WaMu lifeline doesn't guarantee independence

The frustration Seattle residents feel toward Howard Schultz for selling the Sonics may be nothing compared with the potential legacy of Washington Mutual CEO Kerry Killinger. What's the move of a basketball team compared with losing a major corporate headquarters?

The $7 billion capital infusion led by private equity outfit TPG may have saved the nation's largest savings and loan. But for what future remains to be seen.

WaMu has long been an outlier: a major financial-services company not based in New York or Charlotte, N.C.; a savings and loan still growing nearly two decades after the thrift industry collapsed into one of the biggest financial debacles in history; an independent at a time of historic consolidation.

When times were good, this brought major benefits to Seattle. The company remade the skyline with two towers, including its 42-story world headquarters; backed the WaMu Theater at Qwest Field; and was instrumental in the Seattle Art Museum's expansion. It created thousands of good jobs.

Lately, it's meant layoffs — 3,000 more job cuts were announced Tuesday, on top of December's 3,300 set for elimination — and morale-killing uncertainty and distraction.

And the worst may yet come. If the financial sector falls deeper into the credit crisis, the capital infusion may not be enough to stem WaMu's troubles and a shareholder revolt.

WaMu's announcement of more job cuts, big losses and dividend reductions may only be the first of many pounds of flesh to be extracted.

But even if the infusion succeeds, it may lead to WaMu being sold any way and the loss of a major headquarters.

The first hurdle will be whether TPG made the right bet. Private equity, which in the early 2000s roamed the economy to buy and fix distressed companies, has proved itself painfully fallible in recent months.

It was highlighted by the collapse of the Carlyle Capital Corp., a unit of the once high-flying Carlyle Group private-equity firm, which became mired in $22 billion in mortgage-backed securities.

Texas Pacific Group, which has been around since 1992, claims $30 billion under management. It has the chops to send a message: After the Fed bailout of Bear Sterns and other major Fed infusions, the mortgage meltdown has hit bottom, or at least become clearer.

TPG is not a "rip, strip and flip" operation but usually takes positions for longer periods of time and leaves day-to-day management to the companies themselves.

Whether that management should be left to Killinger, the architect of the string of missteps that brought WaMu to the edge of the abyss, should make for interesting boardroom politics.

Killinger has counted on a friendly board; now two seats will go to TPG. It also remains to be seen if other big shareholders, who had considered mounting a challenge to the board, will be mollified.

TPG's historic patience may be under pressure, too. Along with Kohlberg, Kravis Roberts, it bought Texas power generator TXU (now called Energy Future Holdings) last year in a leveraged buyout that added $40 billion in debt. The revenue it expected from the utility's cash flow has proved disappointing.

Ultimately, TPG expects to provide a big return to its investors from its bet in Seattle. That will likely come from another company buying its stake or an acquisition. JPMorgan Chase reportedly was looking at WaMu.

Seattle may think it already has the scar tissue to withstand another headquarters loss, especially having survived the departure of Boeing when the bosses decamped for Chicago in 2001. But losing a bank headquarters is arguably more painful. The headquarters of major banks (and large S&Ls) are unique assets. They represent centers of capital and talent and are bulwarks of downtown real estate.

WaMu employs 4,400 in downtown Seattle alone. It would be a calamity for commercial real estate if whole floors of two buildings empty out.

Predictable pattern

I worked in Charlotte in the 1990s as that city's big banks gobbled up major regional institutions around the country. In every case, thousands of jobs in the old headquarters city were eliminated or moved to Charlotte. Not only were good jobs lost, but communities were severely destabilized.

Gone were the local CEOs who could write checks and knock heads to address community challenges. Gone was the local banking supply chain of vendors. Philanthropy and stewardship were badly diminished. In many cities, these benefits were never replaced.

Having seen banking consolidation build an Oz-like skyline in Charlotte, I then witnessed the other end of the pipeline in Phoenix.

It's the nation's fifth most populous city, but has no major bank headquarters. That helps account for the struggling downtown, a surprising lack of corporate-level jobs and a dearth of capital for businesses beyond real estate (now even that has dried up).

Seattle won't face such a dreary fall. Its economy is too diverse and deep, including in leading-edge industries.

Downtown leader upbeat

Kate Joncas, president of the Downtown Seattle Association, was upbeat about WaMu when I talked to her Tuesday, calling the infusion "good news" and "a commitment" to downtown.

But even if WaMu is ultimately lost, the downtown area is benefiting from new economy job engines, such as Amazon.com and the Bill & Melinda Gates Foundation.

Still, if the powerful forces of banking consolidation and investor impatience combine to take away Washington Mutual, the pain will last long beyond the last home game of the Sonics.

Jon Talton is a journalist and author living in Seattle. For more than 20 years he has covered business and finance, specializing in urban economies, energy, real estate and economics and public policy. You may reach Jon Talton at jtalton@seattletimes.com