September 26, 2008 / 3:30 PM / 10 years ago

Downey shares sink as WaMu failure triggers fear

Sept 26 (Reuters) - Shares of Downey Financial Corp (DSL.N) tumbled 33 percent, after the biggest U.S. bank failure in history triggered fears that the troubled California savings and loan will meet a similar fate.

Federal authorities shut Washington Mutual Inc (WM.N), the largest savings and loans on Thursday, selling its banking assets to JPMorgan Chase & Co (JPM.N), in the biggest U.S. bank failure.

Federal banking authorities had clamped down on Downey last month by issuing a cease and desist order that required the lender to seek permission for everything from raising capital to naming a permanent chief.

Earlier this month, Downey sold certain real estate assets for $110 million as part of its agreement with regulators to enhance its financial strength by the year end.

The company on Monday named Charles Rinehart chief executive officer, replacing interim CEO Thomas Prince, who would remain senior executive vice president.

Downey struggled in the past due to its exposure to option adjustable-rate mortgages losing $218.9 million in the second quarter. The company is one of the largest U.S. option ARM providers.

Option ARMs allowed borrowers to pay less than the interest and principal due each month. Many borrowers are defaulting on these loans, often finding themselves owing more than their homes are worth.

Shares of Downey were down $1.26 at $2.64 in morning trade on the New York Stock Exchange. (Reporting by Dinesh Nair, Supantha Mukherjee in Bangalore; Editing by Deepak Kannan)

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