DBRS Changes Trend on Washington Mutual, Inc.’s Ratings to Negative

DBRS has today changed the trend on all ratings of Washington Mutual, Inc. and its subsidiaries (WaMu or the Company) to Negative from Stable. This rating action follows the Company’s announcement indicating that it will substantially increase its loan loss provisioning levels to reflect weaker credit performance of its portfolio and higher expected loan losses. WaMu has also announced that it is planning to resize its home-lending business and record a $1.6 billion (after tax) writedown of all the goodwill associated with the Home Loan Group. At the same time, the Company announced that it has materially reduced its dividend and plans to raise an additional $2.5 billion of preferred stock. DBRS views the Company’s plan to replenish, and to a lesser extent, increase, capital as prudent, given the significant challenges its faces. DBRS believes that WaMu’s near-term earnings power is materially reduced, as its earnings will be offset by the continued weak credit performance. Accordingly, in DBRS’s opinion, the Company has limited flexibility to manage additional factors that may negatively impact earnings.

The trend changes reflect the growing uncertainty concerning the performance of WaMu’s portfolio in the face of the adverse housing conditions, particularly the unknown impact of the declining house prices, and the overhang in the housing markets. Increases in loss frequency as well as loss severity continue to drive higher credit losses, which has caused WaMu to revise its current and anticipated provisions estimates. The Company now estimates its loan loss provisions to be in the range from $1.5 to $1.6 billion for Q4 2007 and $1.8 to $2.0 for Q1 2008, which are significantly above our expectations. Accordingly, DBRS has very little tolerance for any additional increases in provisions. Moreover, continuation at this run rate throughout 2008 is well beyond our tolerance levels and will add considerable pressure on the rating.

DBRS views WaMu’s earnings power as significantly reduced for the near term. Importantly, DBRS believes that this reduced earning power greatly limits the Company’s ability to invest in and defend its franchise, which is increasingly more important, given the intense competition for retail deposits. Further, although the proposed preferred equity offering bolsters capitalization and reduces leverage; the cost of this form of equity will also negatively impacted the Company’s earnings powers, as the all-in cost of this proposed issuance will likely be elevated given prevailing market conditions.

The ratings reflect DBRS’s view that WaMu’s franchise remains strong, and also takes into consideration the steps the Company is taking to bolster its capital. The Company’s healthy retail bank with its solid deposit base provides resilient net interest income and substantial fee revenues. DBRS expects that WaMu will continue to achieve acceptable performance in its Retail Banking and Commercial groups. However, DBRS expect earnings in the Card Services group to be reduced, given the weaker economy and higher charge-offs. A significant decrease in earnings from the Card Services Group will place negative pressure on the ratings.

WaMu’s acceptable liquidity position is anchored by its significant deposit base. The recent market disruptions, however, have greatly decreased the Company’s funding flexibility, as the range of funding alternatives has been reduced, while the reliance on wholesale-sourced funding has increased. Moreover, given the increased competition for deposits, WaMu will be challenged to raise retail deposits, at an acceptable cost, to reduce its reliance on more expensive wholesale forms of funding such as Federal Home Loan Bank advances.

The Negative trends reflect the significant near-term headwinds the Company is facing. Additional weakness in earnings or evidence of any weakness in risk management systems will negatively pressure ratings. As indicated above, WaMu’s solid franchise is a considerable factor in the ratings confirmation, accordingly, the ratings will come under pressure should signs emerge indicating that WaMu’s franchise is impaired by the reduced earnings and the weakened credit profile. Conversely, evidence of stabilization in operating fundamentals, including earnings and credit performance, will be viewed favorably.

Note:
All figures are in U.S. dollars unless otherwise noted.