Investors fret over WaMu's survival odds

"Think Happy Thoughts" was the subject line of Bob Bjorklund's morale-boosting e-mail to his staff in WaMu's Capital Strategies department Friday.

"It's going to be ugly out there today and over the next several weeks, but when in doubt, repeat after me; '$50 billion dollars!' "

The WaMu executive was referring to the bank's statement last week that it has more than $50 billion in available liquidity to pay depositors and make loans.

The e-mail, whose authenticity was confirmed by a WaMu spokeswoman, assured the portfolio manager's team that "WaMu is going to come out the other end of this craziness in great shape." As for the hedge funds and short sellers betting against WaMu, "we'll have the satisfaction of wiping out those shorts and they can taste some of their own medicine."

Wall Street apparently didn't get that memo. The stock of WaMu, the biggest U.S. savings and loan, tumbled 27 percent Monday on concern it won't be able to find new capital or a buyer to stay in business.

The shares dropped 73 cents to $2 as investors gauged whether the Seattle company can continue without fresh cash to cushion as much as $19 billion in bad mortgages over the next 2 ½ years.

The stock continued to fall in after-hours trading, dropping 20 cents, or 10 percent, to $1.80.

Lehman Brothers Holdings, beset by losses tied to home loans, filed for bankruptcy protection Monday after failing to find new funds or an acquirer.

"There's a very good chance that they are the next one to fail," Charles Lemonides, chief investment officer at Valueworks in New York, said of WaMu on Bloomberg TV.

The company has said it has enough capital and liquidity to stay in business, and new Chief Executive Alan Fishman has said he'll be able to turn the company around.

Sara Hasan, who covers Washington's smaller community banks at McAdams Wright Ragen in Seattle, said the market to some extent is "painting everybody with the same brush."

Bjorklund's memo makes a valid point, she said: that WaMu has the funds to keep its business running. What investors should be watching is its capital levels, a different pool of money eroded when the company records losses on loans.

WaMu's 80 percent slide in market value to $3.4 billion since March leaves the company valued at about what JPMorgan Chase was willing to pay at the time to buy the struggling lender.

WaMu rebuffed the JPMorgan offer, instead choosing an investment by private-equity firm TPG.

JPMorgan isn't in talks to buy WaMu, a person briefed on the matter said Friday.

An acquisition by JPMorgan would be "a strategic positive" for the New York firm, Morgan Stanley analysts led by Betsy Graseck said in a Sunday note.

Bank of America Chief Executive Kenneth Lewis, who this weekend agreed to acquire Merrill Lynch, told CNBC on Monday that he isn't interested in WaMu.

WaMu may be forced to sell all or part of itself to raise capital, say consultants including Bert Ely, president of Ely & Co. in Alexandria, Va. A buyer would also have to shell out an additional $1.38 billion to TPG, based on the terms of the deal the firm negotiated in April.

"My opinion is, yes, the company is for sale, if and when they can find a willing buyer," said Gary Townsend, CEO of Hill-Townsend Capital in Chevy Chase, Md. The buyer would be "one that's willing to pay enough to make the deal work."

Big drop

WaMu tumbled in the past six months, dropping 36 percent last week alone, a record decline, as the bank lost $6.3 billion tied to home mortgages. The lender ousted veteran CEO Kerry Killinger and disclosed that its chief regulator has told it to boost risk management and compliance.

Standard & Poor's cut WaMu's credit rating to junk Monday because of the deteriorating housing market.

S&P reduced its rating on WaMu to BB- from BBB-, leaving it three levels below investment grade, and cut its rating on the subsidiary bank to BBB- from BBB.

"Increasing market turmoil and the related impact from managing its concentrated mortgage franchise in this troubled housing and credit cycle led to the downgrade," S&P wrote.

The rating cut followed similar announcements last week from Moody's Investors Service and Fitch Ratings.

Responding to S&P's announcement, WaMu said, "It's important to note that S&P attributed its action to worsening market conditions, and not to any material change in the evaluation of Washington Mutual's financial condition."

Information from Bloomberg News is included in this report.