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IndyMac Collapse Fuels Fears About WaMu

ROBERT SIEGEL, host:

Te government takeover of IndyMac is sparking concerns about other financial institutions. Washington Mutual is one that's under enormous financial strain. It's one of the nation's largest savings and loans. This week, Washington Mutual had to do something that financial institutions do not like to do. It issued a statement promising that it had plenty of money on hand. NPR's Wendy Kaufman explains why.

WENDY KAUFMAN: Washington Mutual's stock is selling for a little more than 10 percent of what it was worth a year ago, so the statement was designed to persuade Wall Street and depositors that the firm was financially sound and could survive as an independent financial institution.

Trouble at the Seattle-based savings and loan commonly known as WaMu has been brewing for some time. As some critics see it, the once-conservative institution got greedy and is now paying the price.

Rich Clayton(ph), the research director of a union-affiliated investment group, says in 2003 and 2004, WaMu shifted away from fixed-rate mortgages to higher-paying ones which carried more risk; subprime and adjustable-rate loans, for example. Many of the company's loans were in California, where the housing market was overheated. And, says Clayton...

Mr. RICH CLAYTON: They didn't anticipate that house prices were actually going to fall, even though there were plenty of warning signs. They also didn't really understand the nature of the mortgages that they were issuing and the degree to which falling house prices would translate into very large delinquency and default rates on those mortgages.

KAUFMAN: Now the company's own projections call for huge losses, says Jamie Peters, a bank analyst at Morningstar.

Ms. JAMIE PETERS (Morningstar): Depending on what happens with the economy, the California real estate market, the nationwide real estate market, they're projecting somewhere between $12 and $19 billion of losses on their portfolio. That is a lot, a lot of money.

KAUFMAN: So is the company likely to become the next IndyMac? Gary Gordon a stock analyst at Portales Partners, an independent research firm, says there are three big differences between WaMu and the California bank taken over by federal regulators.

First, WaMu has far more capital. A $7 billion infusion of private equity earlier this year helped on that score. Second...

Mr. GARY GORDON (Portales Partners): While Washington Mutual certainly does not have a pristine loan portfolio, it's a lot better looking than IndyMac's was. Then the third thing is the deposit base. While IndyMac had a couple of branches, by and large their deposits came from advertising, much more hot money. People were in there for a higher rate.

KAUFMAN: They would abandon the bank in a second, he says, and they did. In contrast, says Gordon, WaMu has a retail network of more than 2,000 branches, which generates billions in profits and has a loyal customer base. They're not likely to start a run on the bank.

Washington Mutual cited its strong retail base in this week's statement about capital and liquidity, but the company isn't saying anything more until it releases its quarterly earnings next week. Wall Street and perhaps Main Street will be paying close attention.

Meanwhile, expect more layoffs in September. The company has already laid off more than 7,000 employees this year. Wendy Kaufman, NPR News, Seattle. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Wendy Kaufman