UPDATE 3-Washington Mutual sinks below $2, rallies by close
(Recasts with late stock jump, adds comment, bond price, CD yields)
By Jonathan Stempel
NEW YORK, Sept 11 (Reuters) - Washington Mutual Inc (WM.N) shares sank below $2 for the first time since 1990 as anxiety grew about its capital needs and survival prospects, before staging a powerful late rally.
The thrift's shares closed up 51 cents, or 22 percent, at $2.83 on the New York Stock Exchange, after earlier trading as low as $1.75. Despite the late jump, they were down 34 percent since Monday, when Washington Mutual named Alan Fishman its new chief executive.
"WaMu was another battered bank stock that many investors believed could be the next one which might not survive," said William Lefkowitz, options strategist at brokerage firm vFinance Investments. "Some investors might have felt that WaMu has been punished enough for the short term."
Washington Mutual reported a $3.33 billion second-quarter net loss, including the first loss in its credit card unit. It has said mortgage losses could reach $19 billion through 2011.
The Seattle-based thrift raised $7 billion this year from investors led by private equity firm TPG Inc [TPG.UL], but the falling stock price could make any new capital too costly.
"Unfortunately, their options have narrowed significantly, even over the past two days," Sean Egan, manager of the ratings desk at Egan-Jones Ratings Co, said in an interview.
"What is ideal is an investment well in excess of $10 billion, probably closer to $15 billion or $20 billion, with the hope of additional investments over time," he added. "Few investors can write a ticket that large, and even fewer have the ability to move quickly."
Washington Mutual spokesman Brad Russell declined to comment. TPG spokesman Owen Blicksilver also had no comment.
Other financial stocks also rallied late in the session. The 24-member KBW Bank Index .BKX rose 2.8 percent, with the entire gain coming in the last 20 minutes of trading.
Still, Washington Mutual shares are down 92 percent in the last year. Its "distressed" 5.25 percent notes maturing in 2017 fell 2 cents on the dollar to 44 cents, pushing its yield up to 18.08 percent from 15.87 percent, according to MarketAxess.
REGULATOR MONITORING SITUATION
Earlier this week, Washington Mutual said its main regulator, the Office of Thrift Supervision, has stepped up its oversight into how the thrift manages risk.
"We're fully aware of the situation, and we're monitoring it," said William Ruberry, an OTS spokesman.
Fishman is a former chief executive of Brooklyn, New York's Independence Community Bank Corp, which was bought by Sovereign Bancorp Inc SOV.N in 2006.
He became Washington Mutual's chief executive Monday, replacing Kerry Killinger, who was ousted by the board after 18 years at the helm.
Richard Bove, a Ladenburg Thalmann & Co analyst, suspended his "neutral" rating on Washington Mutual Thursday, citing uncertainty about what the OTS ordered the thrift to do.
DEPOSITS
Analysts have said the thrift may be starved for buyers because of an accounting rule that takes effect in December. The rule will force buyers to write down assets of targets to market prices, perhaps requiring them to raise costly capital.
JPMorgan Chase & Co (JPM.N) is said to have approached Washington Mutual early this year about a merger, but Killinger rejected the overture, according to published reports. Washington Mutual ended June with $309.7 billion in assets, while JPMorgan had $1.78 trillion.
Moreover, a clause in the TPG investment agreement complicates any capital raising. Washington Mutual must cover any dilution in TPG's investment if the thrift is sold, or if it raises more than $500 million of equity, for less than $8.75 per share -- within 18 months of the infusion.
It is unclear how customers are reacting.
Fishman said Monday there had been "no dramatic movements" in deposit flows at the thrift, which is offering a 5 percent yield on 12-month certificates of deposit. The thrift ended June with $181.9 billion in deposits.
Egan said: "There has to be concern about how well WaMu can retain its deposit base, which is the lifeblood of the institution." (Additional reporting by Dena Aubin and Megan Davies in New York, Doris Frankel in Chicago, and John Poirier in Washington, D.C.; editing by Maureen Bavdek, Jeffrey Benkoe, Gary Hill)
