September 24, 2008 – 3:21 pm

With the multiple takedowns of broker-dealer banks and Goldman Sachs and Morgan Stanley both changing their stripes, only the feds seem to notice the stench coming from the ground where WaMu lies gasping.

Washington Mutual, the nation’s largest thrift with $310 billion in assets, reportedly is under the gun from the Office of Thrift Supervision to get a deal pushed through, but analysts say it all may have to wait until Treasury Secretary Henry Paulson brokers a deal with Congress to get the high-stakes bailout plan pushed through.

“We’re aware of the situation and we’re monitoring it closely,” said OTS spokesman William Ruberry.

Sure they’re monitoring it closely and they don’t want to get stuck with all the “toxic” mortgage assets on the bank’s balance sheet. Washington Mutual’s ratings were cut down to cheap junk by Moody’s Investors on Monday. Then to more junk today by Standard & Poor’s. Even as the bank appeals for fresh capital, spreads on the bank’s debt are wide open.

Credit default swaps on WaMu’s debt rose to an upfront cost of 61.5 percent the sum insured, or $6.15 million paid upfront to insure $10 million in debt for five years, from 54.3 percent on Tuesday evening, according to Markit Intraday. The swaps also require annual payments of 5 percent.

Before the bubble burst in the summer of 2007, to say spreads could gap like this would be grounds for commitment, but here in the aftermath of the bubble burst it’s commonplace.

So what does this all mean for Washington Mutual?  Well contrary to the standard analysis out there, it means absolutely nothing:

Meanwhile, WaMu’s situation continues to grow more dire. Federal regulators reportedly have been pressuring the thrift to recapitalize or find a buyer, and two major ratings firms downgraded its credit rating further into junk territory this week.

See, there is no more pressuring Washington Mutual for anything.  You can’t get blood out of a dead WaMu. Former CEO Killinger already bled it to the last red cent before leaving the hot seat. The bank’s $310B in assets is now dwarfed by incalculable mortgage-related liabilities. As the option ARM resets start popping off, that debt is only going to grow, not disappear. Who wants it?

A single buyer might be willing to take on the whole company if the mortgage business is shielded by the government. Otherwise, a breakup to segregate its attractive retail banking and deposit base is possible.
Shielded by the government just means an FDIC takeover. In other words, the taxpayer gets stuck with it again.  But that goes right along with the Treasury’s bailout plan, and we have to believe that’s a likely scenario. 
What that really means is Killinger knew what he was doing all along. He and the other insiders got out with their riches and the taxpayers get stuck with the junk that is now WaMu.

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