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Short WaMu? Analyst Says Yes. Sees Losses Ahead

Washington Mutualmay have to set aside $14 billion this year for credit losses, according to a Goldman Sachs analyst who also took a rare step of urging investors to sell the company's shares short.

The largest U.S. savings and loan, known as WaMu, may lose $3.30 per share this year and not turn a profit until 2010, analyst James Fotheringham wrote on Friday.

Fotheringham previously forecast a 2008 loss of $1.00 per share. He cut his forecast for 2009 earnings to break-even from a profit of $1.10 per share. He has a "sell" rating on Seattle-based WaMu, and cut his price target to $10 from $12.

Keefe, Bruyette & Woods analyst Frederick Cannon last week also projected WaMu would not be profitable before 2010.

On Tuesday, WaMu said it raised $7 billion from investors led by private equity firm TPG, which took a $2 billion stake. The infusion eased concern about the thrift's capital.

But WaMu also projected a $1.1 billion first-quarter loss, or $1.40 per share, and nearly doubled its forecast for quarterly credit losses to $3.5 billion. It also set plans to cut 3,000 jobs, close 186 home lending offices, and stop making mortgage loans through brokers.

Fotheringham estimated that WaMu has $17 billion to $23 billion of potential mortgage losses, but has absorbed only $3 billion. WaMu's home loan portfolio has "disproportionate exposure" to states where home prices may fall, including half in California alone, he said.

The analyst added that credit card operations might also be a problem, as WaMu "leads its peers with respect to recent growth" in credit card delinquencies.

"Given the sufficiency of WaMu's recent equity capital raise, we recommend investors go long via the credit markets," Fotheringham wrote. "However, given the credit costs expected this year, we recommend shorting WaMu stock."

Short-sellers sell borrowed shares, hoping to buy them back later at lower prices to replenish the shares' lenders.

In morning trading, Washington Mutual shares were about flat at $11.42 on the New York Stock Exchange. They have lost about three-quarters of their value from their 52-week high of $44.60 last June 4.

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