Shocking, an S&P analyst today changed his rating on WM to a "sell." Considering we are entering into an unprecedented housing downturn and already in the thick of a secondary market liquidity crisis, you would think analysts would have cut ratings on pretty much all major banks, particularly those like WM with nearly 10% in junk housing loans. The next few quarterly earnings reports should take WM lower.

FBR just reduced 2007 earnings estimates by 31% from $3.60 a share to $2.50 on possible loan writedowns.  Credit Suisse announced yesterday that mortgage lending will go from $3.3 trillion in 2005 to an estimated $1.8 trillion in 2008.  Keep in mind that pretty much all remaining mortgage originators are focused on the "prime" sector which they can sell to Fannie or Freddie - with increased competition comes even thiner margins.  Not a good long-term business model.

Disclosure, we have been short (put options) WM since February 2007 and continue to maintain this position.

August 30, 2007 - NEW YORK (AP) -- A Standard & Poor's stock analyst cut his rating on Washington Mutual Inc. on Thursday, citing concerns about the bank's exposure to the ailing housing market.

Mortgage banking analyst Stuart Plesser downgraded Washington Mutual stock to "Sell" from "Hold," and cut his target price by $4 to $33. He also lowered his 2007 and 2008 earnings forecasts, to $3.41 and $3.90 respectively.

Plesser noted that about 9 percent of Washington Mutual's loan portfolio is subprime mortgages, or home loans to people with poor credit histories. He said deteriorating credit quality will likely force the bank to boost its provisions for unpaid loans by more than expected in the second half.

"We also look for origination volume from the home loan business to be lower than previous estimates," Plesser wrote in a note to investors, adding that the bank's profit margins on mortgages will likely narrow because the secondary market for the loans has largely dried up.

Investors have become increasingly worried about the value of mortgages amid rising delinquencies and defaults, especially among subprime mortgages. Those worries have spread into the larger market, leading investors to avoid purchasing nearly all mortgages on the secondary market.

Shares of Washington Mutual fell 64 cents to close at $36.