So, Fannie Mae and Freddie Mac have collapsed.  They exist but are in conservatorship. They'll be taken over by regulators and the Treasury Department will purchase the senior preferred stock, a large percentage of which is owned by other US banks—neat transfer!  Many banks are facing challenges, but the question that interests me is will mortgage giant Washington Mutual [NYSE:WM] be seized by the FDIC?

I think it's a fair question to ask why the government didn't terminate these two entities months ago.  They're really anathema to everything to which we in the US purport to believe.  From a policy perspective, I can see a reason for these GSEs and, if they work well, they should lower costs, but for me at least, the whole GSE concept doesn't fit well in a private market system.  Split them up into many smaller entities competing in the same market and create an entity similar to the FDIC, the Federal Mortgage Insurance Corporation, with a similar mandate and funding mechanism.

Now that I have looked at the banking system in a little more detail, there are definitely more banks to follow.  I subscribe to feeds from the FDIC and learn about the two recent failures in as many weeks.  I now think that Washington Mutual, often call WaMu, will fail; that is, be seized by the FDIC.  At least, without an infusion of cash, I don't see how it can escape a liquidity crisis as soon as December.  Interestingly, FDIC doesn't have enough agents for all its branches; if and when the seizure happens, it's going to be an interesting, multi-agency operation to close all branches for a weekend and open it the following Monday without further damaging confidence in the banking system.  Typically, FDIC moves in with state agencies.  The failure of WaMu would be a blow, for a number of reasons.  I don't see how the FDIC would move in without informing dozens of other agencies and, hence, risk spilling the beans in advance.  Typically, FDIC seems to try to line up a buyer for the seized assets.  Like IndyMac, I don't see that happening for WaMu.  It would be good if WaMu can make it through to the end of the year.  I will keep an eye on the stock (it's appreciated a little over the last few days) to see if trading volume grows; it's what I would expect to happen if rumors of a seizure start to leak out.

The big surprise in all this mess is why are people surprised?  In literature it's called foreshadowing, but it was clearly signaled in the dot.com debacle: too much money and too few controls = disaster.  At least there, people lost their hopes; in this crisis, they've lost their homes!