Capital Markets

Subprime Ills Make WaMu Slash Dividend, Payroll

The investor payout plummets from 56 cents per share to 15, and 3,150 will lose their jobs.
Stephen TaubDecember 11, 2007

The sub-prime crisis has taken a heavy toll on the nation’s largest thrift, Washington Mutual, which announced that it will cut its dividend by nearly 75 percent and eliminate 3,150 jobs.

The company also said it will raise $2.5 billion from a new convertible preferred stock offering to shore up its capital base, and that it will exit the subprime mortgage market.

“A substantial infusion of new capital, significant expense reductions, the major change in our home loans business, and our planned dividend reduction all combine to further fortify WaMu’s strong capital and liquidity position,” said chairman and CEO Kerry Killinger. “These actions will also better position us to pursue various initiatives, particularly in our leading retail banking business, which is at the core of our business strategy.”

The thrift is cutting its quarterly dividend rate to $0.15 per share from its most recent quarterly dividend rate of $0.56 per share.

Washington Mutual said it will generate about $3.7 billion of tangible equity in 2008 as a result of the divident reduction and the proposed capital issuance. It estimated that with the changes to its business plan, its national mortgage originations will shrink to $1.5 trillion in 2008, down about 40 percent from an estimated $2.4 trillion this year.

As part of its plan to exit the subprime mortgage business, WaMu expects to close about 190 of 336 home loan centers and sales offices; close nine home loans processing and call centers; eliminate about 2,600 Home Loans positions (or about 22 percent of its home loans staff); eliminate about 550 corporate and other support positions; and close WaMu Capital Corp., its institutional broker-dealer business, as well as its mortgage banker finance warehouse lending operation.

The company said it will take a fourth quarter after-tax charge of approximately $1.6 billion for the writedown of all the goodwill associated with the home loans business.

Further, continued deterioration in the mortgage markets and declining housing prices will result in a fourth quarter provision for loan losses of between $1.5 and $1.6 billion, approximately twice the level of expected fourth quarter net charge-offs, Washington Mutual said.

The company currently expects its first-quarter 2008 provision for loan losses to be in the range of $1.8 to $2 billion, reflecting an increase well ahead of charge-offs, which are also expected to grow significantly during the quarter. The first-quarter range reflects the company’s current view that prevailing adverse conditions in the credit and housing markets will persist through 2008.