WaMu's Default Risk Soars After Cuomo Files Suit

Last week we mentioned that Seattle's WaMu was accused of colluding in a appraisal-inflation scheme. Today, Bloomberg reports that the fall-out has fallen: "Washington Mutual fell $4.04, or 17 percent, to $20.19 at 1:15 p.m. in composite trading on the New York Stock Exchange, the biggest decline since the stock market crashed on Oct. 19, 1987." As a result, significant bets are being made:

The risk of Washington Mutual defaulting on its debt soared to the highest in at least five years, credit-default swap trading shows. The contracts, used to speculate on the ability to repay debt or hedge against losses, climbed 130 basis points to 385 basis points, according to broker Phoenix Partners Group in New York. They've more than quadrupled in the past month.

Meanwhile, over on the New York Attorney General's site, Andrew Cuomo is impersonating a pitbull, if pitbulls knew how to file subpoenas:

“In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual’s mortgages have not been corrupted by inflated appraisals,” said Attorney General Cuomo. “Our expanding investigation into the mortgage industry has uncovered that Washington Mutual improperly pressured appraisers to provide inflated values that best served the lender’s interest. Knowing this, Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals.”

David Schneider, president of Washington Mutual's home-loan division, responded by saying, "We take accusations such as these very seriously," via cell phone from a white Bronco on I-5.

UPDATE: The Seattle Times now reports that: "The company has said it will set aside $1.1 billion to $1.3 billion this quarter to cover loans that go bad. Today said it expects to set aside a similar, or slightly larger, amount in the first quarter of 2008."