Like M's, Wamu has a bad record

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Bill Virgin

Tuesday, July 20, 2004

Like M's, Wamu has a bad record

By BILL VIRGIN
SEATTLE POST-INTELLIGENCER COLUMNIST

Once they were the hometown darlings of the fans, but that seems like ages ago. Now, with performance swooning, there are worries about when or whether improvement will come, and dark mutterings about the need for a managerial shake-up.

Oh yes, there's some unhappiness about the Mariners, too.

Actually what we had in mind was Washington Mutual Inc., the Seattle-based financial giant that reports its second-quarter earnings tomorrow.

Wamu has already told the world its numbers for the whole year aren't going to look good compared with last year's earnings or expectations for this year, so the element of surprise will be as about as great for investors as the Mariners' likely fourth-place divisional finish will be to baseball fans.

In both cases those who follow the team (or bank) are suggesting that management could have done a better job warding off the present predicament, and many have suggested that new management might be needed for more wins (or higher earnings).

You can continue the parallels for a while, until you collide with this cold reality: No matter how bad the Mariners' record this year, they'll be back to play next year.

Without a marked improvement in results, some investors say, Washington Mutual might not be.

Washington Mutual is in hot water with investors because it has twice issued earnings warnings; in the most recent case, the company says it hasn't cut expenses fast enough to keep up with the slowdown in its mortgage business. Analysts also have questioned Wamu's strategy in hedging against the long-predicted swing in interest rates.

Indicative of the sour mood is this passage from a recent story in Barron's: "The thrift's footprint, including a big position in California, could attract acquisitive banks that might view Wamu as undermanaged and ripe for cost-cutting. Enhancing such prospects: Wamu's aggressive CEO, Kerry Killinger, probably isn't as popular with his board as he was a year ago."

The Barron's piece also, in passing, uses the term "botched" to describe Wamu's integration of recent acquisitions. That is, if anything, an underreported part of the Wamu story.

If you add up all the complaints about all other financial institutions, then triple that sum, you still wouldn't come close to the number of complaints I get about Washington Mutual, mainly about its mortgage operations. The e-mails, phone calls and letters come from all over the country, as people report not just problems with screwed-up accounts but a seeming unwillingness or inability to fix them. Every time we write a column or story about Wamu, we get another flood of complaints.

Washington Mutual in some circles has become a company people love to hate. "Thieves with briefcases" is among the gentler epithets I've read in those e-mails.

The service problems don't get much mention in the analysts' reports, but they could prove to be more damaging in the long run to Washington Mutual's independence and expansion plans than missing earnings estimates. It doesn't do much good spending a lot of money on an advertising campaign to position yourself as an irreverent, customer-friendly bank, if what people are hearing through unofficial channels is that you're not a good company to do business with.

Most companies endure bouts of trouble at some point in their existence, and trouble is a relative term. Boeing is having trouble right now with the ethics scandals, competition from Airbus and continued weakness of the aerospace sector. But Boeing is still making money and is in no danger of going out of business. Same with Washington Mutual.

But trouble is also not a momentary occurrence; left unattended, it has a nasty way of accelerating and multiplying. In Washington Mutual's industry, a company need not be in danger of going under to be vulnerable. You can bet someone has already done whatever is the computer equivalent of a back-of-the-envelope calculation on what a deal for Wamu would look like. The longer trouble persists, the more people will be running the numbers.

Would a Wamu buyout matter? Not to the rest of the country. Around here, you bet it would, in terms of a lost headquarters, jobs and community leadership.

Ten days before releasing its earnings warning, Wamu announced the date of its annual presentation to investors in New York. At the Nov. 16 meeting it will be facing the Wall Street stock analysts and money managers who will make recommendations to clients about buying, holding or selling the stock -- and whether to accept a buyout offer should one materialize.

Washington Mutual has between now and Nov. 16 to prove it recognizes the problems, and that the measures it is taking to correct those problems are working.

If Wamu can prove both those points, it could be a happy meeting.

But if between now and then the corrective measures don't seem to be taking hold, and if it drops another earnings disappointment on investors, Washington Mutual faces two potential scenarios for that November conference, neither of them pleasant:

That its executives will be facing a room full of unhappy and skeptical investors.

Or that it won't be around to host the conference at all.

P-I reporter Bill Virgin can be reached at 206-448-8319 or billvirgin@seattlepi.com. His column appears Tuesdays and Thursdays.

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