Washington Mutual ousts CEO

September 8, 2008 5:20:33 PM PDT
Washington Mutual Inc., ravaged by losses from sour mortgages, removed Kerry Killinger as chief executive of the nation's largest savings and loan on Monday, adding him to the growing list of banking bosses ousted by their boards. Killinger, 59, is being replaced by Alan H. Fishman, the former president and chief operating officer of Sovereign Bank and president and CEO of Independence Community Bank.

Also Monday, WaMu said that it has entered into a memorandum of understanding with the Office of Thrift Supervision concerning aspects of its operations. WaMu has committed to provide the OTS with an updated, multiyear business plan and forecast for its earnings, asset quality, capital and business segment performance.

The plan will not require the company to raise capital or increase liquidity, WaMu said.

WaMu shares fell 15 cents, or 3.5 percent, to close at $4.12, after dropping as much as 24 percent earlier in the session. Its shares have fallen 90 percent since early July of last year, right before the rapid erosion in the credit markets began.

Battered by rising mortgage delinquencies and defaults, and by the sinking value of its mortgage portfolio, WaMu has lost nearly 70 percent of its market value this year.

Killinger, who was stripped of his chairman title in June, became CEO of the Seattle-based thrift in 1990 and built WaMu into one of the country's largest banks. But with a heavy focus on subprime and option adjustable-rate mortgages - the types of mortgages at the heart of the housing bust - WaMu's losses began to mount and its shares plummeted, sparking an outcry from shareholders.

The board's splitting of the CEO and chairman roles in June was an effort, at the urging of shareholders, to improve corporate governance. At WaMu's shareholder meeting in April, a nonbinding resolution calling for the installation of a non-employee as board chairman passed with 51.5 percent of the votes.

But Killinger - who received compensation valued at $14.4 million in 2007 - held on to his post as CEO, even as the list of other top banking executives shown the door continued to grow.

After backing Killinger for so long, the board's sentiment finally changed.

"The board and Kerry mutually agreed that this was the right time for Kerry to leave the company," said spokesman Brad Russell in an e-mail to The Associated Press.

Killinger's exit follows that of Wachovia Corp. CEO Ken Thompson, Merrill Lynch & Co.'s Stanley O'Neal and Citigroup Inc.'s Charles Prince.

The 62-year-old Fishman became president and CEO of Brooklyn, N.Y.-based Independence in 2001. He later served as president and chief operating officer of Sovereign Bank after the Philadelphia-based bank bought Independence for $3.6 billion in cash in 2006.

"The board has great confidence in Alan's ability to lead WaMu," said Chairman Stephen E. Frank in a conference call with analysts, "and to return the company to profitability as quickly as possible."

Most recently, Fishman has served as chairman of privately held commercial mortgage brokerage Meridian Capital Group. Fishman said he will step down from this post.

While the management change may be long overdue, few are convinced it will prove a quick fix to the bank's ongoing problems.

"You have a bunch of people who were upset with Kerry Killinger and wanted him out of the company because of the huge mistakes he'd made over the last few years," said Richard Bove, a bank analyst at Ladenburg Thalmann & Co. But bringing in Fishman isn't necessarily going to change anything, Bove said.

"A new CEO can bring new energy, new perspective to a struggling company," said Moshe Orenbuch, an analyst at Credit Suisse, in an interview. "But they can't undo a loan that has been written already. What new management should be focusing on is making inroads into disposing its existing problem asset base."

In an interview with the AP, Fishman said his first three priorities are to review the balance sheet, review the income statement and review the brand. He said it is too early to comment on whether the bank will pursue any asset sales.

Some speculate that WaMu is ripe for a buyout, but a sale could prove to be difficult in this environment.

While the bank has an enviable West Coast bank branch footprint that would otherwise make them attractive to a potential buyer, it's hard to value the loan portfolio and that makes buying them very difficult, said Frederick Cannon, an analyst at Keefe, Bruyette & Woods. Fishman, who would not comment on whether the bank would consider a buyout offer if one came to the table, stressed his belief in the value of the franchise.

"I share the board's confidence in WaMu's underlying strength," Fishman said during the conference call. "I know that we can and will manage the issues we face today."

WaMu's troubles largely stem from rising delinquencies among its "option" adjustable-rate mortgage loans. The bank stopped originating the negative amortizing loans, also called option ARM loans, in June. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years.

WaMu became one of the first retail banks to seek outside cash in the wake of the credit crisis when it agreed to sell equity securities to an investment fund managed by TPG Capital and to other investors this spring, raising $7.2 billion in fresh capital.

In July, the bank reported a $3 billion second-quarter loss - the biggest quarterly loss in its history - as it increased its loss reserves to more than $8 billion to cover bad loans.

The company expects cumulative losses in its residential mortgage portfolio to total $19 billion, the high end of previous guidance, and has said 2008 will be the peak year for provisioning.

During the second quarter, WaMu announced plans to exit the wholesale lending business and close all remaining standalone home loan centers, resulting in 3,000 job losses. The bank said it would instead focus its mortgage-originating efforts in its retail bank branches and Web site, and by expanding its call center operations. WaMu announced an additional 1,200 job cuts in June.

Earlier this year, the bank slashed its quarterly dividend to 1 cent from 15 cents, which will result in savings of about $490 million a year.