The sliver of good news in the failure of Washington Mutual (WM), the Wall Street Journal points out, is that it puts no strain on the FDIC insurance fund, which is already dealing with a rash of recent failures of smaller banks. The sale of WaMu’s loan book and retail branches to JPMorgan Chase (JPM) obviates the need to support depositors through application of the federal insurance fund. JPMorgan gets a $176 billion mortgage book and 2,200 branches for just $1.9 billion, though the big New York bank will also take $31 billion in writedowns and raise $8 billion in new capital by selling common shares.

One unsettling aspect of the failure, though, is that it continues the government’s record of acting unpredictably during the markets’ September crisis. The beginning of this episode, to go back three weeks, came when Treasury Secretary Henry Paulson seized Fannie Mae and Freddie Mac on the grounds their continued operation in their current form posed unacceptable risks to the health of the financial system. He made this judgment after he and the top federal housing regulator, James Lockhart, spent months defending the companies as well capitalized. The markets assumed the switch came as a result of rising funding costs for the mortgage companies, but the government’s explanation of the turnabout left something to be desired.

A week later, the government let Lehman Brothers fail, six months practically to the day after Bear Stearns effectively collapsed. The Fed, through its special liquidity efforts such as the Primary Dealer Credit Facility - which allowed Wall Street banks to borrow at its discount window - had spent the intervening months apparently signaling that it would stand behind the big brokerage firms such as Lehman that served as the Fed’s primary dealers. But for reasons that aren’t absolutely clear, the government then let Lehman fail - a decision that, while defensible on grounds that the taxpayers can’t be expected to save fat cats from their own mistakes, shocked the credit markets and led to the next day’s emergency bailout of insurer AIG (AIG).

Now, the feds have taken over and sold WaMu. Like the Fannie-Freddie takeover and the collapse of Lehman, the seizure of WaMu was in some ways predictable and yet, in its execution, leaves questions. John Hempton, a hedge fund manager who writes the Bronte Capital blog from Australia, points to the last paragraph of Friday’s Journal account of the takeover, which reports that new WaMu chief Alan Fishman - who took over less than three weeks ago - and his team flew back to Seattle from New York Thursday night, totally unaware that the Office of Thrift Supervision was about to take over the bank and put it into FDIC receivership.

“Is this for real? Is this how the American government now acts?” he wrote Friday. Hempton, who has spent recent days explaining on his blog why he held some WaMu preferred shares even as the bank appeared to be teetering on the verge of oblivion, continued: “I would prefer think my post was wrong than the American Government acts in arbitrary capricious ways. If the FDIC took over WaMu whilst the executives were on the plane without discussing the true liquidity situation of the bank first then I fear for all American capitalism.”

Questions about what might happen to Washington Mutual (WM) are weighing on the Seattle thrift yet again. S&P cut its counterparty credit rating on WaMu’s holding company Wednesday, citing the prospect that the firm might be dismembered and sold off in parts rather than being acquired in toto. News reports have firms including Citi (C), JPMorgan Chase (JPM) and Toronto Dominion (TD) looking at possible WaMu purchases. S&P reaffirmed its rating on WaMu’s bank subsidiary.

“Given the stresses facing the broader U.S.-based financial institutions sector,” analyst Victoria Wagner wrote, “the available pool of large bank acquirers that are not capital constrained or devoid of their own
mortgage credit stress is quite small, raising the possibility that the purchase may be only partial.”

Wagner writes that a piecemeal sale of WaMu could leave creditors of the publicly listed holding company facing losses, “because the assets at the holding company are not sufficient to cover the full
repayment of the $14.4 billion of rated unsecured debt outstanding.” WaMu shares, which have dropped more than 90% over the past year and have come under intense pressure this month following an earlier S&P downgrade and a panic in the financial sector, were off 12%.

Assuming Bank of America (BAC) completes its planned purchase of Merrill Lynch (MER) as scheduled in the first quarter of 2009, Merrill chief John Thain will have had one of the shortest runs as the CEO of a top financial firm on record. The question now is whether the CEOs of two other struggling firms - Robert Willumstad of AIG (AIG) and Alan Fishman of Washington Mutual (WM) - will end up beating Thain’s record.

In this way, at least, time is on the execs’ side. Willumstad took over at AIG in June after his predecessor, Martin Sullivan, was ousted for his failure to warn investors of the insurer’s massive losses on derivatives contracts tied to the plunging mortgage market. Fishman joined WaMu just last week, after the Seattle-based thrift forced out longtime head Kerry Killinger amid worries about the bank’s holdings of souring adjustable-rate mortgages. By comparison with Fishman and Willumstad, Thain is a grizzled veteran at Merrill, having taken over last November following the ouster of Stan O’Neal.

With investors racing to reduce their exposure to mortgage-related holdings in the wake of the collapse of Lehman Brothers, WaMu and AIG are under intense pressure to raise capital or find big partners. AIG shares were down 37% in early trading, on top of their 60% plunge Monday, as the company remained silent for a second day on any plans to bring in new money. The outlook was dimming on a rescue of the firm after it suffered several ratings downgrades Monday afternoon - moves that could force the cash-strapped firm to produce as much as $19 billion in new collateral and other funds, analysts estimate.

“The downgrades are just the latest development placing pressure on AIG’s liquidity,” Morgan Stanley analyst Nigel Dally wrote Tuesday. “When we layer in additional mark-to-market losses, other contingent liabilities, likely investment portfolio losses, and other items, we estimate near-term capital
and liquidity needs to be in the range of $45-50 billion.”

The news is only slightly more upbeat at WaMu, which rose modestly Tuesday on the latest report - this time in a U.K. paper - that the firm is in advanced talks to sell itself to JPMorgan (JPM). Analyst Betsy Graseck at Morgan Stanley wrote Sunday that a deal would be a strategic positive for JPMorgan, though she stressed that she believes it’s unlikely a deal is imminent. “First, working through the Lehman situation likely takes precedence for JPM,” she wrote. “Second, other banks are suggested to be interested in WM. Third, WM has a new CEO who presumably is interested in remaining independent.” WaMu rose 35 cents to $2.35.

Washington Mutual’s (WM) new chief, Alan Fishman, could be looking at the briefest executive tenure in recent memory. The American Banker reported Friday that the struggling Seattle-based thrift is in “advanced discussions” to sell itself to JPMorgan Chase (JPM). The publication, citing sources, said the talks “are ongoing at the highest levels of both companies.”

WaMu didn’t comment, and Bloomberg reports JPMorgan isn’t in talks to buy WaMu. The New York Times, for its part, reports the company won’t make a bid unless the government asks it to.

The conflicting reports come just five days after WaMu hired Fishman, a longtime thrift industry executive, to replace Kerry Killinger. The decision was greeted with a torrent of selling in WaMu’s shares, which fell as low as $1.75 in trading Thursday - putting them down 95% over the past year - before they staged a recovery to end up on the day at $2.83. WaMu said Thursday evening it remains well capitalized and has enough liquidity to survive as an independent firm, and took issue with Moody’s decision to downgrade the firm.

But JPMorgan chief Jamie Dimon has long been seen as a natural buyer of WaMu, having made a below-market bid for WaMu this past spring before Killinger, in his wisdom, opted instead to take a recapitalization deal from a group led by private equity firm TPG. (See a breakdown of Dimon’s likely takeover targets.) With WaMu shares now fetching around $3 apiece, down from the low double digits at the time of JPMorgan’s earlier $8-a-share bid, the sides may find they have less to bicker about the next time  they’re considering a deal - even if, as the dissenting reports suggest, a takeover isn’t imminent.

Three days into his new job, Washington Mutual’s (WM) new chief executive has a crisis on his hands. Shares of the Seattle thrift plunged for the third straight day Wednesday, as investors continue to flee the shares of financial firms with big mortgage exposures and a possible need to raise capital. The cost of insuring against a default on WaMu debt surged to a record high in the market for so-called credit default swaps, Reuters reported.

The selloff means that the stock - which had already shed more than three-quarters of their value over the past year as of last Friday - has dropped 42% in Alan Fishman’s three days on the job, setting a new 52-week low.

WaMu’s plunge is attributable in part, no doubt, to the company’s disclosure that it reached a deal with regulators over some of its practices - a step that is far from routine. That said, WaMu isn’t the only financial stock under immense pressure. Wachovia (WB), which like WaMu was a big player in the mid-decade explosion of aggressive adjustable-rate mortgages that now appear doomed to writedowns as house prices fall, dropped 8% in heavy trading, and the well chronicled Lehman Brothers (LEH) traded more than 100 million shares for the third day in a row after the firm outlined a big quarterly loss and plans to scale back its mortgage exposure. Lehman shares, after earlier rising as much as 18%, were up 3% at midday.

With the government having taken Fannie Mae (FNM) and Freddie Mac (FRE) into conservatorship this week, it’s starting to look like the furious trading in WaMu, Wachovia and Lehman may not let up until another shoe - whether a successful capital raise or something less salutary - drops.

Regulators have been in touch with Washington Mutual (WM). The Seattle thrift announced Monday that it entered into a memorandum of understanding with the Office of Thrift Supervision “concerning aspects of the bank’s operations, principally in several areas of its risk management and compliance functions, including its Bank Secrecy Act compliance program.”

As part of the arrangement, WaMu has agreed to provide the regulators with “an updated, multi-year business plan and forecast for its earnings, asset quality, capital and business segment performance.”

The agreement is noteworthy because it comes just three months after WaMu assured investors that it hadn’t been subject of any regulatory action and was “not currently in such discussions with any regulatory agency.” WaMu made that claim in June after Cleveland-based National City (NCC) reached an agreement with its regulators over lending and capital issues, raising fears among investors that regulators were taking a harder look at the risk management practices at banks with substantial exposure to souring mortgage loans. A call to WaMu wasn’t immediately returned.

WaMu said the arrangement “will not require the company to raise capital, increase liquidity or make changes to the products and services it provides to customers.” Nonetheless, the company’s stock sat out Monday’s financial sector rally, even as WaMu announced the departure of longtime CEO Kerry Killinger and the hiring of thrift industry veteran Alan Fishman. WaMu shares dropped 13% to $3.70.

September is shaping up as a tough month for CEOs of hard-hit financial companies. Washington Mutual (WM), the Seattle thrift whose shares have plunged over the past year amid rising loan losses, ousted longtime chief Kerry Killinger and replaced him with former Independence Bancorp and Sovereign Bancorp (SOV) exec Alan Fishman.

The move, announced Monday, comes just a day after the government ousted the chiefs of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) in taking the companies into conservatorship, a legal state similar to Chapter 11 bankruptcy protection.

While Fannie chief Dan Mudd and Freddie CEO Richard Syron have plenty to answer for in the decline of their companies’ fortunes, their missteps pale in comparison to WaMu’s Killinger. Unlike Mudd and Syron, who came aboard at mid-decade after the government-sponsored enterprises shook up management following multibillion-dollar accounting scandals, Killinger has been with WaMu for more than two decades and was at the helm when the bank wrongheadedly steered its way into the business of hawking aggressive mortgages. These risky moves included offering so-called option adjustable rate mortgages that allow borrowers to pay less than the full principal amount up to a certain limit.

Killinger somehow managed to hold onto his CEO post earlier this year, when a group led by private equity firm TPG put $7 billion into WaMu to keep the bank afloat. But since then, WaMu has continued to deteriorate — it lost $3.3 billion in the second quarter, as it booked big reserves for future losses on  risky mortgage loans — and analysts suspect another loss may be on the way with next month’s third-quarter results. Investors in WaMu can only be reassured that Killinger won’t get another chance to claim the worst will soon be behind the bank. Shares rose 18% in premarket trading Monday.

Washington Mutual (WM) jumped Thursday after a U.K.-based hedge fund said it had a 6% stake in the Seattle thrift. The Toscafund said in a filing with the Securities and Exchange Commission that it owned 105 million shares in the struggling mortgage lender as of July 16, making it the firm’s second-biggest shareholder. Shares of WaMu, which have plunged over the past year as the bank has added $12 billion to its loan loss reserves to brace for losses tied to the housing bust, surged 20% in midafternoon to their highest level in more than a week, as Wall Street took the filing as a sign that WaMu investors haven’t lost hope.

Not everyone is impressed, of course. Hedge fund manager Doug Kass told CNBC he’s shorting WaMu, noting that Tosca has long had an interest in the bank. In fact, Tosca approached WaMu earlier this year and expressed interest in being part of any group that helped to recapitalize the company. WaMu raised $7 billion in April through the sale of common and preferred stock to a group led by private equity firm TPG - a deal that made WaMu’s biggest shareholder. Toscafund, for its part, owned 60 million shares as of April 17, according to an earlier WaMu filing. WaMu shares rose 71 cents to $5.44.

Washington Mutual’s (WM) board has had a change of heart. The Seattle thrift said Tuesday in announcing its latest quarterly loss that its board has done an about-face on executive pay. Noting “the impact of mortgage-related loan loss provisions and foreclosed asset expense,” the board said Tuesday afternoon that execs including CEO Kerry Killinger won’t get annual incentive payments this year under its leadership bonus plan.

It only stands to reason that Killinger shouldn’t be getting a bonus for a year in which WaMu has lost half its stock market value in the wake of consecutive billion-dollar-plus quarterly losses. Yet WaMu had said in a regulatory filing back in March that it would calculate 2008 bonuses considering factors such as operating profit and noninterest expense - without taking into effect housing-related loan losses and expenses tied to real estate foreclosures.

Events since have put that formula to the test. After losing $1.1 billion in the first quarter, WaMu said Tuesday it lost $3.3 billion in the second quarter, due to a massive build of reserves against losses on its souring mortgages. Along the way, the company has also had to raise $7 billion in new capital from private equity investors, adding to existing shareholders’ distress.

While these developments have conspired to reduce Killinger’s paycheck, he continues to hold down his CEO post - even after the CEOs of many other major banks taking huge mortgage-related hits have been pushed aside. “In the face of unprecedented housing and mortgage market conditions,” Killinger said Tuesday, “we are continuing to execute on a comprehensive plan designed to ensure that we have strong capital and liquidity, an appropriately-sized expense base and a strong, profitable retail franchise.” WaMu shares rose 6% in after-hours trading.

A prominent investor is saying it’s time to replace Washington Mutual (WM) chief Kerry Killinger. Value investor David Dreman told Bloomberg Friday he believes Killinger, who oversaw the bank’s disastrous push into subprime and adjustable rate mortgages, should be dismissed. Dreman’s firm, Dreman Value Management, owned nearly 29 million WaMu shares as of the end of March, according to Lionshares.com. The comments come a week after Dreman, whose firm has big holdings of financial stocks as well as energy, tobacco and drug plays, said on Bloomberg television that “financials obviously have been slaughtered” and that “there doesn’t seem to be a bottom.”

WaMu is certainly a case in point there. The Seattle-based thrift’s shares have dropped 86% over the past year, as falling house prices and rising mortgage defaults have left WaMu nursing massive losses on bad loans. The firm posted two straight quarterly losses earlier this year and raised $7 billion in new
capital in April. Killinger was stripped of his chairman’s post earlier this month as a board reshuffling brought in new outside directors.

But the moves haven’t soothed worries that falling house prices will mean bigger problems on WaMu’s balance sheet in coming months. Dreman’s comments - and the company’s tumbling stock, which recently hit lows last seen in 1992 - could add to the pressure on big shareholder TPG, the private equity firm that took a big stake in WaMu in April’s capital raise, to make a change at the top.