WaMu's woes put leaders on hot seat

The mortgage industry's gusher of bad news knocked two leading Wall Street CEOs from their perches in the past two weeks.

As each company's tally of billions in losses surged upward in recent months, their stocks tumbled and investors looked for someone to shoulder the blame.

At Merrill Lynch, shares were down 23 percent this year when the board gave Chief Executive Stan O'Neal his walking papers. At Citigroup, the stock had fallen 40 percent when Charles Prince resigned as chairman and CEO.

At Washington Mutual, also struggling to find the bottom of its mortgage problems, shares this year are down 55 percent through Friday.

The differences may outweigh the similarities. But bank analyst Sara Hasan, who sees WaMu's downtown Seattle headquarters from the nearby offices of McAdams Wright Ragen, says she's hearing from investors "lots of questions about whether the company needs new management, or whether they will be able to pull through it."

More extreme is the CNBC money loonie, Jim Cramer, who last Monday slapped WaMu Chairman and CEO Kerry Killinger atop the "Mad Money" Hall of Shame.

He wound up a classic Cramer rant, laced with off-the-cuff insults ("Believe me, it's not easy to be that bad"), by urging that Killinger resign at an analyst briefing two days later.

(For balance, perhaps, Cramer in a separate diatribe last week branded New York Attorney General Andrew Cuomo "a genuine communist" for drawing loan buyers Fannie Mae and Freddie Mac into his inquiry over allegations that WaMu pressured appraisers to inflate valuations on properties.)

Last Wednesday's analyst briefing, which was followed by a 17 percent plunge in WaMu shares, featured only one tame question about the board's attitude toward management's performance. The answer was even blander. Killinger assured analysts that the turmoil is "masking the fundamental underlying strengths of this company."

But after a decline that's lopped seven years of growth off the stock price, one longtime local WaMu watcher who is not an analyst says, "The pressures on the board have got to be growing."

He adds, "I'd be surprised if we got through this without a head rolling" at some level.

Others are quick to point out what separates WaMu from Citi and Merrill. The latter are diversified, global companies, so shareholders could ask how a CEO allowed one corner of the business — packaging mortgage investments — to sink the rest.

For WaMu, by contrast, mortgage lending is front and center. Though its repeated increases in projected losses may have cost management some credibility, says Hasan, "It's hard in this situation to finger the blame on any one person because so much of it is a cyclical business, and this is a down cycle."

Killinger has ridden out such cycles before — one in the late 1990s cut the stock value in half, she adds.

Standard & Poor's equity analyst Stuart Presser echoes that view: "Anytime you have a stock down by that magnitude, obviously investors are upset. But it's hard to say that if you had someone else at the helm it would have been any different."

WaMu's top two leaders are of similar ages but radically different vintages. The 57-year-old Killinger practically invented the company, becoming CEO in 1990 and taking it on an acquisition tear that made it a national phenomenon. The 53-year-old president and chief operating officer, Steve Rotella, joined in 2005 from JP Morgan.

"Killinger in a way is the bank, much the way Gates is Microsoft," said the local WaMu watcher.

Presser gives the WaMu executives a fair amount of credit, though he put a "sell" rating on the company in March: "They did try to scale back their (loan) origination quicker than their competition — they saw this coming. They moved into another business when they purchased (credit-card issuer) Providian. Those were positive moves."

And even if management was slow to give full recognition to its loan problems in hopes that things would turn around, he says, "A lot of companies on Wall Street have been guilty of that. ... I don't think that's any cause for heads to roll."

It would be different, analysts agree, if anything in Cuomo's probe ties bank executives to improper appraisal practices. "I would hope the board would have a low tolerance for that," says Hasan.

Compared to Killinger, the WaMu board consists of relative newcomers. Only three of the 12 other directors have been on the board since 1991, when he became chairman.

That suggests a very different dynamic than at Citigroup or Merrill, where the CEOs, though longtime company executives, were only promoted to their current jobs within the past five years. Both execs reportedly had other issues with their boards, as well. And Citi had an éminence grise in the form of former CEO Sanford Weill, ready to engineer a transition.

Pressures at WaMu are likely to increase before they abate, as the appraisal investigation drags on and loan losses pile up. Some analysts this past week predicted those losses would hit $4.9 billion to $5 billion in 2008, up from perhaps $2.9 billion this year.

But outside of the talk on cable TV, there are few signs that investors are ready to jettison WaMu's leadership.

Still, the uncertainty over WaMu's short-term future is palpable. After the four-hour investor meeting one respected analyst, Paul Miller of Friedman Billings Ramsey, on Thursday slashed his price target from $23 to $14. Another, Jim Bradshaw of D.A. Davidson, set his target nearly 50 percent higher, at $20.

rgrunbaum@seattletimes.com or 206-464-8541