September 15, 2008 – 6:36 pm

The credit crunch has made landfall, and the ill wind has blown down three pillars of Wall Street: Bear Stearns, Merrill Lynch and now Lehman Brothers. It took just a weekend to blow away Merrill Lynch and 158 years of Lehman Brothers. As the storm’s strength surges, the scope and pace of its damage intensifies.  The storm could have just as easily taken down Washington Mutual, but there’s no hurry because Washington Mutual has already signaled it’s not going to float back up the charts.

Washington Mutual slammed the door shut on an empty barn today, effectively saying that its insiders were out and its game is up.

Weighed down by widening credit default swaps, the cutting of its credit to junk and still bleeding from past beatings, Washington Mutual is lining up nicely to be the next toppled domino. Check it out:

Goldman Sachs Group Inc.’s spreads widened to 3 percent, from 2 percent Friday, while Morgan Stanley’s increased to 4.5 percent from 2.5 percent.

By contrast, Washington Mutual’s spreads stood at about 20 percent on Monday afternoon, and AIG spreads widened to about 13 percent, Blum said.

When the spread or difference in yields on the swap and a government bond of comparable maturity widen, debt holders believe there is a greater chance of default. Last week, the cost to insure the debt of Seattle-based Washington Mutual rose to a point where investors essentially acknowledged it was more likely than not the bank would default.

It is more likely than not that the bank will default,  and Moody’s and Standard & Poor’s have finally cut WaMu to junk. Not a moment too soon, either!!!

Washington Mutual share prices have cratered 74% since March and dropped over a third in a single week. With its insiders out and its defenses down, WaMu is a sitting duck.

Analysts at Stifel Nicolaus & Co. said Sept. 12 that loan losses are increasing rapidly. “The biggest risk is a run on deposits,” wrote the analysts, led by Chris Brendler, raising the third-quarter loss estimate to $1.42 a share from 77 cents. WaMu needs to raise $5 billion, analyst Frederick Cannon at Keefe Bruyette & Woods wrote in a note to investors today.

So Washington Mutual is now waiting quietly for the inevitable…

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