After Bear, is there a next firm?

Lehman was the focus. As Bear Stearns saw its support disappear the market focused on LEH with its fixed income prowess and deep involvement in the mortgage securities business. Wrong place to look it seems, at least for now. If there is a next significant victim of this market that requires some sort of rescue, however painful as BSC's was, it may not be a broker/dealer. It could be Washington Mutual. WM is significant as the seventh largest financial institution by assets in the country. It is the largest thrift. It has very little cushion now for more negative news. It would attract Fed attention.

On Friday its debt was downgraded by Moody's to Baa3, or one notch above junk. That's near death for a financial institution if anyone is paying attention. Standard and Poors, more lenient, moved WM down to BBB+ from A- several weeks ago, still two notches above Moody's. There have been rumors of capital infusions being sought or offered, from Goldman Sachs, or Warren Buffett, or a large U.K. hedge fund. It's more than a little concerning to remember that Buffett was rumored to be considering a significant capital advance to Bear Stearns just a few months ago.

If Alt A mortgage credits continue to deteriorate, and some of WM's pools seem to be, confidence may wane. A spokesperson for WM cited branch deposits and FHA access as sources of funding that were reliable if markets were not. That was not the best statement--- too defensive perhaps. With its new WhooHoo ad campaign, its statement that there will be 100 de novo branches opened in the next year, and the Board's heavily reported approach to executive compensation and continuity of employment(accountability issues here big time), Washington Mutual continues to push ahead with its never ending optimism. That may be their strength, maybe not.