Several years ago, the market was super hot and banks were making serious money selling packaged loans to investors in the form of mortgage backed securities.  As banks were competing with each other to originate more loans, and because effectively all of the qualified buyers had been serviced already, banks started to heavily endorse these ARM loans.

Because these loans adjusted, the borrower could receive a discounted interest rate early, and after a period of time, the interest rate would adjust to market conditions.  The problem is that these unqualified buyers were only qualifying because the introductory interest rate was so low.  Once the interest rate started to adjust, chaos was soon to follow.

WaMu was the second largest holder of such loans.

Everyday, their financial situation was getting worse as these loans began to default, which triggered a cyclical effect of confidence loss in the bank.

Notice I said that WaMu was the SECOND largest holder of such loans.  Who's number one?  Wachovia.  Yes, all eyes are on Wachovia now which is certainly warranted.  If the confidence-loss cycle begins to accelerate, they certainly could very well be the next bank on the chopping block.

In fact, given enough time, this is practically inevitable.

The only saving grace for Wachovia is the government's bailout.  The bailout, as it is currently understood, would offer Wachovia the ability to sell its bad loans off to the government.  If this could be done, those loans could be taken off the sheets and it can put and end and even reverse the it's confidence-loss cycle.

Only time will tell now.

-Beasley

Real Estate | Economy | Financial