WaMu faces $14 billion losses, should be shorted: GS

By Jonathan Stempel

NEW YORK (Reuters) - Washington Mutual Inc WM.N may have to set aside $14 billion this year for credit losses, according to a Goldman Sachs analyst, who also took the rare step of urging investors to sell the shares short.

The largest U.S. savings and loan, also known as WaMu, may lose $3.30 per share this year, and not turn a profit until 2010, analyst James Fotheringham wrote on Friday.

Fotheringham previously estimated a 2008 loss of $1.00 per share. He cut his forecast for 2009 earnings to break-even from a profit of $1.10 per share. He has a "sell" rating on WaMu, and cut his price target to $10 from $12.

In afternoon trading, Washington Mutual shares were down 59 cents at $10.83 on the New York Stock Exchange.

Keefe, Bruyette & Woods Inc analyst Frederick Cannon last week also projected WaMu would not be profitable before 2010.

On Tuesday, WaMu said it raised $7 billion from investors led by private equity firm TPG Capital LP TPG.UL, which took a $2 billion stake. The infusion eased concern about the thrift's capital.

But WaMu also projected a first-quarter loss of $1.1 billion, or $1.40 per share, and nearly doubled its forecast for quarterly credit losses to $3.5 billion. It also plans to cut 3,000 jobs, close 186 home lending offices, and stop making mortgage loans through brokers.

Goldman Sachs (GS.N) bankers were among the advisers to WaMu on its $7 billion capital-raising plan. Wall Street bankers and research analysts are supposed to operate separately to eliminate the risk or appearance of conflicts of interest.

Fotheringham estimated that WaMu has $17 billion to $23 billion of potential mortgage losses, but has absorbed only $3 billion. WaMu's home loan portfolio has "disproportionate exposure" to states where home prices may fall, including one-half in California alone, he said.

The analyst added that credit card operations might also be a problem, as WaMu "leads its peers with respect to recent growth" in credit card delinquencies.

"Given the sufficiency of WaMu's recent equity capital raise, we recommend investors go long via the credit markets," Fotheringham wrote. "However, given the credit costs expected this year, we recommend shorting WaMu stock."

Seattle-based WaMu did not immediately return a request for comment.

Short-sellers sell borrowed shares, hoping to buy them back later at lower prices to replenish the shares' lenders.

The stock has lost about three-quarters of its value from a 52-week high of $44.60 last June 4.

(Additional reporting by Tenzin Pema in Bangalore; Editing by Brian Moss/Jeffrey Benkoe)