WaMu stock rebounds on rumors of sale

Over the past dozen years, Washington Mutual has built itself into a nationwide financial powerhouse through a series of acquisitions. Now, speculation is rife that the troubled Seattle-based lender may itself be bought out.

On Friday, CNBC reported, without citing sources, that WaMu has been in "very preliminary talks" with JPMorgan Chase about a deal. "No deal is imminent but the talks were held fairly recently," the cable channel said.

That report, along with word that Bank of America was buying Countrywide Financial, was enough to send WaMu shares sharply higher. The stock, which had sunk to a nearly 12-year low Wednesday, gained 53 cents Friday to close at $14.69; with Thursday's $1.82 gain, that was a two-day rise of 19 percent.

Chase has long been rumored to be interested in WaMu, primarily for its extensive branch network. The New York bank has been burned less by the mortgage debacle than many of its peers, and Chase executives have publicly stated that the bank wants to expand in faster-growing parts of the country such as the West and Southeast.

On the local level, any sale of WaMu likely would mean the loss of many headquarters and back-office jobs. As of last year an estimated 5,000 WaMu employees worked at the company's namesake headquarters on Second Avenue, though WaMu's recent spate of layoffs means that number likely is lower now.

But formidable obstacles remain to any deal — not the least WaMu's battered balance sheet and its heavy exposure to the kinds of loans that run greater risk of borrower defaults.

WaMu spokesman Darcy Donahoe-Wilmot declined to comment on the reports late Friday.

WaMu, one of the nation's biggest home lenders, has been ravaged by the nationwide housing slump, the rise in defaults and delinquencies, and the collapsed value of its mortgage-backed securities.

Through the third quarter of 2007, WaMu set aside $1.57 billion to cover loans gone bad. It will set aside at least $1.5 billion for the fourth quarter, and up to $8 billion this year.

WaMu will report financial results for the fourth quarter and full-year 2007 on Thursday.

Any potential acquirer would have to weigh the attractive parts of WaMu's business — notably its 2,200-plus branches in 15 states — against the risk that its mortgage portfolio could deteriorate further.

The delinquency rate on one of WaMu's signature products, so-called "option ARMs" — adjustable-rate mortgages that let borrowers defer interest payments — has almost tripled over the past year, to 1.74 percent of all such loans.

That may not sound like much, until you realize that WaMu has $57.8 billion in option ARMs on its books.

Add that to the thrift's $59.1 billion in regular home-equity loans, $17.3 billion in subprime mortgages and $2.7 billion in subprime home-equity loans, and well over half of WaMu's entire loan portfolio is in higher-risk categories.

Over the past 12 months, shares of WaMu have tumbled by more than two-thirds, increasing speculation it could become a takeover target.

Those rumors gained force when Bank of America confirmed it was buying Countrywide — an even more troubled mortgage lender that earlier this week was widely rumored to be heading for bankruptcy. But investors hoping for a takeover premium likely will be disappointed. The $4 billion price tag on Countrywide works out to just $7.16 a share — 7.6 percent below Countrywide's closing price Thursday. Countrywide closed down $1.42, or 18.3 percent, to $6.33.

Analysts who follow WaMu say there are few if any likely buyers other than Chase.

Bank of America will have its hands full with Countrywide. Citigroup's own financials are weak enough that it sold 4.9 percent of itself to the Abu Dhabi Investment Authority for $7.5 billion. And other U.S. banks likely are too small or too troubled.

Nor would foreign banks likely want to enter the U.S. mortgage business while it's in free fall.

Earlier this week, WaMu rewrote compensation rules governing what CEO Kerry Killinger and other top executives will be paid if they leave or if the company changes hands; WaMu said the rewrite was a response to new tax rules and wouldn't increase the potential payouts in the event of a takeover.

Drew DeSilver: 206-464-3145

or ddesilver@seattletimes.com