Banks tend to build big, imposing buildings for their headquarters. Large amounts of limestone suggest security and permanence, and a rock-solid balance sheet. Now that Washington Mutual has been downgraded to junk status by both Moody’s and Standard & Poor’s, can the US’s largest savings and loan continue to operate from the financial equivalent of roadside shack?

WaMu can muddle through for a while. The downgrades do not trip any covenants in its current funding arrangements. The parent company, to which the junk status applies, has funds through to 2010.

However, the essence of the business of banking is earning a spread between the interest paid to accumulate funds, and that made on lending. As a trusted institution, a bank should be able to raise capital more cheaply than its customers. It is hard to see how WaMu can achieve this while paying premium rates to borrow. The group is already offering savers a 5 per cent rate on deposits for one year. (The nationwide average is 3.7 percent, according to Any signs that savers were becoming skittish could cause regulators to step in.

A sale would be one solution – JPMorgan Chase was rebuffed in the spring – yet new chief executive Alan Fishman seems determined to turn the business around, bringing on board former colleague Frank Baier as finance director to help. Losses are expected to moderate in the second half, but even sharing that optimism it will be a challenge to rebuild capital through earnings. WaMu is heavily exposed to areas like California and Nevada, which are suffering the greatest fallout from the housing bust. Private equity house TPG, which led a group of investors contributing $7bn in June, might choose to pour in more cash. Yet estimates for the amount of capital required range from $2bn to $20bn, depending on the severity of the economic downturn. Shacks are no place to shelter at the moment.

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