Rule hobbling suitors batters WaMu stock

Shares of Washington Mutual fell 29.7 percent to a nearly 18-year low Wednesday on concern a new accounting rule could hinder attempts to find a buyer.

WaMu stock dove 98 cents to $2.32, the lowest close since November 1990. The stock of the Seattle company, the nation's biggest savings and loan, has tumbled nearly 46 percent since the board Monday announced the ouster of CEO Kerry Killinger, and the shares are down 93 percent in the past year.

Potential acquirers ended talks to buy WaMu this year in part because the accounting rule would force buyers to compute a target's assets at market prices instead of deriving values from measures including the purchase price, two bankers involved with the talks said.

Rising unemployment and falling property values, meantime, will boost foreclosures.

"The revised rules will create additional hurdles for WaMu, and there are already plenty of hurdles," said Jaime Peters, an analyst at Morningstar in Chicago. WaMu is in "a tough place."

WaMu spokesman Brad Russell declined to comment on potential acquirers and the Financial Accounting Standards Board (FASB) rule.

Newly installed WaMu Chief Executive Alan Fishman, who sold the last bank he ran, said Monday a sale wasn't in the bank's future. "You don't build a company to sell it," he said.

Fishman was CEO of Brooklyn's Independence Community Bank, which was sold to Philadelphia-based Sovereign Bancorp in 2006.

Others aren't so sure.

"The market will likely view the removal of WaMu's former CEO as the last remaining hurdle for the board to consider pursuing a possible sale," Merrill Lynch analyst Kenneth Bruce wrote Monday to investors. Complicating a potential sale: "the poor quality of WaMu's loan portfolio."

The lender expects losses of up to $19 billion in the next two years, mostly from subprime and option adjustable-rate mortgages that borrowers may struggle to repay. Job cuts and declining U.S. home prices threaten to undermine Fishman's efforts to rebound from $6.3 billion in losses over the past three quarters.

WaMu had its credit-rating outlook cut Tuesday by Standard & Poor's, which cited concern that losses may exceed the company's forecast. Of WaMu's $309.7 billion in assets, 77 percent are from loans.

"We know they've got the loans and we know what the loans look like," said Gary Gordon, an analyst at New York-based Portales Partners. "The next issue is how does the economy and housing play out and what's the influence on those loans."

The new accounting rule could also be an obstacle. The FASB change, effective in December, may delay consolidation in an industry saddled with more than $500 billion in writedowns and credit losses.

"The new rule will curtail M&A by making it too expensive," said Robert Willens, a former Lehman Brothers Holdings accounting analyst and executive who teaches at Columbia Business School.

"With loans fetching their greatest discounts since the Great Depression, it sharply reduces the value of a target's assets," he said. "That will force an acquirer to raise additional capital in this very difficult environment."

The rule may create a situation where a bank that seems well-capitalized on its own wouldn't meet liquidity requirements if it were acquired because its loan values would fall, Morningstar's Peters said.

"In that case, the target's capital might not support the marks, and the acquirer could be forced to put in additional capital," she said.

FASB says the new rule will bring U.S. standards in line with those overseas.

The board first decided on its implementation last December, giving companies a year to incorporate the new standard into accounting procedures.

Information from Bloomberg News reporters Ari Levy, Jonathan Keehner and Linda Shen is included in this report.