The warning signs have been increasing that Washington Mutual (WM) is closely following behind the footsteps of failed bank IndyMac. The chart below shows the dismal share price action over the past year. Furthermore, over the last two days, its share price has fallen over 30%. Adding to the worry is the increased trading volume recently. As noted in the article below, creditors lately have been quietly pulling funds from WM. Since IndyMac was not on the FDIC's supposedly highly scrutinized watchlist of troubled banks, the odds are good that they "overlooked" WM as well.

Partial sanity returned today - VHF

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WaMu Slumps as Gimme Credit Cites Liquidity Concern

By Ari Levy

July 24 (Bloomberg) -- Washington Mutual Inc. tumbled more than 20 percent for a second day as Gimme Credit LLC said unsecured creditors were ``pulling funds'' from the biggest U.S. savings and loan.

Gimme Credit analyst Kathleen Shanley cited the decline in federal funds purchased and commercial paper to $75 million from $2 billion at year-end, which Washington Mutual reported this week in its second-quarter results. Securities sold under agreements to repurchase dropped to $214 million from $4.1 billion at the end of 2007, she wrote.

Washington Mutual, known as WaMu, reported a $3.3 billion second-quarter loss on July 23. Rising delinquencies forced the Seattle-based company to boost provisions for bad loans. While WaMu said it has enough capital after raising more than $7 billion earlier this year, Shanley said liquidity remains a concern.

``We won't use the phrase `run on the bank,' but we would be remiss if we did not observe that many creditors have quietly been pulling funds,'' wrote Shanley, based in Chicago. Their actions are ``presenting an increasing funding challenge,'' she wrote. Gimme Credit is an independent research firm serving corporate bond investors.

WaMu spokesman Derek Aney didn't respond to calls for comment. Chief Executive Officer Kerry Killinger has said the $7 billion cash infusion led by TPG Inc., coupled with plans to save $1 billion annually by trimming the mortgage business, gives the lender enough money to ride out the U.S. housing slump.

Credit-Default Swaps

Washington Mutual slid 80 cents, or 17 percent, to $3.85 at 1:24 p.m. in New York Stock Exchange composite trading, after dropping as much as 23 percent earlier. The stock fell 20 percent yesterday and has lost 90 percent of its value in the past year.

Some 212 million WaMu shares changed hands, more than five times the average trading for a full day over the past year, according to Bloomberg data. The stock has moved at least 10 percent nine times in the past three weeks.

The cost to protect WaMu's bonds from default rose to a record. Credit-default swaps on the company climbed 100 basis points to 873 basis points, according to Credit Derivatives Research LLC. An increase in the contracts, used to speculate on a company's ability to repay debt or to hedge against losses, signals deterioration in investor confidence.

Credit-default swaps were conceived to protect bondholders against default, and pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements.

Analysts at Piper Jaffray Cos., Merrill Lynch & Co. and Friedman Billings Ramsey Group Inc. said after WaMu's earnings report that it may need to raise more cash. According to a clause in the TPG agreement, if WaMu raises more than $500 million in equity at less than $8.75 a share within 18 months, it must compensate TPG for the difference.

Standard & Poor's said WaMu has the liquidity to meet obligations without raising more funds through 2012. Analysts at Lehman Brothers Holdings Inc. and UBS AG also said the company should have enough capital.

Chart 1: WM 1-Year