WaMu is Bleeding

Some wounds can kill and others once inflicted will never heal. Those that never heal are inflicted by betrayal, by trusted ones, by those sworn to protect and are by far the most painful. But it was Washington Mutual who concealed its coming betrayal with such a rarely achieved devastating perfection. In an Enronesque ploy the bank carried on as if all were normal, canceling not a single scheduled event, not even a awards trip for its top performing mortgage sales staff.

At the end of February, around 200 of Seattle-based Washington Mutual’s (WM) best performing retail loan consultants, their guests, and top company brass set off for four days of sun, snorkeling, and gambling at Atlantis Paradise Island resort in the Bahamas.

This was one of many such incentive trips over the years the retail banking and mortgage company had bankrolled for the top 10% of its commission-driven mortgage team.

But it just gave a false sense of security, as by May most would be without a job.

For those salespeople who had been with the company during the real estate boom of the past few years, it was only the latest of many such trips. For first-time invitees it was a trip they had worked hard to earn. But for all of them, though they didn’t know it then, it would be their last.

Like many victims of the mortgage collapse, most of the loan officers, especially those who were in the Bahamas, feel burned.

So, the bank continued to burnish the thin veneer of its glossy outside to a high brilliant luster, while corrupt and corroding from within it was collapsing.

As the subprime crisis worsened and the numbers of defaults increased, WaMu saw its share price drop 70%, from a high of 44.66 on May 24, 2007. Like most other mortgage lenders, it was hemorrhaging money. Since April, 2007, it had lost 74% of its market value. At its first-quarter earnings call Apr. 15, the company announced it had lost $1.1 billion during the quarter and also needed to set aside $3.5 billion to cover loan losses in the quarter.

For staff who had been in the Bahamas, the news was particularly hard to fathom. They were, after all, members of the elite President’s Club, top earners who were able to generate annual revenues of $40 million to $200 million.

Hard to fathom? At first perhaps, but for share holders who depend on share price not snorkeling trips for dinner, that 74% cliff dive hit them right between the eyes. Betrayed, befuddled, searching for answers investors found only lies and corruption.

Washington Mutual Inc. (WM) failed to foresee the speed and severity of the decline in U.S. house prices as the housing-market meltdown rocked the giant thrift, its president and operating chief said Wednesday.

Steve Rotella also told the UBS 2008 Global Financial Services Conference in New York that “2008 will be a very challenging year for earnings,”

Yea sure Steve, but we all saw it. Banks earn profits by lending, profits drive stock options into the money, officers and board members therefore make money based on share price. Now riddle me Steve this: if the insiders sell the corporate soul to the devil, and get out before there is hell to pay do they keep everything? Just asking, because Mary E. Pugh, chair of the bank’s finance committee, has stepped down along with board member Anne Farrell. The banks claims Farrell left, due to the company’s mandatory retirement age. Sure, sure, but the stench gets even more foul.

WaMu CEO Kerry Killinger also announced changes to the controversial executive compensation plan. The plan originally included a rather shady way of calculating bonuses, ignoring some of the credit losses that have clobbered shareholders (and cost former employees their jobs) when determining compensation for top executives.

All the time Steve what did you think of the risk rotten loans?

The investor said President and Chief Operating Officer Stephen Rotella endorsed “risky” loans including adjustable- rate mortgages.

On last quick question Steve, if you were so clueless on the housing crash why were you so busy preparing for it?

Nonetheless, WaMu has secured about $50 billion in “highly reliable excess liquidity,” Rotella said, leaving the bank free from relying on capital markets for commercial paper or unsecured debt. Like others, as WaMu lessens exposure to housing and mortgage risks, it has focused on retail-banking operations to drive revenue growth.

Investor pride is powerful, as powerful as the human psyche is fragile, first it denies, then admits faults and failings only grudgingly, but can in the end it can accept fault undeservedly and disparage its own very best capabilities. Eventually against your most difficult resistance and cognitive dissidence the certainty that you were sold out sets in and as easily as seasons change anguish turns to outrage and outrage seeks to vent.

A WaMu employee stepped to the microphone at last Tuesday’s shareholder meeting and unleashed a fierce attack on the bank’s leaders, particularly President Steve Rotella.

The public rebuke was stunning — and its private aftermath is equally unexpected.

The 2,000-plus shareholders and employees heard Tom Golon, a loan consultant for 10 years in WaMu’s downtown Seattle home-lending center, declare that “this man has driven the company to the edge of bankruptcy, and he should be fired, and his bonuses should be taken back from him.”

Golon, who is among the approximately 3,000 employees losing their jobs at month’s end, called Rotella “the man most responsible for the demise of WaMu,” adding that he was “kicked out of (JP Morgan) Chase four years ago and came over to WaMu to do his damage.”

He did it, they did it! The decimation of share prices, first quarter loss of $1.14 billion vs a profit in Q1 of 2007 in addition to billions taken in write downs and losses with billions more admittedly on the way, bulking up loan loss reserves by $3.51 billion (set aside) two dividend cuts a forced dilutive sale of shares in excess of $7 billion and another $50 billion in various other forms of liquidity all in preparation for a shi# storm for the ages in the global housing market rattled economy.

WaMu has long been a dangerously wounded beast investors have been undeniably better served to avoid. For its part current management probably does not want to finish the beast, they will bleed it to within a centimeter of its life, then bleed it a little more, but not kill it, you can’t beat blood out of a dead WaMu. Yet for this bank the most difficult decision will be whether to live or die.

If by some miracle Stephen Rotellas retail banking and liquidity processing can save WaMu, it will still be at a steep cost. Nothing comes free in the post credit burst. Raised capital will bang up current investors in dilution and only further burden the already over laden share price. Newly invested capital is put at instant extreme risk as with Enron and Bear Stearns. Or the bank could be left to fail turning current investment into certain total loss, but alleviating further risk factors for current and would be future investors. The stark alternatives now force the impossible decision on all participants, which is worse, death or salvation.

The retail investors who have sunk large parts of their life earnings into its shares will not easily let go, and management who prefer to bleed the beast forever probably will. So, for WaMu only death can stop the bleeding, bleeding from wounds that will never heal.