WaMu's fortunes tied to the company it keeps

Last week shares of Washington Mutual returned to the dog days of July, falling below $4, a stunning collapse from $39.25 a year ago. One would have to go back to 1990, to a much smaller, younger company, to match that low price.

Yet what most recently shoved the shares down was nothing directly related to the nation's largest savings and loan. Instead, the culprits were other institutions: American International Group, the giant insurer, facing major losses because of mortgage write-offs, and ailing Lehman Brothers, once a Wall Street titan, struggling to find a buyer. All banking stocks suffered.

This is not a problem for federally insured depositors, nor does it say anything about the safety and soundness of Washington Mutual. It does, however, raise a troubling new scenario for executives working to fix the company.

In addition to being largely powerless to reverse the housing collapse, they are lashed to a toxic banking industry that continues to hemorrhage bad loans. Nine banks have failed this year. WaMu's strategic blunders remain the primary cause of its troubles, but the downdraft in banking as a whole will make a comeback even more difficult.

To put it in the terms of the real-estate industry it helped stoke, Washington Mutual lives in a bad neighborhood.

The thrift's leadership has long warned that it was at sea in what Chief Executive Kerry Killinger last month called the unprecedented conditions in the housing market. Washington Mutual was heavily exposed to risky mortgages and some of the epicenters of the housing collapse, such as inland Southern California, Phoenix and Florida.

It's not just a question of when home sales will revive. As the prices of houses continue to drop, the value of most American's biggest asset declines and is less salable. No longer can a family sell a house every two years for significantly more than it paid, making it easy to pay off big mortgages.

The consequences have migrated from risky subprime mortgages into the mainstream, resulting in levels of defaults and foreclosures not seen since the Great Depression.

For a big housing lender such as Washington Mutual, the results have been catastrophic.

The overall weakness of banking adds another unknown. As a result, forget an early acquisition of Washington Mutual, an event that would be a civic disaster in Seattle but would allow investors to recoup some of their losses.

JPMorgan Chase, a potential WaMu suitor, savior of Bear Sterns and always seen as the firewall in the crisis, was forced to write down $1.5 billion in subprime mortgage losses. It may face more carnage from its position in Fannie Mae and Freddie Mac preferred shares.

Wells Fargo, another big bank recently seen as avoiding the worst of the mess, is also mired in likely Mae and Mac losses. Lehman, crushed by mortgage-backed securities, was looking for a white knight — not among the investment banks on Wall Street — but the Korea Development Bank.

At their late-August gathering at Wyoming, central bankers confessed how little they knew about when banks might hit bottom, especially as the economy continues to soften and jobs are lost.

"When we last met here in Jackson Hole, the nature of the financial crisis and its implications for the economy were just coming into view," said Federal Reserve Chairman Ben Bernanke. "A year later, many challenges remain."

One result is to put more pressure on Killinger's team to show results.

Fairly or not, Washington Mutual is seen as one of the dogs among the financial shares. Dividend cuts, $1 billion in cost savings and widespread efforts to clean up the balance sheet have failed to change that perception.

July's announcement of a $3.3 billion second-quarter loss provoked stock downgrades and warnings from securities analysts of worse red ink to come and perhaps the need for yet another capital infusion.

Much of that pressure has to be coming from TPG, the private-equity outfit that earlier this year put $7 billion into Washington Mutual in a supposed rescue and holds a board seat. David Bonderman, the savvy boss of the former Texas Pacific Group, was calling the bottom of the market.

He was wrong.

TPG bought in when WaMu shares were above $13, getting them for $8.75. It would have been a brilliant move if the housing and credit markets had hit bottom, and Washington Mutual was poised to rebound or be sold. Instead, TPG has been on the express elevator to hell with average shareholders.

Wouldn't you want to be the fly on the wall of those board meetings?

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