When it Rains, it Pours

This is really, really bad.

In a nutshell: the bailout package, which everybody thought was a done deal, has been undone by some combination of Republican recalcitrance and the heat of the presidential campaign. At the same time, WaMu's gone under, with not only its stockholders but also its bondholders being largely wiped out.

Remember how Lehman's default precipitated the this whole crisis in the first place: Lehman's debt was a substantial part of some money-market funds, which then "broke the buck", and all manner of chaos ensued. Now, $30 billion of WaMu debt is going very close to zero, and there could be similar effects. Not to mention the fact that this credit event risks roiling the CDS market at a time when counterparty-risk fears are at an all-time high. Then, add in the fact that House Republicans have come out of nowhere to declare that they want their bailout to come for free -- and suddenly the $700 billion that the market was counting on is thrown into jeopardy.

No one is a winner here. Yes, JP Morgan looks as though it's got itself a good deal for WaMu -- basically buying the bank for $1.9 billion unencumbered by any corporate debt or preferred stock. JP Morgan also now owns the bank which was largely responsible for reinventing retail banking over the past decade, and WaMu's abilities on that front will be very valuable at for the Chase brand. But unless House Republicans start getting constructive on bailout negotiations today, no financial institution is going to look very healthy. (And top management at Goldman Sachs will look like geniuses for raising $15 billion just before everything fell apart.)

The vague sketch of the House Republican proposal in the NYT shows something miles removed from the bailout as it has been understood until now. Bush, Paulson, Bernanke, Obama, House Democrats, and the Senate all seem to be on board with Plan A; only House Republicans are supporting Plan B. And where McCain stands on all this is anybody's guess. If House Republicans thought they were doing him a favor by waiting for him to turn up before blowing up the negotations, they miscalculated badly.

The results of all this? Well, for one thing, dollar Libor seems to be well over 4% and the TED spread is over 300bp.

Yves Smith sums up:

Hope you like the smell of napalm in the morning. Otherwise, this will not be your sort of day.

Brace yourself.