Washington Mutual stock up but merger talk disputed

WASHINGTON (Reuters) - Shares of Washington Mutual Inc were 10 percent higher on Tuesday after a report that JPMorgan Chase & Co was in talks to acquire the troubled Seattle-based thrift.

Britain's Daily Mail newspaper, without citing its sources, reported that JPMorgan was expected to make a bid for Washington Mutual. But two people familiar with the matter told Reuters that JPMorgan was not in active talks at the moment to buy the largest U.S. savings and loan institution.

Shares of Washington Mutual were up 20 cents to $2.20 in afternoon trading and had jumped as high as $2.70 from an earlier intraday low of $1.50 per share.

The stock has lost almost 95 percent of its value from its 52-week high of $39.25 on September 19, 2007, to its close Monday of $2, as investors worry about continued losses related to risky real-estate loans.

Washington Mutual has said its home loan losses could reach $19 billion through 2011, and many analysts believe the thrift might eventually be forced to find a buyer or raise more capital.

The thrift was downgraded to "junk" status on Monday by the Standard & Poor's rating agency.

Washington Mutual responded that none of its unsecured debt is subject to ratings-based financial covenants and that it does not expect the downgrade to have a material impact on its borrowings, collateral or margin requirements.

The thrift also said it sees its capital levels at the end of the third quarter significantly above the levels required of "well capitalized" institutions and that it has not changed its outlook for expected credit losses.

It said it has "de minimis" trading exposure to failed investment bank Lehman Brothers Holdings and no trading exposure to insurer American International Group Inc, which is urgently seeking money to tide it over while it pursues asset sales.

Lehman Brothers filed for Chapter 11 bankruptcy protection on Monday and AIG shares tumbled 34 percent on Tuesday to $3.15, bringing its decline for the year to more than 90 percent.

But AIG stock was trading well off its worst lows, and other financial stocks moved higher, on speculation the U.S. government might consider extending aid to the insurer.

The S&P downgrade of Washington Mutual followed downgrades last week by Moody's Investors Service and Fitch Ratings. Moody's also cut the thrift to junk, while Fitch still rates it investment grade.

(Reporting by John Poirier; additional reporting by Jessica Hall in Philadelphia, Elinor Comlay in New York, and Karey Wutkowski in Washington; Editing by Tim Dobbyn)