Add Washington Mutual (WM) to the growing list of lenders with a questionable balance sheet and needing to raise cash. In response, WaMu cuts dividend and jobs, sets capital infusion.

Washington Mutual, the U.S. savings and loan slammed by slumping mortgage markets, on Monday said it would slash its dividend, cut more than 3,000 jobs and announced a $2.5 billion capital infusion.

The Seattle-based bank also expects to report a net loss in the fourth quarter after recording non-cash write-downs of home loans segment goodwill. Wamu said the write-down will not hurt its key capital ratios or liquidity.

“I’m not at all surprised. It’s just another casualty in the mortgage tsunami sweeping over the country,” said Sean Egan, managing director of credit rating firm Egan-Jones Ratings Inc. Among the steps announced on Monday afternoon, Wamu will sell $2.5 billion of convertible preferred stock.

Wamu is also slashing its dividend payout 73 percent to 15 cents a share. At the old rate, Wamu’s beaten down shares had offered a dividend yield of nearly 12 percent.

Additional details emerge in the AP version of the story: Mortgage Crisis Forces Big Cuts at WaMu.

Washington Mutual Inc., the nation’s largest savings and loan, said Monday that problems in the mortgage and credit markets are forcing it to close offices, lay off more than 3,000 workers and set aside up to $1.6 billion for loan losses in the fourth quarter.

WaMu is also slashing its quarterly dividend 73 percent and plans a $2.5 billion offering of preferred stock that is convertible to common shares. WaMu has not yet priced the offering, but increasing the total number of company shares will dilute their value for existing stockholders. In after-hours trading, WaMu shares fell $1.76, or nearly 9 percent, to $18.12 following the company’s announcement.

After dismantling much of its subprime mortgage operation in September, Seattle-based WaMu will now get out of the business entirely. The company said it will close about 190 of its 335 home loan centers and sales offices, shut down nine call centers and eliminate 2,600 home loan workers and 550 corporate and support jobs. It had already cut 1,000 jobs related to the sale of home loans to people with questionable credit.

The company also said it will shutter WaMu Capital Corp. and rely on third party broker-dealers to sell mortgage-backed securities.

These changes, meant to address what WaMu called “unprecedented challenges in the mortgage and credit markets,” will save the thrift $140 million in the fourth quarter. But the company still expects to post a loss, due in part to a $1.6 billion charge for the writedown of goodwill associated with the shrinking home loans business.

On top of that, WaMu now expects to set aside between $1.5 billion and $1.6 billion for loan losses in the fourth quarter, from the $1.1 billion to $1.3 billion predicted by executives in early November. For the first quarter of 2008, the company said it expects loan losses to total $1.8 billion to $2 billion. Loan losses will remain high throughout the year, WaMu added.

Word of WaMu’s convertible preferred stock offering came just hours after Switzerland-based UBS AG said it would sell $11.5 billion in shares to Government of Singapore Investment Corp., a sovereign-wealth fund, and to an unidentified investor in the Middle East. And last month, Citigroup Inc. took a $7.5 billion investment from the Abu Dhabi Investment Authority in exchange for up to 4.9 percent of Citigroup’s equity.

Government-sponsored mortgage finance companies Freddie Mac and Fannie Mae both recently announced plans to sell preferred stock totaling $6 billion and $7 billion, respectively.

WaMu has not yet priced its offering, and it may have to settle for less-than-favorable terms if the other recent deals are any indication. In exchange for its cash, the Abu Dhabi fund will get an 11 percent annual yield from Citigroup. The Freddie Mac offering have a fixed dividend rate of 8.375 percent, almost 2 percentage points higher than its last sale of preferred stock, in September.

On November 9th, in Appraisal Fraud Reaction I was questioning speculation that WaMu would actually raise its dividend: “Not that it can’t happen but WaMu would be nuts to do anything other than decrease dividends.”

Well here we are. So now the question is where to from here? The answer depends on how much more panic buying we see in the equity markets. I do not know the answer to that but neither does anyone else.

What I do know is foreclosures are rising, foreclosures will continue to rise, and REOs will pile up on bank balance sheets. I also know that those REOs will require still more capital infusions, and that we keep losing high paying jobs that are not going to be replaced for a long time.

Tuesday the Fed will cut rates either 25 or 50 basis points but in the end the Fed will be powerless to stop a huge consumer led recession no matter what the short term reaction is.

Mike “Mish” Shedlock
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