Posted on: Saturday, August 28, 2004

Missteps plagued savings and loan

By E. Scott Reckard
Los Angeles Times

For Washington Mutual Inc., the glory days of growth and acquisitions have given way to layoffs and lowered expectations.

The Seattle-based savings and loan, which became the nation's largest after swallowing three major California thrifts, is completing 13,450 job cuts, closing 100 mortgage offices and shuttering 53 commercial banking branches.

Washington Mutual exited the Hawai'i market last fall, closing its offices in downtown Honolulu, Maui and the Big Island.

WaMu reported zero income from mortgages in the second quarter, compared with $611 million last year. Overall profit was down 49 percent. And its share price has dropped 12 percent since May, closing Tuesday at $38.88 on the New York Stock Exchange.

What went wrong? A national decline in mortgage lending, a business in which WaMu is No. 2 behind Wells Fargo & Co., is partly to blame. But at Wells Fargo and Countrywide Financial Corp., the third big home lender, second-quarter net income still managed to rise.

Banking industry analysts point to a series of management missteps, including:

• Too-rapid expansion in the past decade, including the takeovers of California's American Savings, Great Western Bank and Home Savings, plus four mortgage companies, that kept WaMu from smoothly integrating disparate accounting systems.

• Botched use of financial hedges, investments that were supposed to offset the risk of servicing its $7.5 billion in mortgages.

• Trouble fixing billing errors, misplaced loan payments and other banking foul-ups, leading to an unusually heavy volume of complaints for a major bank, especially one that boasts of its in-branch service.

WaMu's president and chief executive, Kerry Killinger, has acknowledged the seriousness of the problems.

"I know many of you are unhappy," he told analysts recently. "I understand your concerns, and as a significant shareholder I am not happy either."

Killinger, who declined to be interviewed for this story, told the analysts that WaMu became distracted during the home refinance boom, a three-year stretch in which it vied with San Francisco's Wells Fargo and Countrywide in Calabasas, Calif., to be No. 1 in mortgage loans. He said sky-high costs resulted from an inability to get nine aging computer systems working together and the failure of a plan to replace them.

He said his priorities today were to slash costs at the once-profitable mortgage business and to work with consultant BlackRock Inc. on the financial hedges.

So far, Wall Street isn't impressed. WaMu shares have been flat this year and are up just 4.6 percent in the past two years.