Talk of $5 billion infusion drives WaMu shares higher

Washington Mutual, the country's largest savings and loan, is close to landing a $5 billion cash infusion from private equity group TPG and other investors, a source said Monday.

Wall Street cheered news that WaMu may join a growing list of battered financial institutions that have secured needed cash since the credit crisis began last summer. Shares jumped 29.3 percent, or $2.98, to close at $13.15 Monday.

The investment would give TPG, formerly Texas Pacific Group, a mix of common and preferred stock, totaling less than 25 percent of WaMu's outstanding shares, according to the source, who asked not to be named. TPG also would get a seat on WaMu's board.

Other investors include existing WaMu institutional shareholders and other private-equity groups, the source said.

Shares of the Seattle-based thrift have come under heavy fire as problems in the housing and credit markets deepened. WaMu's stock shed nearly 70 percent in 2007, and the sinking value of WaMu's mortgage portfolio and soaring loan-loss provisions — the amount it socks away to cover bad loans — led to a $1.87 billion fourth-quarter loss.

If the deal goes through, WaMu will be one of the first retail banks to accept billions in outside funding, with hopes of distancing itself from the subprime crisis. So far, it has been mostly investment banks holding huge positions in bad mortgages that are roaming hat in hand.

Merrill Lynch announced in January it would take $6.6 billion from three foreign-investment funds. Morgan Stanley sold a portion of itself to China Investment Corp., an investment arm of the Chinese government, for $5 billion in December. In November, Citigroup took $7.5 billion from the Abu Dhabi Investment Authority in exchange for up to 4.9 percent of its equity.

Banks also are issuing new shares to boost capital. Last week, Lehman Brothers Holdings raised $4 billion in a stock offering and Swiss bank UBS announced plans to seek $15.1 billion.

Executives have said fallout from the mortgage crisis would continue to slam WaMu's finances through 2008, and warned that up to $8 billion more will be needed this year to cover future loan losses.

As of Friday, WaMu's stock had fallen an additional 25 percent in 2008.

TPG'S possible investment suggests its chief executive, David Bonderman, believes the slide in financial stocks may be over, said Arnold Danielson, chairman of Danielson Capital, a Vienna, Va.,-based adviser for financial-services companies.

"They apparently view this as a way to invest in WaMu with the idea of looking for a good flip within two or three years," he said. "WaMu is essentially a savings institution that has been trying to play with Bank of America and Wells Fargo and they can't keep up."

As a WaMu director from January 1997 through December 2002, Bonderman knows WaMu Chief Executive Kerry Killinger well and isn't likely to push for a management change, Danielson said.

While Killinger, 58, led WaMu from a thrift with less than $500 million in assets to its current size, "I suspect he realizes he doesn't have 10 more years, so he's looking for as good of an ending as possible," Danielson said.

Analysts have been bearish about Washington Mutual's prospects because of higher credit costs.

Frederick Cannon of Keefe Bruyette & Woods told clients last week he estimates the company will post a loss of $3.15 a share this year, compared with his earlier prediction of $1.45.

WaMu is likely to report expenses from soured home loans of $10 billion this year and $7 billion in 2009, Cannon said.

"We're telling our investors to be very careful until we know the details of this recapitalization," Paul Miller, an analyst at Friedman Billings Ramsey, said in a Bloomberg TV interview. "We're at $9 billion to $10 billion in losses now and we don't know how bad it's getting out there."

Separately, Proxy Governance said Monday it is joining proxy advisers CtW Investment Group, RiskMetrics/ISS and Glass Lewis in opposing the re-election of some WaMu directors, citing the company's mounting losses from home loans and executive pay decisions.

Material from Bloomberg News is included in this report