Washington Mutual's (NYSE: WM) dreams came true today after it announced a $7 billion capital infusion from an investment syndicate led by private-equity firm TPG. Unfortunately, shares dropped after the bank then announced a higher-than-expected $1.4 billion preliminary write-off for the first quarter and a move to slash its dividend to shore up capital. In the end, the good news offset the bad and shares gave back their earlier gains.
Washington Mutual, like many other banks, has found itself under substantial pressure amid rising defaults. The firm's loan loss provisions for the first quarter alone will run $3.5 billion with a net write-off expected to come in at around $1.4 billion. So, while the $7 billion in additional liquidity is good news, the bank may yet face substantial capital concerns going forward. That's not to mention the significant dilution that shareholders will experience.
Fortunately, Washtington Mutual has a series of plans in place to improve its financial situation after this latest capital injection. The bank will significantly reduce its leverage once the new capital is in place, which makes it a far less risky institution. Additional, the planned elimination of its wholesale lending and home-loan centers will help it refocus on the much more stable retail banking sector that isn't completely reliant on real estate for success.
In the end, this is good and bad news for shareholders. The additional capital will enable the bank to reduce its exposure to loans and ensure its going concern. However, the additional capital also comes at a cost - share dilution. Overall, the move should be good for the long-term but difficult for the short-term.
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