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Friday’s announcement that the Federal Reserve and JP Morgan (NYSE:JPM) were going to bail out failing Bear Stearns (NYSE:BSC) is another sign that credit woes are far from over. Which by the way, is ironic because just Thursday, Standard & Poor came out suggesting that we were on the downhill slope of write-downs at the big banks! Talk about being wrong...and by just one day!

Which begs the question: are the credit rating agencies retarded or just late to the party?

On Friday, S&P lowered WaMu's (NYSE:WM) debt rating. Was this perhaps due to the fact that Jamie Dimon had his hands full dealing with a broken Bear Stearns? Mr. Dimon is probably the only executive with the banking sensibility to deal with Bear. His acumen is noted by the Fed's willingness to back the deal without capital risk to JP Morgan.

We know Dimon is sitting on a pile of cash, and that he has been eyeing possible acquisitions. We also know that WaMu has been mentioned as a possible target by JP Morgan. Other rumors circulating suggest private equity involvement or a foreign interloper (bank) on the prowl for an opportunity to have a footprint in the US (especially on the west coast).

But, with Jamie's attention focused on saving the world (literally), what are WAMU's prospects?

As money managers, we get paid to know what's going on in the market (or at least try).

WaMu is one of those stocks that has always bothered me, even when it was flourishing and paying a fat dividend.

The thick 10-k theory: Back in the old days, financial statements came in the mail. My desk was piled with this stuff, and at home could occasionally be found in the bathroom near the pile of well-thumbed Mad Magazines.

After CEO Killinger took the reigns at WaMu, their financial reports got a bit more thicker each year. Of course, acquistions accounted for most of the footnotes, but it was the 3-4 pages of contingincy descriptions related to these acquistions which left me so uneasy.

We used to refer to WaMu's explanations as a "rainy day" fund, given the rosy outlooks and accretive estimates to earnings, etc. I will say this about Killinger; he was great at acquiring deposit growth, which provided assets to build the higher margin mortgage side of revenues.

But, he failed miserably as an operator. The company under Killinger's control botched hedging and interest rate changes often. Apparently, the juicy dividend helped investors forgive management for the operational blunders.

And, as credit reamined cheap, WaMu, like Countrywide (CFC), abandoned the conforming guidelines of Freddie Mac (FRE) / Fannie Mae (FNM) lending practices in favor of their own risk models and assumptions.

Well, the rest is history. Countrywide is prone and supplicating, with Bank America (NYSE:BAC) sniffing indifferently. But WaMu, an elephant by comparison, has more to lose. The dividend was slashed and the stock trades near 11, down some 80+ % from its highs. Considering the incredible and consistant misteps by Killinger and co., you have to ask yourself some hard questions.

How much crap do these guys have on their books, and what would somebody pay for the franchise? I pity any potential white knight who tackles the task of due diligence. They will undoubtedly need lots of bleach to get the dirt out.

Disclosure: Author does not have a position in Washington Mutual, Bear Stearns or JP Morgan.

Source: WaMu: Wasteful Accounting Measures Used