Moody’s Downgrade of WaMu Implies Junk Rating Near (WM)

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This is just not a good day for financial stocks.  Washington Mutual Inc. (NYSE: WM) is feeling some additional pain, and it isn’t because of having ties to any government bailout package.  Moody’s came out this morning and downgraded its debt rating on WaMu.

The senior unsecured debt rating was cut from Baa2 down to Baa3, which is the lowest investment grade.  Its overall bank financial strength of C- and short term rating of prime-2 were "affirmed."  Unfortunately, WaMu outlook is still "negative" so this might not be the last downgrade for a while. Any more downgrades will take it to Junk status and that will bar many holders from being able to hold their debt or equity instruments.

The note cites that WaMu’s necessary provisioning could reduce capital to a point that could lead to additional downgrades on WaMu in 2008.  Moody’s noted that WaMu could raise additional capital, reduce assets, and make further dividend cuts to address this outlook.

Unfortunately, things in the financial sector still have a way to go.  S&P pulled in a lot of suckers yesterday with "the end of the writedowns is in sight" call. 

This sure doesn’t feel like we are anywhere near the end of downgrades nor does it feel like the writedowns and deleveraging will suddenly stop.  This looks like a situation where it will feel like waterboarding before it gets better.

Jon C. Ogg
March 14, 2008