A shake-up at the top has apparently done little to quell investor unrest over the future of Washington Mutual (WM), the nation’s largest thrift. Share prices fell for the third straight day despite a move on Monday to replace long-time CEO Kerry Killinger with a company outsider, and were down more than 20 percent on Wednesday when this story was published. Bottom line: investors are fleeing firms with signficant mortgage exposure and a likely need to raise capital. WaMu fits that description to a tee. Beyond replacing Killinger, the bank disclosed earlier this week that it had entered into a Memorandum of Understanding with its chief regulator, the Office of Thrift Supervision, over its risk management and capital management practices. WaMu lost $3.33 billion in the second quarter, as it significantly hiked its loan loss reserves by $3.74 billion to $8.46 billion. The bank has remained steadfast in its assertion that it will not seek to raise additional capital, although it’s pretty clear investors no longer buy the company line. Out of WaMu’s $231.1 billion loan portfolio, it’s $52.9 billion in option ARMs and another $62.5 billion in home equity loans and lines of credit that are drawing the most attention from analysts and investors. Total nonperforming assets at the Seattle-based bank jumped to $11.2 billion at the end of the second quarter, up 22 percent from the first quarter and nearly three times the NPAs recorded one year earlier. “There are rumors of potential suitors walking away,” Tim Backshall, chief analyst at Credit Derivatives Research, told Reuters, referring to new Financial Accounting Standards Board rule that industry experts say will significantly curtail M&A activity. Bloomberg first reported on the new FASB rules and their impact on both WaMu and Cleveland-based National City Corp. (NCC), suggesting that the new rule will force “acquirers to compute a target’s assets at market prices instead of deriving values from measures including the purchase price.” See full Bloomberg story. As a result CDS spreads on WaMu have soared, with Reuters reporting Wednesday that spreads hit an all time high, as investors are betting on imminent trouble for the bank. Colin Barr at Fortune mused Wednesday that “it’s starting to look like the furious trading in WaMu, Wachovia and Lehman may not let up until another shoe — whether a successful capital raise or something less salutary — drops.” Reflecting the trouble facing WaMu, Standard & Poor’s Ratings Services on Tuesday said it had put the thrift on a negative outlook for a likely ratings downgrade in the next 60 days. “The outlook revision reflects the increasingly challenging housing and mortgage markets and their impact on WAMU’s core mortgage franchise,” said Standard & Poor’s credit analyst Victoria Wagner. Disclosure: The author held no positions in WM when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.