SEATTLE - Washington Mutual will keep investing in its profitable retail banking business as it attempts to recover from its losses in mortgage lending, CEO Kerry Killinger said Wednesday.

"The retail channel is the cornerstone of WaMu and the foundation of our comeback," Killinger told the Seattle Rotary. "We'll continue to invest in our core retail at the same time we slow and eventually stop activities that don't make sense for our company."

Killinger's lunchtime speech to some 800 Rotary members was his first public appearance since WaMu's board of directors last week stripped him of his post as the company's chairman. His fellow Rotarians discretely didn't ask him about that unpleasantness, but Killinger addressed it obliquely, saying that friends and family have been treating him solicitously, with most telling him that "you look better than I thought you would, considering."

WaMu's stock price certainly hasn't been looking good. Shares fell as low as $5.78 on Wednesday, as rumors spread on Wall Street that the company faces regulatory action. WaMu issued a statement denying the rumor, and the stock rallied slightly to close at $6.06. That was still down 62 cents on the day, and over the past month, shares of WM have lost roughly 40 percent of their value, amid fears that a second round of subprime mortgage defaults looms ahead in 2009.

Killinger acknowledged investor unhappiness, saying that "our company is not earning a satisfactory return." The company previously warned that it expects to lose $1.1 billion in the first quarter, and has set aside $3.5 billion to cover loan losses.

But he made pains to stress that WaMu's in a liquid financial position. In the past six months, he said, the company has raised $10 billion in new equity - most of it the result of a $7 billion infusion from TPG, a Texas-based private equity fund. In addition, Killinger said, WaMu grew its core deposits by $8 billion, and it has access to $50 billion from the Federal Home Loan Bank, should it need it.

"That should be sufficient" to both tide WaMu through the downturn and fund new growth when it emerges from the current crisis, he said.

Killinger said the mortgage crisis wasn't a complete surprise.

"We all knew that housing prices were rising at an unsustainable rate. We all knew that the market would have to correct itself," he said. "I knew we had a problem when my wife's hairdresser was talking about her third condo in Florida."

However, most economists - including the Fed, Killinger said - expected it would be a mild correction. Instead, it's been "what I would call a dramatic free fall."

WaMu was in the subprime mortgage business, but the "vast majority" of its loans were conservative ones, made to prime borrowers who only took mortgages worth 80 percent of what they could reasonably afford to repay, Killinger asserted.

But when home values in places like California and Florida plummeted 35 percent, "even conservatively written loans can perform badly," he said.

(The situation in Seattle is "not nearly as dire," he told the Rotarians. Depending on which numbers you track, home values here are "flat to down about 5 or 6 percent. It's one of the top-performing markets in the country.")

The collapse in home values has shaken consumer confidence, led to lower consumer spending and widespread job losses, and has put some people out of their homes. More bad news is coming, he said: Local governments that rely on property tax revenues will face severe budget shortfalls.

"This is frankly about as challenging as it gets for those of us in the home-lending business. We haven't had this difficult a period since the Great Depression," Killinger said. There's plenty of blame to go around, he added, but "it's time to stop trying to fix the blame and start trying to fix the problems."

WaMu has tightened credit standards to "make sure we don't add any more problems" and is cutting costs - including the layoff of more than 3,000 bankers in its mortgage division. It continues to invest in its retail business, which Killinger said is the key to future growth: WaMu added a million retail banking customers in the first quarter, he said.

WaMu also has set aside $2 billion to help homeowners refinance their delinquent mortgages, Killinger said. So far, the thrift has re-written the terms on 35,000 home loans. "We're doing all we can to help our borrowers."

On a national level, Killinger says he supports legislation in Congress to help the housing market, including more money for consumer credit counseling programs, a $7,500 tax credit for first-time home buyers and an assistance package to help homeowners who are upside-down on their mortgages - meaning they owe more on the loan than the property is worth - get refinancing.