Big banks have formed an unusual alliance with consumer advocates to urge the government to allow huge portions of credit card debt to be forgiven, a turnabout from recent years when the banking industry lobbied strenuously to make it harder for consumers to erase their credit card debts in bankruptcy.

The new pilot program — which the banks hope will become permanent — could involve as many as 50,000 people struggling with credit card debt. On an individual basis, the amount of debt to be forgiven would rise according to the severity of the borrower’s financial situation, up to a maximum of 40 percent.

It would have been nice if they’d come around to this way of thinking three years ago, but any relief is welcome, I guess.

Incidentally, if you’re wondering why the banks can’t just institute this program themselves without asking the government to get involved, it’s because they can’t:

Current government rules don’t allow lenders to offer repayment plans that reduce the amount of principal owed and borrowers to repay the balance over a period of several years. In cases where the principal can be reduced, under credit card settlements, borrowers normally are required to pay off the remainder over months rather than years.

Former Federal Reserve Chairman Alan Greenspan said a “once-in-a-century credit tsunami” has engulfed financial markets and conceded that his free-market ideology shunning regulation was flawed.

“Yes, I found a flaw,” Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. “That is precisely the reason I was shocked because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Critics charged WaMu put itself in an especially difficult position by its acquisition of a mortgage company that specializes in loans to people with poor credit histories. That segment, known as the subprime market, was the first in which problems appeared. WaMu also loaded up on other risky types of lending, such as option ARMs (adjustable rate mortgages), which allow borrowers to set their own payment, even if the result was that the principal actually grew from month to month. In addition, WaMu’s mortgage business is concentrated in hard-hit states such as California and Florida.

Weakness also is starting to show up in WaMu’s portfolio of more conventional home loans, as well as in home equity lines of credit and credit cards.

To many the situation is looking increasingly dire for WaMu, especially in the wake of the stunning collapse of IndyMac Bank last month. WaMu shares have fallen 85 percent in the past year, wiping out some $60 billion in market capitalization.

AND while it’s hard to believe that WaMu will face a similar fate as IndyMac - given its $180 billion-deposit base, its most recent capital-raising initiatives and its mix of assets - many Wall Streeters are uncertain about its fate as conditions continue to worsen in some of WaMu’s key markets in California and Florida.

“I don’t see Washington Mutual failing the way IndyMac did,” said Alexandria, Va., banking consultant Bert Ely at Ely & Co. “But it’s looking less and less likely that they’ll remain independent.”

(Sorry about the lack of posts last week. These are busy times.)

The comments file is public information and can be accessed here. It’s sobering to pick a few at random and read the individual stories of ordinary, fiscally responsible Americans who’ve gotten fed up at the capricious and punitive way they’re treated by these companies. With this kind of response, these new regulations seem all but certain to be approved. Democracy in action!