Behind Wamu's Stock Plunge

Posted by: Chris Palmeri on September 8, 2008

Normally when an unpopular ceo gets the boot, the company’s share price climbs in a massive sigh of relief. Kerry Killinger, ceo of troubled thrift Washington Mutual, officially got fired today. But Wamu stock is down 18% to $3.50.

Wamu’s drop is even more surprisingly coming amidst what should be good news for the mortgage industry. The federal government is taking over industry giants Fannie Mae and Freddie Mac. While that means potentially huge losses for the shareholders of those firms, it is intended to be a signal that the administration is taking serious steps to minimize the fallout of the mortgage crisis. Treasury Secretary Henry Paulson says the goal of the bailout is to prevent an escalation in foreclosures and to keep mortgage rates from soaring. Stocks in general are up on the news.

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Killinger’s departure wasn’t exactly unexpected. What’s amazing is that he hung on as long as he did. That’s likely to due to his 18-year tenure at Wamu and the fact that he built the firm up from a small Seattle thrift to a national player in banking and mortgages. Wamu’s growing pains—and questions about Killinger’s leadership—began even before the mortgage meltdown, however. In 2006 the company’s overtaxed computer systems suffered high profile problems.

During the mortgage boom, Killinger plunged headlong into subprime loans and exotic adjustable rate mortgage products. His team tried to throttle back more than a year ago, but it wasn’t enough. In the second quarter Wamu lost $3.3 billion. Private equity firms—led by Texas-based TPG— pumped $7.2 billion into the company in April. They must have been seething as the stock dropped from $8.75 to $4 per share. Shareholders were angrily calling for Killinger to step down at the company’s annual meeting.

On top of all this, Wamu announced on Monday that it had reached a memorandum of understanding with the Office of Thrift Supervision wherein it agreed to provide the federal regulators with more details about his operations.

Killinger’s successor, Alan Fishman, has a long history in financial services, including the job of president of Pennsylvania’s Sovereign Bancorp. Wamu’s stock drop means investors think he’s a got a long, tough road ahead of him.

Reader Comments

Terry Cuellar

September 26, 2008 5:58 PM

I worked for Home Savings of America for 24 years when WaMu took us over in 1998. I left the company a short time later in 1999 as I felt from the training and direction I was getting from WaMu they were an unethical bunch of upper management. They were going to cut my pay $1000 a month and told me how I could make up my difference in pay by not giving into customers on service charges or fees and I would be rewarded by a monthly bonus. So in other words, screw the customer and I get to pay my bills with my full salary. Unethical, huh?!?!?!? I knew this day would come. It just took a little longer than I thought.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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