Washington Mutual Gets $7 Billion From TPG-Led Group

April 8 (Bloomberg) -- Washington Mutual Inc., the largest U.S. savings and loan, got $7 billion from a group of investors led by David Bonderman's TPG Inc. after losses on subprime loans ate up capital and erased 74 percent of its market value.

Washington Mutual sold 176 million shares at $8.75 a piece, 33 percent below yesterday's closing price on the New York Stock Exchange, and $5.5 billion in convertible preferred shares, the company said in a statement today. TPG will buy $2 billion of the shares. The lender also slashed its dividend and announced 3,000 job cuts.

Chief Executive Officer Kerry Killinger, struggling to reassure investors the lender has enough capital to stay afloat, said the dividend cut will preserve $490 million annually. Seattle-based Washington Mutual, which said today it lost $1.1 billion in the first quarter, will stop making loans through mortgage brokers and close 186 home-lending offices.

``The question is whether this is enough to stop the bleeding,'' said Matthew Paschke, a portfolio manager at Leuthold Weeden Capital Management in Minneapolis. ``It's a high-risk bet.'' Leuthold no longer holds shares in Washington Mutual and isn't betting that the stock will decline through a short position.

Washington Mutual, known as WaMu, fell $1.34, or 10 percent, to $11.81 a share at 4 p.m. in New York Stock Exchange composite trading.

The new stock means earnings per share may drop by half, Merrill Lynch & Co. analyst Kenneth Bruce wrote in a research note today. He raised his rating on the shares to ``neutral'' from ``sell.''

Dilution

``While diluting returns to existing shareholders, the capital raise would significantly strengthen WaMu's capital ratios and could prevent further downgrades on its debt to below investment grade,'' he wrote.

Washington Mutual sold a total of 804.6 million shares in the deal, including the convertibles, Washington Mutual spokesman Derek Aney said in an e-mail. The lender is also selling an undisclosed number of warrants, according to the statement.

``When a firm has to double its shares outstanding and yet still be under credit-quality pressure, it's not a particularly comforting move,'' said Sean Egan, managing director of Egan-- Jones Rating Co. in Haverford, Pennsylvania.

Banks and securities firms including Citigroup Inc. and Lehman Brothers Holdings Inc. have raised $136 billion of capital after more than $232 billion of losses tied to subprime mortgages, according to data compiled by Bloomberg.

Provisions

Washington Mutual said it will set aside $3.5 billion because of expected losses on home loans and expects costs of $1.4 billion from uncollectible loans during the first quarter, contributing to a net loss of $1.40 a share. That's more than triple the 39-cents-a-share consensus cited by CreditSights Inc. analyst David Hendler in a report today.

``This substantial new capital -- along with the other steps we are announcing today -- will position us for a return to profitability as these elevated credit costs subside,'' Killinger said in the statement.

Washington Mutual's debt rating remained unchanged at Standard and Poor's and Fitch Ratings Ltd. today. Moody's Investors Service changed the outlook on the lender to ``stable'' from ``negative.''

Washington Mutual will stop making loans through mortgage brokers and close its home loan offices, while focusing on its 2,500 bank and small business lending offices. The unit that's being closed, known in the trade as wholesale mortgage lending, contributed 40 percent of fourth-quarter originations, according to a slide presentation.

Dividend Slashed

The quarterly dividend was cut to 1 cent a share from 15 cents, the second time it's been reduced since November 2007 when it was 56 cents.

The infusion, originally planned for $5 billion, was increased because of strong investor demand, according to Aney.

``It's dilutive for shareholders on a massive basis, so it's not great for the company, but it's great for the system that capital can be raised during these stressful times,'' Vincent Farrell, a principal at New York-based Scotsman Capital Management LLC, said on Bloomberg Radio.

Bonderman, 65, TPG's founding partner, will join the board. Larry Kellner, CEO of Continental Airlines and former chief financial officer of American Savings Bank, will be an observer at TPG's request. Bonderman declined to comment through a spokesman, Owen Blicksilver.

Long Ties

Bonderman worked with Killinger before, as a director from January 1997 through December 2002. They crossed paths in 1996 when Washington Mutual bought American Savings Bank of Irvine, California, from Keystone Holdings Inc., a firm owned by investor Robert Bass. Bonderman was chief operating officer.

Bass's firm acquired American Savings, one of the biggest U.S. savings and loans to fail in the 1980s, in a government- assisted rescue during 1988 for $350 million in new capital plus $50 million in acquisition costs. Eight years later, Washington Mutual purchased the lender from Bass for stock valued at $1.2 billion.

TPG teamed with Kohlberg Kravis Roberts & Co. to buy Dallas-based power producer TXU Corp. last October. It was seeking more than $15 billion for a new fund, potential investors said in February.

Overdue Loans

TPG Partners IV, the $5.3 billion fund the firm started in 2003, has since returned an average of almost 36 percent annually to investors, according to data on the Web site of the California Public Employees' Retirement System. The firm's 1994 fund also had an annual return of 36 percent, according to data compiled by an Oregon state investment fund.

Washington Mutual ranked sixth among U.S. mortgage companies last year, according to trade publication Inside Mortgage Finance. The lender once ranked among the 11 biggest originators during 2006 of subprime mortgages, which are made to people with the weakest credit.

Overdue loans and foreclosures set a record last year in the U.S., and Washington Mutual posted its first loss since 1997 in the fourth quarter. The company wrote down the value of the home-mortgage unit by $1.6 billion.

Washington Mutual has lost about three-quarters of its market value in the past year ended last week, leaving the company almost tied with Cleveland-based National City Corp. among the worst performers in the 24-stock KBW Bank Index. National City, Ohio's biggest bank, ranked 10th among subprime lenders in 2006, according to a March ranking last year by Inside Mortgage Finance.

Deposits

Subprime loans typically have the highest default rate, and bad subprime mortgages set a record in the fourth quarter, according to the Mortgage Bankers Association. That contributed to the U.S. housing slump, the worst in at least 25 years.

More than 100 home lenders have sought buyers, halted loans or gone out of business since the start of 2007, according to data compiled by Bloomberg.

Goldman Sachs Group Inc. and Lehman were the placement agents for Washington Mutual. The bank's legal adviser was Simpson Thacher & Bartlett LLP. Credit Suisse Group served as financial adviser to TPG, while Cleary Gottlieb Steen & Hamilton LLP served as the legal adviser.

The company ranks sixth with a 3.2 percent share of U.S. bank deposits behind Bank of America Corp., JPMorgan Chase & Co., Wachovia Corp., Wells Fargo & Co. and Citigroup Inc., Killinger said in a Jan. 29 investor conference. It had $194.3 billion in deposits as of Dec. 31.

The Office of Thrift Supervision, the regulator which oversees Washington Mutual, cleared the way for the transaction by affirming yesterday that TPG isn't acquiring more than 25 percent of any type of the company's stock, according to a memo.

Hendler's report on March 27 said Washington Mutual was responsible for 20 percent of OTS deposits and they are the second-biggest borrower in the Federal Home Loan Bank Board system at $63.9 billion as of Dec. 31.