Saving WaMu won't be easy even for experienced outsider

Alan Fishman, Washington Mutual's new chief executive, is nothing if not blunt.

Asked Monday what he can do for WaMu that former CEO Kerry Killinger couldn't, Fishman responded: "I have no idea. Probably nothing."

Though that was Fishman's way of complimenting longtime CEO Killinger, whose ouster was formally announced Monday, it nicely summed up the widespread doubts that any new chief executive — even one with Fishman's track record — can by himself get the beleaguered lender back on solid ground.

"A new CEO can certainly add energy and a fresh perspective to the issues that face a company struggling with the burden of significant problem assets," Moshe Orenbuch, a banking analyst for Credit Suisse, wrote Monday in a note to clients.

"However, [he] cannot undo the loans that have been written or the effects of the real estate cycle," Orenbuch wrote.

WaMu is staggering under the weight of billions of dollars in high-risk home loans it made during the now-collapsed housing boom. The Seattle-based lender has lost a stunning $7.9 billion so far this year, with more losses expected until at least 2010.

Although it has aggressively cut back on the riskiest categories of mortgage lending, it still has $129.3 billion in such loans on its books — each one a potential time bomb of default.

The company's primary regulator said Monday it would keep a closer eye on WaMu's operations, indicating concern.

Jaime Peters, an analyst with Morningstar in Chicago, noted that with nearly $310 billion in assets and more than 2,200 branches, WaMu is several orders of magnitude larger than Independence Community Bank, which Fishman ran from 2001 until he sold it to Sovereign Bancorp for $3.6 billion in 2006. And, she said, WaMu is one of the most troubled mortgage lenders in the country.

"This is something he's never seen before," Peters said. "He has a lot of skills, but it's going to take a very unique and disciplined individual to work through WaMu."

By not only pushing Killinger out but also bringing in someone from outside, WaMu's board was trying to do several things, observers said. Most immediately, the move sent a message to investors that WaMu is serious about rehabilitating itself.

"I don't think the board had a lot of choice in the matter," said Paul Hodgson, senior research associate for The Corporate Library, a research firm in Portland, Maine. "Everyone associates Killinger with the troubles, and even if he were doing a great job in undoing some of the damage, it's likely that shareholders just didn't believe in him anymore."

Indeed, WaMu's stock jumped in early New York Stock Exchange trading Monday on news of Killinger's ouster, rising as high as $5.12, up 20 percent, before falling back on worries about the company's long-term health. The shares bottomed out at $3.25, down 24 percent, before recovering and closing at $4.12 for a 3.5 percent loss on the day.

The main thing a new CEO — especially an outsider — can bring to a troubled company is fresh perspective, Morningstar's Peters said.

"You're going to have new eyes that can look at the same problems and come to different conclusions, without any of the historical 'This is what WaMu has always done' bias."

With less than 24 hours on the job, Fishman gave no hints that he planned a dramatic departure from the recovery plan Killinger had been pursuing: cut payroll and other costs, drastically pare back the home-loans division, and concentrate on doing more business with retail checking- and savings-account holders.

"I think you have in the branch network an irreplaceable, wildly valuable franchise that has to be nurtured and invested in, and you need to promote very heavily alongside it and through it," he said.

Whatever Fishman does in the coming weeks and months, it will be with federal regulators looking over his shoulder. WaMu announced Monday it had entered into a "memorandum of understanding" with the U.S. Office of Thrift Supervision (OTS) for several areas of its operations, particularly risk management and compliance.

WaMu also will have to give the OTS an updated multiyear business plan and forecast for profitability, asset quality, capital and business-segment performance. The plan will not require the company to raise capital or increase liquidity, WaMu said.

By itself, such a memorandum is an informal, low-level disciplinary measure, Peters said. But under the circumstances, she said, it indicates the OTS is worried about WaMu's health.

"They want to go through all WaMu's compliance and risk systems to make sure they're adequate," she said. "They want to be there so that if it looks like the company is about to go over, they can step in."

In a conference call with analysts, WaMu Chairman Stephen Frank — who took that position in June after the board stripped the title from Killinger — said the board had looked at both internal and external candidates to replace Killinger.

Jeffrey Krug, an associate professor of strategic management at Virginia Commonwealth University, said that given the mortgage market's near-collapse, an outside CEO could be more effective than an insider in dragging the company into a new era.

"When your entire competitive environment has changed and you have a top management team with a certain organizational inertia, bringing in an outsider can sometimes be a very effective means of altering their thinking," Krug said.

All things being equal, he said, an internal candidate might have been preferable, especially one with enough experience in several areas of WaMu's business to have developed his or her own ideas about what is needed

But none of WaMu's top executives fits that description. Of the 11 senior people immediately below Killinger, only one has worked at WaMu for even a decade. Six have been there fewer than five years.

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