S&P lowers WaMu to BBB+

Standard & Poor's said it lowered its long-term counterparty credit rating on Washington Mutual Inc. to BBB+ from A- and affirmed the short-term rating at A-2.

The outlook is negative.

The agency said the downgrade is due to weak earnings over an extended time period and exposures to the troubled housing markets, which are escalating the loss severity of WaMu's subprime and HELOC loan portfolios. WaMu's earnings outlook for 2008 is quite weak, in S&P's view, given the severity of losses in the HELOC portfolio and the ever-growing, pessimistic projections for home price trends and mortgage performance in WaMu's key markets, California and Florida.

S&P said WaMu's other key business units remain profitable, although the retail banking and commercial and credit cards units' contribution to consolidated earnings is not enough to mitigate the earnings volatility of the home loans business. The raising of $4 billion in preferred equity in the fourth quarter and the sizable cut to the common dividend have shored up WaMu's capital level to a relatively strong position and should support its business during this troubled mortgage cycle, the agency predicted.

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