Kerry Killinger, the deposed head of Washington Mutual, was in Congress this week protesting that the seizure of the Seattle-based bank on Sept. 25, 2008, was not only premature, it was “unfair.”
Had WaMu only been placed on the “do not short list” and thus protected from those nasty Wall Street speculators. Had WaMu only been allowed to live a few weeks longer, it could have benefited from the increase in federal deposit insurance (the per-person limit was raised to $250,000 from $100,000). Had WaMu only survived long enough to have its debt guaranteed by the FDIC.
In bemoaning the lack of federal handouts and guarantees, Killinger found reason to blame virtually everyone -- the regulators, Wall Street, even the bank (JPMorgan Chase & Co.) that exposed itself to losses when it scooped up WaMu’s carcass.
The one person Killinger did not blame was the person who destroyed a sound, 100-year-old banking institution with reckless and wildly speculative lending: himself.
Remarkably, Killinger testified: “I believe WaMu should not have been seized and sold for a bargain price.” It’s true that shareholders of WaMu got nothing. It’s also true that the previous spring, JPMorgan had offered to acquire WaMu in an unassisted transaction for $8 a share. Killinger turned it down.
Having milked WaMu for, reportedly, more than $100 million in compensation (including $24 million in 2006), Killinger had good reason to want to keep the bank independent. But with the possible exception of Angelo R. Mozilo of Countrywide Financial Corp., arguably no banking executive did more harm to the fabric of the U.S. mortgage industry.
Killinger became chief executive in 1990, at the age of 40, when WaMu was a medium-size and conservatively run thrift. He built it into a behemoth with 2,200 outlets. Revealingly, he boasted to an interviewer in 2002 that he viewed WaMu “as more retail than banking. That’s where the big payoff is.”
Retailers are concerned with a single transactional moment -- when the sale is made. Prudent bankers know that they do not reap their harvest until years later, when loans are repaid. This distinction did not trouble Killinger in the slightest.
WaMu was run with one purpose only -- to issue loans, seemingly without regard to whether the borrower could repay them. Court documents and testimony reveal that loan officers were discouraged from soliciting information from applicants; a company flier with the catchy and revealing motto “a thin file is a good file” urged them to keep interviews brief.
In advertisements, casually attired WaMu employees poked fun at staid bankers in suits -- as if the prudent banking style that had maintained WaMu as a solvent institution since 1889 was not only antiquated but a minor embarrassment.
Even the bank’s chief compliance and risk oversight officer was drafted into the effort to push loans out the door. According to a memo she allegedly circulated, risk personnel at WaMu were to play a “customer service” role and to avoid imposing a “burden” on loan officers.
WaMu became a leader in issuing adjustable-rate mortgages and, especially, mortgages in which the borrower was allowed to defer a portion of the interest due. Naturally, such mortgages were popular because the initial monthly payments were low. But since part of the interest was deferred, the homeowner actually fell further into debt month after month. Such mortgages were a trap almost guaranteed to result in massive foreclosures.
WaMu was betting it would be able to unload its mortgages in the capital markets (where they were packaged as securities and sold to investors), and during the bubble years, it did. However, as it noted in its 2006 annual report, if delinquency rates on mortgages were to rise, investors might have less appetite for the subprime and other risky loans that WaMu was peddling. In short, Killinger’s bank knew it was betting the ranch.
WaMu noted in its disclosures that its customers might be unable to afford their mortgages when their rates adjusted; they were dependent on home prices continuing to rise. The bank added: “Appreciation levels experienced during the past five years may not continue.”
When the inevitable occurred and home prices began to fall, the secondary market for mortgages shut down and WaMu was stuck.
In September 2008, after Lehman Bros. failed, WaMu’s depositors panicked. Almost overnight, WaMu, the country’s biggest thrift, lost 10% of its deposits. By then it was too late. Two weeks after Lehman collapsed, WaMu was shut down -- by far the biggest bank failure in U.S. history.
Killinger says the regulators intervened too soon. But according to a report prepared by the inspectors general for the Treasury Department’s Office of Thrift Supervision and the Federal Deposit Insurance Corp., leaked this week and released Thursday, regulators should have intervened sooner.
The report confirmed that WaMu failed mostly “because of management’s pursuit of a high-risk lending strategy that included liberal underwriting standards and inadequate risk controls.”
Kerry Killinger has it wrong again. This was not a bank that deserved federal bailouts and guarantees. This was a bank that deserved to die. And Killinger made it that way.
Roger Lowenstein is the author of a just-published book on the financial crisis, “The End of Wall Street.”