Shareholders, who have already undergone considerable pain, will likely get nothing as a result of the takeover, and the Journal reports senior debt holders could be wiped out as well. This could set off a chain reaction in the market for credit default swaps, or financial insurance policies that allow traders and investors to bet on the likelihood of defaults on various debt instruments.

If in fact WaMu defaults on its senior debt, financial institutions that sold these swap agreements could face liabilities that dwarf the nominal value of the debt itself. The credit default swap market is huge and unregulated, and obligations to pay out in the event of default typically exceed the outstanding amount of the underlying security by orders of magnitude. This market is already busily trying to deal with the fallout from Lehman Brothers’ bankruptcy: Another round of defaults won’t simplify matters.

Almost 10 months ago, WaMu announced plans to lay off workers, close branches and scale back its lending operations in an attempt to cut costs. We noted on the Buzz at the time that WaMu has been ahead of the curve in nearly every aspect of the credit crunch, dating back to a decision in 2006 to stop buying loans from some of the small mortgage banking institutions that originated the worst quality loans during the mortgage bubble.

Since that time, banks of all shapes and sizes have cut costs, laid off workers and scaled back lending. It should come as no surprise if WaMu’s collapse is the first of many bank failures that make the FDIC’s first 12 "problem children" seem like toddlers in comparison.