WaMu: layoffs, losses — and worst isn't over

The deep, dark well that Washington Mutual finds itself in just gets deeper and darker, and the climb out looks harder and harder.

Seattle-based WaMu, one of the nation's largest home lenders, announced a major restructuring of its mortgage-related businesses Monday and all but wrote off 2008 as a lost cause. Any meaningful recovery from the housing and mortgage meltdowns now seems a long ways off.

Nearly 3,300 of WaMu's 50,000 workers will lose their jobs by the time the restructuring is complete at the end of March, including 380 in metro Seattle and 160 elsewhere in Washington state.

Looking beyond the layoffs, office closures and the slashed dividend WaMu announced Monday, Wall Street observers focused on the eye-popping sums the company said it now plans to set aside for bad loans this quarter and next — up sharply from just a month ago.

Banking analyst Jim Bradshaw, of the D.A. Davidson brokerage in suburban Portland, said WaMu's latest turnaround measures mean the company will be lucky to turn a small profit next year — at best, less than a penny per share.

"Next year's earnings are pretty much wiped out," he said.

WaMu said it expects to put aside anywhere from $7.2 billion to $8 billion next year for bad loans, compared with an estimated $3.1 billion to $3.2 billion this year and $816 million in 2006.

The home-loan business, where most of WaMu's problems are found, will bear the brunt of the cuts announced Monday:

• About 190 of WaMu's 336 home-loan offices will be closed, including six in metro Seattle.

• Nine processing centers and call centers supporting the home-mortgage business will be shuttered, including a center in Bellevue that employs 110 people. A total of 2,600 workers in the home-loan business will lose their jobs.

• WaMu will stop making subprime mortgage loans entirely, after ratcheting down that business substantially earlier this fall.

• WaMu Capital, the company's in-house brokerage that bought and sold mortgage-backed securities, will be shut down. The unit employs an estimated 125 people in New York City.

• WaMu's warehouse-lending operation, which lent money directly to mortgage companies, also will be closed.

• Some 550 corporate and other support jobs will be cut.

Rumors and tension filled WaMu's home-loan offices Monday afternoon, as workers anxiously waited to hear whether their jobs were safe.

"We had no clue this was coming," said one Seattle-area loan consultant who has worked at WaMu for five years. "We've heard some of the people in higher positions are losing their jobs, managers who that never would have happened to in the past. That has us scared."

Another Seattle-area loan consultant said she joined WaMu in March, seeking job security, but was laid off on Monday. "I think it's heartless," she said by phone while packing her belongings. "I know we've had it rough, but I was worried about getting production up. I guess this industry doesn't have any security."

That may have been the understatement of the year. With house prices and sales volumes dropping across much of the country, more and more homeowners are defaulting on their mortgages — and not just the "subprime" loans that have garnered most of the public attention.

That has eroded the secondary markets for mortgages, cutting off a major source of cash for new loans and leaving WaMu and other lenders holding piles of mortgages of dubious value. The credit squeeze has undermined WaMu's financial structure and led some to question the company's survival prospects.

Last month, WaMu executives said they'd set aside $1.1 billion to $1.3 billion this quarter to cover bad loans, and a similar amount in the first quarter of next year. But on Monday, the company raised those estimates to $1.5 billion to $1.6 billion this quarter, and $1.8 billion to $2 billion next quarter, with similar charges to follow in the final three quarters of 2008.

The company also said it will take a $1.6 billion after-tax charge to write down all the goodwill associated with its home-loan business — guaranteeing a net loss this quarter.

Shareholders' pain

WaMu's shareholders will share the pain. The company's quarterly dividend — at 56 cents a share one of the richest in the industry relative to its stock price — will be slashed to 15 cents a share starting next quarter.

The dividend cut, widely expected on Wall Street, will save WaMu nearly $350 million a quarter, or $1.4 billion a year.

To raise needed capital to shore up its balance sheet, WaMu also said it would sell $2.5 billion worth of convertible preferred stock. That will be WaMu's second big capital infusion in recent months; in October it sold $1 billion in trust securities.

But getting that cash likely will come at a higher price than WaMu would have paid even a few weeks ago. Moody's and Fitch, two of the three big credit-rating firms, cut their ratings on WaMu Monday, raising the big thrift's borrowing costs.

WaMu made its announcement minutes after regular trading ended on the New York Stock Exchange. The shares had gained 85 cents, as many stocks were buoyed by the prospect of another Federal Reserve interest-rate cut.

But in after-hours trading, WaMu shares fell $1.76, or 8.85 percent, to end at $18.12 — likely foreshadowing rough going when regular trading resumes today.

Seattle Times business reporter Melissa Allison contributed to this story.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com