Activist shareholders' attempts to unseat several Washington Mutual Inc. board members will come to a vote Tuesday when the thrift, badly battered by the subprime mortgage crisis, holds its annual meeting and reports what are expected to be abysmal first-quarter results.
Ousting directors charged with managing WaMu's exposure to risky mortgages won't restore the $28 billion or so in shareholder value that has evaporated between the end of 2006 and the close of trading Friday.
But groups representing government and union pension funds say some board members should be held accountable for not acting to protect the company amid mounting evidence that housing prices were set to collapse. And others should be punished for doling out fat bonuses to executives while shareholders lost money, they say.
The shareholders' case was underscored a week ago when WaMu, the country's biggest savings and loan, announced it would take a $7 billion cash injection from private equity group TPG and other investors.
The company also disclosed it would post a wider-than-expected loss for the first quarter and set aside $3.5 billion for mortgage defaults and foreclosures, $1.5 billion more than previously expected.
Washington Mutual is one of several financial institutions under fire for risk management and executive compensation issues this year from shareholder groups, which have also called for changes at Citigroup Inc., Morgan Stanley, Merrill Lynch & Co., and Wachovia Corp. The chair of Citigroup's audit and risk committee, C. Michael Armstrong, is expected to step down in response, according to a Wall Street Journal report.
CtW Investment Group has asked shareholders to vote against the re-election of Mary Pugh, chairwoman of WaMu's finance committee. The group is part of the Change to Win federation of U.S. labor unions that includes the International Brotherhood of Teamsters and the Service Employees International Union.
In letters to the thrift and shareholders, CTW argued that Washington Mutual's shift away from traditional mortgages and toward subprime, adjustable-rate and other higher-risk mortgages was ill-advised.
"We believe the finance committee ought to have been pushing back much harder than it did," said Richard Clayton, CtW's research director, in an interview. CtW questioned Pugh's independence, given her investment management company's business relationship with WaMu.
Washington Mutual Chief Executive Kerry Killinger and Stephen Frank, a board member, responded in a letter to shareholders that the company balanced risk by focusing more on the retail banking business starting in 2004. WaMu made fewer subprime mortgages and sold other risky loans in 2006, and cut back on all types mortgage lending in 2007. At the end of last year, WaMu announced it would exit the subprime business completely.
Killinger and Frank also said WaMu and Pugh Capital Management ended their business relationship in 2006.
CTW and others also objected to the way WaMu's board formulated executive bonuses for 2007 and 2008. In filings with the Securities and Exchange Commission, WaMu said 2007 bonuses excluded charges related to the subprime crisis, as would those awarded in 2008. The board will base its awards in 2008 in part by "subjectively (evaluating) company performance in credit risk management," according to one document.
CTW asked shareholders to vote against James Stever, chairman of the human resources committee.
"Mr. Stever and other directors stressed the difficulty of determining an objective target for credit loss and foreclosure cost mitigation, and the importance of retaining talented executives," the group said. "We find these arguments unconvincing."
A second group, the American Federation of State County and Municipal Employees, has asked shareholders to withhold votes from the board's entire five-member human resources committee, including Stever. The WaMu board has 14 members, including Killinger.
AFSCME, a 1.5 million-member-strong public service employee union, also questioned the board committee's decision to exclude charges related to the subprime crisis when calculating bonuses.
"We find this approach difficult to understand, since subprime credit losses are the biggest problem the bank is facing. What's more, they're a problem for which current management is responsible," AFSCME Chairman Gerald McEntee wrote in a letter.
Killinger and Frank explained in their own letter that 2008 bonuses don't take into account mortgage-related costs because housing prices and homeowner delinquencies "are affected by important and currently unpredictable sector-wide factors in the broader market and economy."
Proxy advisers including RiskMetrics Group's ISS Governance Services, Glass Lewis & Co. and Egan Jones Proxy Services have joined CtW and AFSCME's campaign.
Richard Ferlauto, director of corporate governance for AFSCME, said in an interview that after informal conversations with shareholders he expects "significant support." CtW's Clayton said he was "guardedly optimistic" that a majority of voters will oppose Pugh and Stever's re-election.
The efforts by shareholders predated WaMu's startling news that it would receive $7 billion in cash from TPG and a number of existing investors, in a deal that would significantly dilute existing shareholders' stakes.
Clayton said that regardless of Tuesday's outcome, shareholders should be pressing the company about why it accepted the TPG offer instead of one from JP Morgan Chase & Co., and why other shareholders were not invited to participate in a stock offering.
According to a person familiar with the matter, WaMu realized in recent weeks it would need more cash than expected to cover credit losses.
The company approached JP Morgan, TPG and other banks and private equity groups, according to the person, who was not authorized to speak publicly about the situation and asked not to be named. WaMu's intent was to raise money "swiftly and with certainty" before it announced first-quarter earnings, the person said.
The need to move quickly ruled out a public stock offering, according to the person, who also said that JP Morgan's offer, reported to be worth as much as $8 per share, was rejected because it was actually significantly lower and was made with a number of conditions.
WaMu's shares fell 47 cents to $10.95 Friday.