WaMu Shares Get Slammed as Credit Worries Grow

Investors hammered shares of Washington Mutual for a second day amid concerns about the bank's credit quality after the cost to insure its debt jumped Thursday.

Credit-research firm Gimme Credit said in a report that some unsecured creditors are reducing their exposure to the bank. "We would be remiss if we did not observe that many creditors have quietly been pulling funds from the bank," Gimme Credit analyst Kathleen Shanley said in a report.

Washington Mutual's shares tumbled 63 cents, or 13 percent, at $4.03 on the New York Stock Exchange, after being down as much as 20 percent earlier .

Washington Mutual directly refuted the idea that it faces liquidity problems, however.

"As we stated publicly months ago, WaMu funds all of its business through its banking operations, and does not rely on commercial paper," a Washington Mutual spokesman told CNBC.com. "We have more than $40 billion in readily available liquidity today."

Credit-default swaps on Washington Mutual's debt rose to an upfront cost of 12.5 percent to insure $10 million in debt for five years, in addition to annual premiums of 500 basis points, according to Markit Intraday. The swaps typically start trading on an upfront basis when spreads widen over 1000 basis points.

The swaps closed at 832.5 basis points on Wednesday, according to Markit Intraday.

Credit protection sellers often start asking that contracts be paid on an upfront basis when a default is viewed as a possibility within five years, and so seek to be paid more at the outset of the contract, in addition to quarterly payments.

"The shift to upfront represents more of a shift to 'when' WaMu defaults as opposed to 'if'," said Tim Backshall, chief derivatives strategist at Credit Derivatives Research in Walnut Creek, California.

Current trading levels imply around a 51 percent chance of default within 5-years and 24 percent within a year, Backshall said.

"It's the first real mainstream financial CDS that I've ever seen trade upfront, that gives you an idea how much risk the market sees in it," Gary Kelly, director of research at Tradition Asiel Securities Inc. in New York.

(Trying to make sense of the WaMu volatility? Click on the video at left.)

Some analysts and rating agencies, however, have said they consider Washington Mutual's liquidity sound for the coming few years.

Standard & Poor's said on Wednesday, "WaMu's holding company has liquidity capacity to meet its obligations without accessing the capital markets through 2012."

- Reuters contributed to this report.

© 2009 CNBC