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Originally published September 19, 2008 at 12:00 AM | Page modified September 19, 2008 at 1:25 PM

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Could WaMu survive by selling off key pieces?

As Washington Mutual searches for ways to survive the financial meltdown, one option that's been floated is to sell off pieces rather than...

Seattle Times business reporter

As Washington Mutual searches for ways to survive the financial meltdown, one option that's been floated is to sell off pieces rather than the entire company.

The idea would be to raise enough cash to enable WaMu to ride out the storm, rather than handing over the whole business at a bargain-basement price. The Seattle-based thrift's far-reaching branch network and its big credit-card business are two candidates.

But observers are split over whether WaMu could raise enough money in piecemeal sales to alleviate stock traders' concerns about its financial health, and some argue that approach would merely delay the inevitable.

"I don't think they'd want to sell in pieces, because eventually they'd end up with a piece they couldn't sell," said Jaime Peters, an analyst with Morningstar in Chicago.

Other ways for WaMu to stay independent could include a big equity investment from an outside firm — assuming a willing investor could be found — or a "good bank/bad bank" plan, in which WaMu's problematic loans would be shifted to a newly created spinoff.

It was reported this week that investment bank Goldman Sachs has begun shopping WaMu to potential buyers and investors. Though the company has declined to confirm that, it has made no effort to deny it's for sale, as it has done in the past.

WaMu's travails are just part of the biggest crisis to hit the U.S. financial industry since at least the savings-and-loan debacle of the 1980s and early 1990s, and arguably the worst since the Great Depression.

The past two weeks have witnessed one major bankruptcy (Lehman Brothers), one shotgun marriage (Merrill Lynch to Bank of America) and three de facto nationalizations (Fannie Mae, Freddie Mac and AIG).

Frederick Cannon, an analyst for Keefe, Bruyette & Woods in San Francisco, estimated in a recent report that if WaMu's financial condition deteriorates further, it might need to raise another $4 billion to $5 billion.

Breathing room

Even if the company's loan losses stay within current estimates — Cannon thinks they'll total $23 billion this year and next — a big capital infusion would reassure investors of WaMu's solvency and give new CEO Alan Fishman some breathing room to execute a turnaround plan.

But with WaMu's stock at such low levels — it closed Thursday at $2.99, up 98 cents — raising large amounts of new capital from investors would be difficult. Even if successful, it would drastically dilute the stakes of existing shareholders.

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At the current stock price, the market values WaMu at about $5.1 billion. But that encompasses both the healthy parts of the business, such as the branch banks, and the troubled parts that may actually have a negative value — primarily the mortgage business, which contains billions of dollars' worth of less-than-prime loans.

In theory, selling the healthy parts could enable WaMu to unlock some of the value now masked by the mortgage mess.

WaMu's 15-state network of retail branches, widely considered its most valuable asset, would be an obvious place to start.

The branches in metro New York, Illinois, Texas, Florida and Georgia are geographically isolated from its predominantly Western base, and are in some of the nation's fastest-growing areas. (The company refused to break out its 2,239 branches by state, except to say 188 are in Washington.)

"New York and Chicago come immediately to mind, because WaMu isn't dominant in those markets and other banks could use those branches to bulk up their networks," said Bert Ely, a banking-industry consultant in Alexandria, Va.

WaMu's $26.4 billion credit-card business, acquired from Providian Financial in 2005, also might be attractive to some other lender, despite rising losses. WaMu has 12.7 million credit-card accounts and is the sixth-largest issuer of Visa cards and MasterCards.

In a sense, WaMu is in the same position as the millions of ordinary people having trouble keeping up with their mortgage payments but who are reluctant to sell their homes for less than what they paid for them.

Price has to be right

"Even at times like this, stuff can be sold, with enough of a discount," Ely said. "The reason stuff doesn't get sold is because people don't want to eat the discount."

A variant of the good bank/bad bank idea, a federal entity to take over banks' bad debt, reportedly is being considered by the Treasury Department and congressional leaders.

Such an arrangement, similar to the Resolution Trust Corp. that helped wind down the savings-and-loan crisis of the 1980s, would relieve much pressure on beleaguered financial companies such as WaMu.

It's not clear, though, how quickly such an entity could be set up.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com

Copyright © 2008 The Seattle Times Company

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