Desperation is in the air at Washington Mutual (WM). That WaMu is offering 5% on CDs should be proof enough. From LastNightInVegas . If the 5% rate WaMu is offering on CDs isn't indication enough that there's trouble brewing, the fact that WaMu is promoting it with a hand drawn white board sign certainly clinches it.

On a more serious note, please consider the following chart of WaMu credit default swaps courtesy of Chris Puplava at FinancialSense .

WaMu 5-Year Credit Default Swaps

For more on Credit Default Swaps
Pimco: What Are Credit Default Swaps and How Do They Work?
Wikipedia: Credit Default Swaps
CBOT: CDS Example

In rally attempt after rally attempt in the financial sector, Washington Mutual is one of the last stocks to participate. There is good reason for this action. It's called "Death Spiral Financing". Previously I talked about Death Spiral Financing at WaMu, Merrill Lynch, Citigroup .

This is a different form of death spiral financing. WaMu is paying 5% on CDs at a time the Fed Funds Rate is 2.0% and the discount rate is 2.25%. Where can WaMu invest money safely and return 5%? The answer is nowhere.

It is a moral hazard that WaMu can even offer CDs at 5% with FDIC guarantees. Money is increasingly flowing to such endeavors, at taxpayer risk. Supposedly FDIC is self insured. I say supposedly. And although I am certain that FDIC guarantees will be honored, I am increasingly suspicious of how those guarantees will be honored.

LondonBanker has an excellent article on this subject called Is the FDIC another troubled monoline? It's a good read. Please take a look.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

Mike Shedlock Archive

Comments

Jay
04 Sep 08, 02:30

WaMu

WaMu also offers ECR's that are near 3.0, and they offer money markets that are at 3.7. I guess they should just not worry about deposit products at this time. Maybe they should just roll over and give up. There are many other banks that are still lending focused even in this market. At least WaMu is making a push on the deposit side. They are building out their small business banking solutions and team, and they are investing in TMS. Seems like a pretty good plan vs laying down and quitting. They will be back. In three years when their stock is 8 - 10 times higher, then you will see.

Damon
05 Sep 08, 13:58

Not as crazy as you think

I've been a customer of WaMu for years, and they ALWAYS have a CD sale like this once a year, where the rates are over .50% higher than any other bank/credit union. Right now, every bank is fighting for deposits, that's their main objective. I think it only makes sense to secure as much of it as possible.

In terms of how FDIC money will be honored, my IndyMac experience shows that I was able to get 100% of my insured money back.

Mike
05 Sep 08, 16:00

WaMu/FDIC

Sure! We know the lines for FDIC are only geting shorter(hahaha)and how prompt and responsive the Gov't is in paying back money it owes. Too many banks will fail at one time by Oct and my obligation(and maturity)to feed and take care of my family lead me to put my cash in a private trust account with a firm who has law/history of not using customer deposits on it's balance sheets like american banks(most recently busted-Citigroup) Best of Luck!

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.