WaMu depositors are safe, shareholders not so lucky

Let's get this out of the way right now: Your money — up to $100,000 per institution — is safe if it's in a bank account insured by the FDIC. The Federal Deposit Insurance Corp. may even 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 Bancorp, helped send Washington Mutual shares down nearly 35 percent Monday, closing at $3.23. Those same shares fetched nearly $43 a year ago.

Markets are not rational, so it's impossible to know what the bloodbath in 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, then slammed into the general credit markets, the whispered question has been how these giants would be damaged.

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

And although Freddie's auction of bonds was well received Monday and the shares of the two companies initially soared, investor confidence soon broke and the stock prices fell.

Economists and other party poopers pointed out that Freddie and Fannie's 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 Stearns and credit infusion for investment banks seems like another example of, to paraphrase the commander in the movie "Top Gun": "Son, you're writing checks your body can't cash."

Economic body, at least. It's ailing with banking, housing and energy trouble.

The weak dollar introduces another level of uncertainty. While it makes U.S. exports more competitive, it makes dollar-based assets potentially less attractive. Overseas investors and central banks have piled up American debt. Policymakers sit awake at night worrying about them dumping dollars and taking away our national credit card. (Note that the Freddie/Fannie bailout was timed to reassure Asian markets.)

This is the mess that Washington Mutual, sadly, was a key player in creating. On Monday, investors said they don't believe the worst is over. Lehman Brothers 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 key differences. Pasadena, Calif.-based IndyMac is a stepchild of Countrywide Financial, the death star of subprime toxicity now hung around the neck of Bank of America. IndyMac was created to handle mortgages too large to sell to Fannie and Freddie, which in itself 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 haven't been concerned about the much larger and stronger Washington Mutual.

Still, Washington Mutual faces a massive cleanup job and massive uncertainty. The past week is a reminder that, even now, no one knows what's lurking in the scary debt cellars of the major financial players. And how one institution's trouble can quickly spread.

One result is that the time bought by a major infusion of private equity and thousands of layoffs has been telescoped down from years to months. Yet there seems little sense of urgency coming from Washington Mutual.

Real-estate meltdowns take years to work out. The worst of the financial disaster is not over. No fresh bubble is going to magically cloak years of colossal bad judgments. Wealth, careers and dreams have been obliterated in staggering numbers. The financial system itself will be fundamentally changed.

To worry about the collateral civic damage to Seattle seems trivial by comparison. It's not. It can't be said often enough that the headquarters of a large financial institution is an economic jewel of the first magnitude.

I wish we could be confident that Washington Mutual's leadership was working hard to stay independent and not merely biding time, doing just enough to put lipstick on the pig, waiting for a merger. Penalty for early withdrawal, indeed.

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