Yet another credit fire flares up, this time at Washington Mutual; Plus, discount window borrowing hits a new record
"Shares of Washington Mutual Inc. fell sharply Thursday, as concerns persisted about the company's mortgage portfolio following its report of a $3 billion quarterly loss earlier this week.
"Shares dropped 90 cents, or 19.4 percent, to $3.75 in afternoon trading. Shares are down about 72 percent for the year.
"Late Tuesday, the nation's largest thrift posted a $3 billion loss due to increases in its loss reserves to cover souring loans in its mortgage portfolio. The stock fell 20 percent Wednesday.
"We are concerned that credit and market conditions will continue to damage Washington Mutual's financial flexibility over the near to intermediate term," wrote Citi Investment Research analyst Bradley Ball in a note to clients Wednesday. "In particular, we think a credit rating agency downgrade of Washington Mutual's debt to junk levels, as threatened by Moody's, would likely raise the cost of doing business and further dampen performance during the currently challenging environment."
"Moody's Investors Service's said late Tuesday that it put WaMu's senior unsecured rating of "Baa3" on review for possible downgrade. A rating of "Baa3" is one notch above junk status.
Standard & Poor's has subsequently downgraded WaMu's counterparty credit rating to "BBB-minus," one notch above junk status."
Downey Financial was another big loser on the day, down 34% today and 94% year-to-date. The Newport Beach-based S&L was a big option ARM lender during the bubble days, and its nonperforming assets are surging as a result. Here's an excerpt from a Bloomberg story on the firm:
"Downey Financial Corp., the California savings and loan, replaced top management and may seek investors or buyers after a fourth straight quarterly loss. The stock fell as much as 29 percent after Friedman, Billings, Ramsey Group Inc. raised doubt about the company's survival.
Chief Executive Officer Daniel Rosenthal, 55, stepped down and Downey is exploring "strategic alternatives,'' the Newport Beach-based lender said today in a statement. FBR analyst Paul Miller said finding a buyer may be difficult because of losses from adjustable-rate mortgages.
Downey was one of the biggest sellers of option-ARMs, which let borrowers defer part of the monthly payment and add it to the principal. Option-ARMs become more risky for banks when housing prices are falling because the loan's size can quickly exceed the home's value. In Downey's home state, households are foreclosing at 2.6 times the national average, contributing to a $258.9 million loss in the second quarter for the company and about $600 million in losses over the past year.
"The company is under extreme stress given the current housing market situation in California,'' Miller said in a report today. "With borrowers walking away from their homes coupled with the inventory overhang and weakening unemployment, defaults and loss severity will further increase.'' Miller, top performer in Bloomberg's survey of analysts, said Downey's operations are at risk'' and cut his price target to $1 from $13."
Meanwhile, some late news out of the Federal Reserve: Borrowing at the discount window jumped to a record high in the week ended yesterday. Per Bloomberg, loans to commercial banks increased by $2.47 billion to an average of $16.4 billion per day (chart above). The previous high was $16 billion per day in the week ended May 28. The daily average during the week of the 9/11 attacks (which included the largest single day's worth of borrowing, $45.5 billion) was $11.7 billion.