I hate to say it, but I told you so about Washington Mutual

So the biggest bank failure in the history of our country occurred yesterday and quite frankly was somewhat of a non-event. The quick FDIC step-in and subsequent fire sale to JP Morgan kept bank failure on page two with the $700 billion federal bailout clearly the bigger headline. This is something that hopefully not too many people got burned by. The writing has been on the wall for months, and if you chose to gamble with your money above the FDIC limits then I have little sympathy for you. The WaMu failure was like a big spinning hurricane that took forever to land - if you didn’t evacuate ahead of time shame on you.

Not to gloat, but we called the WaMu failure a discreet possibility almost a year ago, simply by looking at option ARM profits and wimpy loan loss reserves. We also threw Wachovia in that mix. So now that WaMu is out of the way it’s time to refocus on the next big one to go down. And it will be Wachovia.

From Bloomberg on the WaMu horse-trade first:

Washington Mutual Inc. was seized by government regulators and its branches and assets sold to JPMorgan Chase & Co. in the biggest U.S. bank failure in history.

WaMu became “unsound” after customers withdrew $16.7 billion since Sept. 16, the Office of Thrift Supervision said yesterday. Branches are open today and depositors have full access to their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said.

The failure of WaMu, which has $188 billion in deposits, ratchets up pressure on lawmakers to piece together a rescue package for the nation’s financial system. The government’s inability yesterday to reach agreement on a bailout and the seizure of the biggest savings and loan sparked a sell-off of bank stocks, led by a 27 percent tumble in Wachovia Corp.

Now Reuters is reporting the obvious, Wachovia is looking for a way out:

Wachovia Corp has begun preliminary merger talks with Citigroup Inc, the New York Times said on Friday, a move that would combine two giant U.S. banks battered by the global credit crisis.

The talks are early and no transaction may emerge, the newspaper said, citing people briefed on the matter.

Wachovia’s market value was about $21.6 billion as of Friday’s market close, and Citigroup’s was $109.7 billion, according to Reuters data.

Now for Wachovia this may be like tying yourself on to the Titanic, as no one has really looked under the hood of the assets held by Citi. And these are massive amounts of assets folks. If Wachovia and Citi tie up it may be like to rocks trying to cling to each other to float in the ocean - it ain’t gonna happen. The Wachovia merger to Citi would have to necessitate forming a bad bank that fails, because I can’t imagine that Citi needs any more liability - especially with Wachovias nice portfolio of exploding option ARMs that are expected to “ripen” in the next two years.

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