WaMu Retrenches After
Hit From Mortgage Crisis

Washington Mutual Inc., reeling from continued turmoil in its mortgage business, said it plans to reduce its dividend, cut jobs and sell preferred stock to generate $3.7 billion in capital.

The moves continued a year of bad news for a once-highflying financial institution closely associated with the explosion of retail banking and heavily marketed mortgage loans across the U.S. in recent years.

The announcement also raised the questions of whether Chief Executive Officer Kerry Killinger -- the architect of WaMu's rise from an obscure West Coast savings and loan to a marquee name in banking -- should continue to run the company and if Washington Mutual could be sold outright.

"You just might say now's the time to take the golden parachute and walk away," said analyst Richard Bove of Punk Ziegel & Co.

In a statement released after the close of the market yesterday, WaMu, based in Seattle, said it plans to slash its quarterly dividend to 15 cents a share from 56 cents a share, cut more than 3,000 jobs as it exits the subprime market entirely and raise $2.5 billion in capital, all to address "unprecedented challenges in the mortgage and credit market." The company also said it expects a fourth-quarter loss on a $1.6 billion goodwill write-down on its home-loans business.

A spokesman for WaMu -- the nation's biggest S&L by market value -- declined to comment about Mr. Killinger's status or the possibility of a buyout of WaMu. Mr. Killinger, the CEO since 1990, couldn't be reached.

Last week, people close to Mr. Killinger said that while the company perhaps should have moved quicker to address subprime fallout, no leadership shake-up was warranted.

WaMu's plan to abandon the subprime market is a reversal from the plan Mr. Killinger outlined a year ago to rejuvenate the company after three years of falling performance. In the early years of the decade, the thrift rocketed through a $1 billion expansion, growing to more than 2,000 branches and registering exponential profit growth. The high-speed expansion stumbled, however, on poor execution, bad branch locations and problems with integrating acquisitions.

As per-share profits fell in 2006, Mr. Killinger's growth plans included a significant focus on loans to borrowers with blemished credit -- a bet on the subprime market now in free fall.

Of the top five mortgage lenders, WaMu's portfolio has the most exposure to risky loans, with 29% of its 2006 loans in the high-cost category, mostly subprime, and 15% backed by homes other than the owner's primary residence. Mortgages on second homes and speculative properties are considered more vulnerable to default.

Washington Mutual is the latest large financial institution to seek help from outside investors as the mortgage crisis has deepened. Shares are down almost 60% in the past 12 months. Analysts have been forecasting a dividend cut, as the thrift's mortgage business has struggled with losses and nonperforming loans. But Mr. Killinger said as recently as last month that the board wasn't expected to evaluate a change in its dividend policy until January. A spokeswoman for WaMu said the board made the decision to take up the question of the amount of the dividend earlier than expected.

Although Washington Mutual said the actions would help it weather difficult housing markets in 2008, they could also prompt potential suitors to pounce. Wall Street analysts have long speculated that WaMu, with about 2,300 branches, could be an attractive takeover target to banks such as J.P. Morgan Chase & Co. that are seeking to expand on the West Coast. A J.P. Morgan spokesman declined to comment.

A potential problem is a lack of buyers, as major U.S. banks such as Bank of America Corp. and Wachovia Corp. have their hands full integrating recent purchases. WaMu also could be viewed as a potentially difficult integration, both because of past technology issues and continued concerns over the quality of its portfolio of loans.

In WaMu's written statement, Mr. Killinger said the actions "better position us to pursue various initiatives, particularly in our leading retail banking business -- which is at the core of our business strategy." Though WaMu has been scaling back, it was still the No. 12 subprime mortgage originator by volume in the first six months of the year.

In the third quarter, WaMu's home-loans unit was hard hit, with its loss widening to $348 million from $23 million a year earlier. Most of the problems centered on mortgages to borrowers with subprime credit, as well as home-equity loans. WaMu is trying to stanch the flood of bad mortgages, eliminating the riskiest types of loans and asking third-party mortgage brokers to provide more data on potential borrowers.

WaMu said the job cuts are part of an attempt to the eliminate $500 million in noninterest expenses by "resizing its home-loans business." It will discontinue all remaining lending through its subprime-mortgage channel; close 190 of 336 home-loan centers and sales offices; and eliminate 2,600 home-loan positions, about 22% of the unit's staff. It also will eliminate 550 corporate and other support positions. WaMu said it also plans to close its WaMu Capital Corp. institutional broker-dealer business and its mortgage-banker finance-warehouse lending operation.

-- Robin Sidel contributed to this article.

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