-sale price. After last week's downgrades, which left its debt rating at essentially "junk" status, management may be inclined to take precautionary measures before things get worse.

So if a sale is on the horizon, who would buy this beleaguered beast? According to the Post, federal regulators have contacted JPMorgan Chase (NYSE: JPM  ) Wells Fargo (NYSE: WFC  ) , and HSBC in the past few days, although we've yet to hear any official word from any of the banks.

One bank we can take off the table is Bank of America (NYSE: BAC  ) . With its acquisition of Countrywide earlier this year and the adoption of Merrill Lynch over the weekend, I think it's safe to say B of A's tapped out right now.

I'm tending to lean toward a merger with either Goldman Sachs or Morgan Stanley. The two remaining independent investment banks are getting hammered this morning as investors realize the days of stand-alone investment banks are numbered. They both need access to a stable deposit base, which is one of the only things WaMu has in its favor right now. Agreed, it's a long shot, but options are running thin for all remaining players these days.

Stay tuned. It doesn't look like this week's crazy events are over quite yet.

For related Foolishness:

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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  • Report this Comment On September 17, 2008, at 4:32 PM, sldfk wrote:

    Since your candidates are themselves in trouble and won't survive, how are they candidates?

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