Much of the financial sector took a pounding Monday, as investors parsed through the Friday failure
of IndyMac Bank
and worried about a similar fate for other large banks with significant mortgage exposure.
Washington Mutual (WM)
saw its shares fall 35 percent to $3.23 after Lehman Brothers Holdings Inc. (LEH)
analyst Bruce Harting predicted the bank faced $26 billion of losses, including $21 billion for mortgages -- and said the bank would set aside $4 billion in reserves for bad loans, driving a steep Q2 loss when it reports earnings on July 22.
The bank’s portfolio includes some $57 billion in option ARM mortgages; and credit quality among negative amortization loan products has been quickly deteriorating among lenders that once specialized in the product.
Shares rebounded sharply in after-hours trading after the bank released a statement
saying it is "well capitalized" under regulatory definitions, pointing to liquidity of more than $40 billion and $150 billion in retail deposits -- share prices jumped 8.36 percent on the news.
News also broke Monday evening that WaMu is laying off further employees
, after reportedly cutting 1,200 in its last round of layoffs on June 19
National City bleeds; Wachovia pinched, too
Mega-regional bank National City Corp. (NCC)
had similar little luck in Monday trading, and saw its shares tank to the tune of 15 percent, closing at $3.77. The Cleveland bank actually saw trading temporarily halted
on Monday after the bank's stock price fell to $3.21 a share, down 27 percent -- the pause came so that the bank could attempt to reassure investors and prevent a possible run on deposits.
"National City is experiencing no unusual depositor or creditor activity. As of the close of Friday’s business, the bank maintained more than $12 billion of excess short-term liquidity," the bank said in its press statement. "Further, as a result of our recent $7 billion capital raise, National City maintains one of the highest Tier I regulatory capital ratios among large banks."
Wachovia Corp. (WB)
also found itself caught up in investor worry Monday, with shares closing at $9.84, off nearly 15 percent, over fears that the bank's substantial option ARM portfolio could take a larger chunk out of the bank than originally thought.
Wachovia said last week that it expects to report an after-tax loss of between $2.6 and $2.8 billion, or $1.23 to $1.33 per share, for the second quarter, as it sets aside an additional $4.2 billion to build loan loss reserves tied mostly to its former Pick-a-Pay mortgage lending program.
The bank holds a substantial $170 billion residential mortgage portfolio; a whopping $121 billion of that total was in the form of option ARMs at the end of Q1.
Disclosure: The author was long FRE and held various put option contracts on WB when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.