Washington Mutual, the Seattle-based savings and loan giant whose stock has been hammered the past week, has raised concern because its demise would be the largest bank failure in U.S. history, putting stress on the Federal Deposit Insurance Corp. to cover depositors.  Washington Mutual yesterday closed at $2 per share, down 27 percent on the day. The stock is 95 percent off its 52-week high. Standard & Poor's downgraded the company's credit rating to junk status, citing the deteriorating housing market.  "The cost to the FDIC if this company fails is likely to be quite high," analyst Rich X. Bove of Ladenburg Thalmann wrote. He estimates the net cost to the FDIC at $24 billion, which is about half of the assets in the FDIC's insurance fund.  The FDIC doesn't comment on specific cases, but a spokesman said yesterday that the fund has sufficient resources to cover the failure of a very large bank. In most cases, the FDIC promises to guarantee deposits up to $100,000. The government regards that promise as sacred. The FDIC might just have to borrow money from the Treasury Department to meet its obligations to depositors.  "We're confident that our resources would be more than adequate to cover any losses from bank failures," FDIC spokesman Andrew Gray said.  Washington area hedge fund managers who specialize in financial firms think the chances of Washington Mutual seeking bankruptcy protection are unlikely. Even if the bank does go under, they said, the FDIC could endure the hit.  "The loss can be absorbed by common shareholders, preferred shareholders and bondholders, in that order, before you get to the deposit insurance," said Gary Townsend of Hill-Townsend Capital, a Chevy Chase hedge fund that concentrates on financials. "I assume that's not enough to break the [FDIC] bank."  Eric D. Hovde of Hovde Financial, a District hedge fund that trades in bank stocks, said Washington Mutual should not be lumped in with Lehman Brothers because he said it has billions of dollars in savings account deposits that make it less vulnerable.  "Does WaMu have problems? Yes," said Hovde, who said he has no stake in the company. "But fundamentally, they shouldn't be in a position of failing but for the press and others whipping up the fear on a failure. They are meeting their tangible capital requirements today. They have a much better funding structure [than Lehman], and it's a much more regulated entity. You can't compare WaMu to Lehman."  TPG, one of the country's largest private-equity funds, bought a 14 percent stake in Washington Mutual earlier this year and presumably could buy more.  "Likely, when push comes to shove, they would make a further investment to keep the ship afloat," Townsend said.
The credit crisis that yesterday pushed Lehman Brothers to file for bankruptcy and drove Merrill Lynch into the arms of Bank of America has many on Wall Street looking at other troubled financials.