July 27, 2008 – 2:15 pm

Just after convulsing from a $3B loss in the second quarter, Washington Mutual staggered from its earnings report straight into another debacle. Now swirling are rumors of an investigation by one of WaMu’s largest lenders and charges by a bank analyst so serious that, even though drained and likely to implode within the week, Wa Mu struck out.

As Wall Street was awash in rumors that WaMu was being audited by the government-sponsored Federal Home Loan Bank, one of its largest lenders, Gimme Credit bank analyst Kathleen Shanley wrote that the institution may be seeing funds quietly being pulled out. That spells bank run (instant death), so WaMu’s assualt on Shanley was instinctive:

“As we stated publicly months ago, WaMu funds all of its business through its banking operations, and does not rely on commercial paper.”

The company also noted that it has $40 billion in cash and cash equivalents.

What they meant to say is that their paper is suited only for the toilet, which is why they had to issue rights while selling assets to bring $40B to bear against the run we all expect. Instead of being forthcoming, they went at Shanley:

But WaMu Treasurer Robert Williams, in an interview with The Post, went further, charging that Shanley’s research reflects a “failure to understand basic balance sheet management,” and added that the S&L’s moves of late have been misconstrued by the analyst.

Shanley, Williams said, took the bank’s dwindling short-term funding levels to mean that its big clients were pulling short-term funding.

But Williams said the bank’s raising of more than $7 billion from private-equity firm TPG has made borrowing from the Federal Reserve’s short-term borrowing window unnecessary.

Necessary or not, the scent of blood is distinctive and unmistakably stems from WaMu’s need for $7B big ones. Since the money came from TPG instead of the Fed’s short-term window, don’t expect the bears to be thrown from the scent. The bears also know the shares that TPG bought for $5 closed at $3.84 on Friday.

The second defensive swipe was taken against the rumored Federal Home Loan Bank investigation. Witness:

Williams also told The Post that the FHLB has not been auditing the bank and has had no unusual discussions with the firm about its capitalization.

Defending a cash-strapped bank is akin to nailing gelatin to the wall. Williams does it the the only way he can: by using words and saving cash.

WaMu’s wounds are gaping and  self-evident. The bank is with out a means for earnings; credit spreads are parting; and options volatility exploding.

Williams’ attack is unfocused and ineffective. Options traders and short sellers show such deadly efficiency that the credit markets have forced default swap contracts to trade upfront:

Credit default swap spreads on WaMu’s debt widened dramatically on Thursday. Contracts are now trading “upfront,” which means investors seeking protection against a default by the thrift must pay fees immediately. These contracts usually require only annual payments.
But when concerns reach extreme levels, sellers of protection demand money upfront too.
CDS on WaMu are currently trading roughly 13% upfront. That means investors seeking protection on $100 million of debt would need to pay $13 million up front and $5 million a year.
Such spreads imply a roughly 50% chance of default in five years or a 24% chance in one year, according to Credit Derivatives Research.
“The market is starting to say when these guys will default rather than if. It’s a much more negative stance,” Tim Backshall, chief credit strategist at Credit Derivatives Research, said in an interview. “This is the first major, well-known financial name that’s gone upfront.” End of Story

WaMu is on the run. Down on the Street, with bears of all sorts circling, WaMu spins like a giant goose warding off one attacker as another bites down.

In a desperate search for friends, WaMu’s gaze settles on the SEC and its list of 19 financial stocks not to be nakedly short sold.

Too bad for you, WaMu. You’re not on the list.


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