updated 9/24/2008 7:37:46 PM ET 2008-09-24T23:37:46

Standard & Poor's Ratings Services downgraded Washington Mutual Inc.'s creditworthiness further into junk territory Wednesday, noting the increased likelihood that any sale of the company would only be done in piecemeal fashion.

The fate of the ailing Seattle-based thrift has hung in the balance for weeks, as investors question the potential for a sale or government intervention in the face of WaMu's plunging stock price — which has fallen 83 percent so far this year.

S&P noted that in the stressed financial services sector, there are few potential buyers not struggling with their own capital constraints and mortgage debt issues, narrowing the possibility for an outright takeover of the entire thrift. But a carve-up of Washington Mutual would increase the risk of default for creditors of the holding company, because the bank's stable deposit base would be gone.

Washington Mutual assured customers Wednesday that Standard & Poor's rating actions do not affect the safety of customers' deposits, which are insured by the FDIC up to certain limits.

WaMu has insisted that its capital levels remain above regulatory standards for being considered "well capitalized," but debt ratings agency Moody's this week cut the financial strength rating of WaMu's main bank subsidiary to "E," its lowest, saying the thrift's capital is insufficient to absorb its mortgage losses.

Last week, a sale of the nation's largest savings and loan seemed imminent, as Goldman Sachs Group Inc. was brought in to assist with a transaction and a major investor removed a potential roadblock to a sale. But after the government announced Friday it was working on a plan to help troubled banks remove billions of bad mortgage debt from their books, momentum stalled as buyers awaited details of the proposal.

"(The potential suitors) are all kind of playing a wait-and-see game right now," said Joe Heider, president of Cleveland-based Dawson Wealth Management, in an interview on Tuesday. "They are trying to gauge the amount of losses that they ultimately could end up absorbing."

A possible scenario attractive to buyers would be WaMu's takeover by the FDIC, which could allow another bank to buy the deposits and branches of Washington Mutual — considered the most valuable part of the thrift — while the government is stuck with selling off bad mortgage debts.

But there would have to be "a triggering event" in order for the FDIC to intervene, said Doug Landy, a partner in the banking regulatory practice at Allen & Overy LLC. "One, the deposits start walking out, or two, WaMu takes such big losses that its capital drops down below certain required levels."

S&P's outlook on WaMu's ratings is negative, implying they could be downgraded even further. But the agency said it could revise the outlook to "developing" if WaMu issued definitive news of a sales transaction or if there was concrete proof of "the potential benefit the Treasury's new bailout plan may offer to WaMu as an independent company."

Washington Mutual shares dropped 94 cents, or 29.4 percent, to $2.26.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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