Investment In Washington Mutual (WM) May Undercut Common Shareholders

Washington Mutual (WM) may get $5 billion in much-need capital. It is an example of how financial companies bet on subprime mortgages which cut their share prices by as much as 75% due to write-offs. The firms then go into the market for capital, and, as they find it, dilute their investors dropping stock value even further.

According to The Wall Street Journal "Private-equity firm TPG and other investors are close to a deal to invest $5 billion in Washington Mutual." The money may go in as common or preferred stock. Either way, the capital table of WM will be affected in a way that current shareholder could see another 35% of the value of their shares disappear. Washington Mutual’s current market cap is only $9 billion. The stock, now at $10, could eventually drop below $7 because of the new money coming in.

The cycle of new investment following large write-offs does significant damage to both individual and institutional shareholders in large banks and brokerage firms sucking more stock market value out of investments. Many of the investors in these firms are already stretched thin by market losses.

But, it is better than the value of the common shares in a Chapter 11 filing.

Douglas A. McIntyre