WaMu depositors are safe, shareholders not so lucky

Let's get this out of the way right now: Your money is safe if it's in an institution insured by the FDIC. The Federal Deposit Insurance Corp. covers up to $100,000 per institution, and even may provide additional coverage for IRAs in those banks. So, don't head for the mattress store.

That said, it's an ominous sign that I can buy a share of Washington Mutual for about the same price as my morning tall, nonfat, no-whip, stirred mocha at Starbucks. The sour taste from a week of more market turmoil, ending with the federal seizure of big mortgage lender IndyMac Bank, sent Washington Mutual shares down 34.7 percent today to $3.23. Those same shares fetched nearly $43 a year ago.

Markets are not rational, so it's impossible to know what the price drop of financial shares is really telling us. Sometimes markets anticipate real trouble. Sometimes they simply react to fear.

The elephants in the room have always been Fannie Mae and Freddie Mac, two gigantic, federally chartered institutions that own or guarantee nearly half of the mortgages in America. As the housing bubble burst and the shock wave first blew through subprime mortgages and then broke into the general credit markets, the whispered question has been how these giants would be damaged.

Unfortunately, we still don't know. After days saying they didn't need a federal bailout, the Bush administration and Federal Reserve spent the weekend arranging just such a parachute.

And although their first auction of bonds was well received today and their shares initially soared, investor confidence soon broke and the stock prices fell.

Economists and other party poopers pointed out that Freddie and Fannies portfolios of more than $5 trillion in mortgages dwarf the $2.9 trillion federal budget, and the non-bailout bailout looks open-ended. The Federal Reserve's unprecedented rescue of Bear Sterns and credit infusion for investment banks seems like another example of, as the commander tells Tom Cruise in "Top Gun," "Son, you're writing checks your body can't cash."

Financial body, at least. With a banking crisis, the FDIC warned other institutions will fail; credit crisis, energy crisis and debt crisis, it's no wonder the dollar is weak. And that introduces the other elephant crowded into the room: overseas investors that have kept America's debt binge alive. How long will they keep extending the limit on our credit card?

This is the mess in which Washington Mutual, sadly, was a key player in creating. Today, investors said they don't believe the worst is over. Lehman Brothers this morning issued a report saying the Seattle thrift could face $26 billion in losses, including $21 billion coming from mortgages.

Coming on top of the IndyMac fiasco, it's no wonder shareholders headed for the exits even though insured depositors shouldn't.

There are a few critical differences. Pasadena, Calif.-based IndyMac is a stepchild of Countrywide Financial, the death star of subprime toxicity that is now hung around the neck of Bank of America. IndyMac was created to handle mortgages too large to sell to Fannie and Freddy, which right there should have been a red flag.

Indeed, investors, analysts and others have been worrying about Indy's safety and soundness for months in a way they aren't concerned about Washington Mutual.

Still, Washington Mutual's future has never been more tenuous. The time bought by a major infusion of private equity and massive layoffs has been telescoped down from years to months. Real estate meltdowns take years to work out. The worst of the financial disaster is not over. And no fresh bubble is going to magically cloak years of colossal bad judgments.

It almost seems gratuitous to call for the replacement of Kerry Killinger as chief executive. Wachovia, the Charlotte banking giant, took that step without even facing the crisis gripping the executive suites in Seattle.

Now it's a question of whether the board itself has the ability to take swift, decisive action.

Jon Talton is a journalist and author living in Seattle. For more than 20 years he has covered business and finance, specializing in urban economies, energy, real estate and economics and public policy. You may reach Jon Talton at jtalton@seattletimes.com