Friday as I was getting ready to go to work, I heard a brief comment on the local news about Washington Mutual being sold to JP Morgan.  They did not mention much else… just that simple one liner. As soon as I got to a computer, I went to CNBC.com to see what was going on.  And OMG!  What was going on was a mess! That one liner definitely did not suffice to explain the gravity of what happened.

Washington Mutual… the WaMu Whoo Hoo… gone! What the @#%$?!?!

A 120 year old bank disappeared over night.  According to what I hear… this is the biggest banking failure in history.  This seems like a bit of déjà vu.  I could have sworn I heard the same story last week, last month.  It seems that everyday… we are seeing the “biggest failure in history”.  How many more “biggest failures” can we endure?

Really people, I must be sleeping.  I am going to wake up any day now and realize that the collapse of the financial industry is a bad dream… a horrible nightmare.  But sadly, I know that I am not sleeping and no pinch is going to cure this mess.

So what happened to WAMU?

Basically, Kerry Killinger, former CEO of Washington Mutual, was paid more than $10 million dollars a year to run the bank into the ground.  And he did a great job.  A bunch of bad judgments and greedy decisions later… WaMu no longer Whoo Hoos.

Killinger left WaMu in utter ruin earlier this month.  Towards the end, he tried to redeem his egregious mismanagement by resigning his position as Chairman of the board, raising capital (TPG raised $7 billion dollars - $2 billion of their own money), laying off employees, and restructuring business lines. And to be honest, I thought his attempts to save WaMu might actually work.  (But boy was I wrong!) Apparently using bicycle patches to fill a gigantic hole ain’t enough to keep the Titanic from sinking.

But what finally took the stern under… since the fall of AIG, Lehman Brothers and Merrill Lynch on September 15^th, WaMu customers withdrew nearly $17 billions dollars in deposits.  The run on the bank rendered it virtually insolvent.  And as we learned from the recent descend of Indy Mac, for a bank… no liquidity means the feds will be arriving soon to put it out of its misery.

The FDIC came in, took over Washington Mutual, sold it to JP Morgan for $1.9 billion dollars… it was all a rather seamless transition for accountholders.  But for WaMu stockholders, for WaMu bondholders, for TPG who had just invested $2 billion dollars in WaMu… well they are up the creek without a paddle.  Or to describe it more accurately, the value of their portfolio is as deep as Atlantic seafloor… (Yeah…  chilling with the Titanic.)

But seriously this is the one thing that really bothers me about WaMu’s downfall… stockholders and bondholders got screwed.

You see… When you buy a company’s stock, that means you are buying equity… ownership in the company.  For WaMu shareholders… holding equity in a company that no longer exists means you are left with nothing.  The value of the stock… $0!

And… When you buy a company’s bonds… that means you are giving the company a loan.  The bond is like an IOU.  For WaMu bondholders… having bonds from a company that no longer exists means that the paper it is written on has more value than the bond itself.  The value of the bond… $0!

And just because you may own individual WaMu stocks and bonds… don’t think this will not impact you.  It will.  Many institutional investors, such as pension funds, mutual funds and other banks and insurance companies, owned the majority of WaMu stocks and bonds.  These pension funds are in charge of our retirement security.  These mutual funds are a part of our 401Ks… our children’s 529 accounts! If you have any money invested anywhere… then odds are you held some stake in WaMu’s success or failure.  And because WaMu failed, the value of your assets dropped.

And aside from the financial impact, the psychological impacts are more far reaching.  If consumer confidence wasn’t completely shot before, you can be guaranteed that it is now.  Consumer confidence measures how consumers feel about the current and future state of the economy.  When consumer confidence is low, then people stop spending (which contributes even more to the economic depression) and start stockpiling money… just in case.

But this situation is different in that consumers no longer feel confidence in the finance industry.  This means that instead of stockpiling money in savings accounts, folks feel more security with stockpiling it under their pillows.  And when people began taking their money out of banks… well you know what happens next (IndyMac, WaMu).

The whole thing is cyclical and as it  continues the problem gets worse.

I, for one, tend to be an optimist.  And I am certainly a strong believer in free enterprise and the ability of the market to correct itself.  But even I, with my typically rosy outlook, am getting worried.  I keep looking for the plunge to end, but the end is nowhere in sight.  Every time I think it can’t get any worse. ..  it gets worse times 2.  I just hope that WaMu will be the last to sink, but for some reason I feel that the dominoes have just begun to fall.