Desperation is in the air at Washington Mutual (WM). That WaMu is offering 5% on CDs should be proof enough. From LastNightInVegas.

If the 5% rate WaMu is offering on CDs isn’t indication enough that there’s trouble brewing, the fact that WaMu is promoting it with a hand drawn white board sign certainly clinches it.

On a more serious note, please consider the following chart of WaMu credit default swaps courtesy of Chris Puplava at FinancialSense.

WaMu 5-Year Credit Default Swaps

click on chart for sharper image

For more on Credit Default Swaps
Pimco: What Are Credit Default Swaps and How Do They Work?
Wikipedia: Credit Default Swaps
CBOT: CDS Example

In rally attempt after rally attempt in the financial sector, Washington Mutual is one of the last stocks to participate. There is good reason for this action. It’s called “Death Spiral Financing”. Previously I talked about Death Spiral Financing at WaMu, Merrill Lynch, Citigroup.

This is a different form of death spiral financing. WaMu is paying 5% on CDs at a time the Fed Funds Rate is 2.0% and the discount rate is 2.25%. Where can WaMu invest money safely and return 5%? The answer is nowhere.

It is a moral hazard that WaMu can even offer CDs at 5% with FDIC guarantees. Money is increasingly flowing to such endeavors, at taxpayer risk. Supposedly FDIC is self insured. I say supposedly. And although I am certain that FDIC guarantees will be honored, I am increasingly suspicious of how those guarantees will be honored.

LondonBanker has an excellent article on this subject called Is the FDIC another troubled monoline? It’s a good read. Please take a look.

Mike “Mish” Shedlock
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