Stung by big losses in its mortgage-banking unit, Washington Mutual is working to slash costs but still expand its retail business. Wall Street has greeted the strategy with both praise and doubt.

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Less than six months ago, speculation was rampant that Washington Mutual might be bought.

Seattle’s largest banking company, after a decadelong run of successful national growth, had stumbled badly in its mortgage business. And measures meant to protect WaMu against interest-rate changes had generated such hefty losses that, as one New York analyst put it, “They might as well have burned $20 bills in their headquarters in Seattle to heat the building.”

As the company wraps up the fourth quarter of a difficult year, the short-term takeover rumors seem to be squelched. But WaMu watchers, once a group of starry-eyed admirers, remain squared off along stark lines.

Some say the sixth-largest U.S.-based banking company is headed for blue skies; others insist it is hopelessly lost and destined to be sold.

Longtime Chief Executive Kerry Killinger has apologized to investors for the company’s missteps and is pursuing a turnaround plan that keeps costs down while continuing WaMu’s expansion march with about 250 new bank branches a year.

Yesterday, Killinger announced the hiring of Stephen Rotella from JP Morgan Chase as WaMu’s new president and chief operating officer, a move the CEO sees as “the natural next step in our growth and evolution.”

A confident presentation Killinger and his team recently made to Wall Street underscored how people who follow WaMu disagree over its outlook.

Bruce Harting, an analyst at Lehman Bros., said the talk last month boosted his faith that WaMu’s top brass could execute their turnaround strategy. “With the game plan they’ve put in place and made very clear at Investor Day in New York, that’s very exciting,” he said.

But Richard Bove, an analyst at Punk Ziegel, said management seemed overconfident and in denial about WaMu’s problems. “These guys were hepped up on Jolt cola or something,” he said. “I got the feeling they butted heads a few times before they came onto the field.”

Bove thinks WaMu should be sold to more experienced hands. Harting says 2005 “will be a transition year up, and then the news just gets better from there.”

Such sharp debate is unfamiliar to Washington Mutual. It was a regional thrift with fewer than $7 billion in assets when Killinger became CEO in 1990. Since then, it traced a trajectory of rapid growth to become a financial-services giant, with $288.8 billion in assets and a branch network that spreads from California to New York.

WaMu had been bathed in the golden light of Wall Street’s favor, so it came as a shock when its well-regarded mortgage business hit a wall in midyear due to high costs, losses in its hedging program and a sluggish mortgage market.

Second-quarter earnings dropped 52 percent, to $489 million, and the next quarter’s profit was down 34 percent from a year earlier.

The company is streamlining operations and, from January through September, slashed more than 8,000 jobs to 55,488 companywide. Locally, it has cut more than 600 workers, about 8 percent of the 7,727 it employed in King County in January.

In July, WaMu said it would close 100 home-loan and all of its commercial-banking offices, which catered to midsize and large companies.

Earlier in the year, it sold Washington Mutual Finance, part of a larger WaMu business that lends to people with spotty credit histories.

But on other fronts, Seattle’s largest corporate occupant of downtown office space is growing. WaMu is building a new 42-story headquarters tower at Second Avenue and Union Street that will connect to the Seattle Art Museum.

The company also is building out its retail-bank network, which has performed well while the mortgage business founders. WaMu has opened 250 of its patented, customer-friendly branches in 2004 and expects to continue that pace next year and beyond in existing markets, an aggressive strategy that generates further divisiveness among investors and analysts.

At least one major WaMu shareholder is pleased with the retail-branch growth.

“We think the retail bank alone is worth more than the stock price,” said Bill Nygren, co-manager of the Oakmark and Oakmark Select funds. Together, the funds hold 27.6 million shares, about 3 percent of WaMu’s total shares outstanding.

“We love the plan Kerry has there of trying to be a nationwide, middle-market bank. There are great economies of scale in being nationwide, and the middle market is underserved,” Nygren said.

WaMu officials say the almost 800 new branches opened since 2000 will become profitable as a group next year.

“We have a vision of creating a unique national franchise serving everyday people and small businesses,” said spokesman Alan Gulick. “Based on extensive customer research, we’re providing customers what they want in a bank, great value in a welcoming, friendly environment. And we can do it profitably.”

Critics say WaMu should not be spending money to add branches when it is still working through problems that sent its earnings plummeting this year.

“There is some concern about their ability to cut costs on one side of their business while they’re spending money hand over fist on the other,” said Jonathan Gray, an analyst with Sanford C. Bernstein & Co.

“People have lost some confidence in the company’s ability to analyze some of these issues,” he said, pointing to problems in WaMu’s mortgage business and its hedging strategy.

The company has said that because of the refinancing boom of the past few years, it neglected to mesh together the mortgage computer systems of various companies it bought. That cumbersome way of doing business escalated costs, contributing to a second-quarter loss of $63 million in the mortgage-banking segment, an area that had had a profit of $489 million a year earlier.

The mortgage business also was hit by losses from financial instruments meant to cushion the blow from changing interest rates.

Likening WaMu’s hedging effort to burning $20 bills “to heat the building,” Gray said, “They mismanaged this process pretty badly.”

Officials at WaMu argue that such hedging is intended to manage volatility over a longer period of time than a single quarter. They have hired the risk and asset-management firm BlackRock to help in that area.

The problems led to speculation earlier this year that WaMu might be purchased cheaply by the likes of New York-based Citigroup or a foreign bank looking to make a splash in the U.S.

WaMu officials strongly assert they intend to stay independent. They do not like, nor have they been accustomed to until this year, anyone suggesting their fortunes might go differently.

Kenneth Posner, an analyst at Morgan Stanley, is encouraged that WaMu executives are working on their problems, but is undecided about the company’s long-term prospects, particularly in the mortgage arena.

“It’s one thing for a basketball player to recover from an injury and get back on the court,” Posner said. “It’s another challenge altogether to get into the league of the sports leaders.”

Melissa Allison: 206-464-3312 or