The former CEO of Washington Mutual, the biggest U.S. bank ever to fail, told a panel of skeptical lawmakers Tuesday that government regulators acted rashly when they seized the institution in September 2008.
WaMu "should have been given a chance to work its way through the crisis," Kerry Killinger, who led the Seattle-based thrift until it was shut down amid in the depths of the financial crisis, told the Senate Permanent Subcommittee on Investigations.
His testimony follows an 18-month investigation by the panel that found WaMu's lending operations were rife with fraud and that management failed to stem the deception despite internal probes.
The panel's documents, made public Monday, show that Washington Mutual was repeatedly criticized over the years by internal auditors as well as by federal regulators for sloppy lending practices that resulted in high default rates. WaMu was one of the biggest makers of "option ARM" mortgages — they allowed borrowers to make payments so low that loan debt actually increased every month.
The Senate subcommittee investigation focused on the thrift as a case study on the financial crisis.
At the time it was seized and sold to JPMorgan Chase in a $1.9 billion deal brokered by the Federal Deposit Insurance Corp., WaMu was the sixth-largest depository institution in America. Washington Mutual helped dump "hundreds of billions of dollars in toxic mortgages ... into the financial system, like polluters dumping poison into a river," said the panel's chairman, Sen. Carl Levin (D-MI).
"Washington Mutual engaged in lending practices that created a mortgage time bomb," Levin said at the start of Tuesday's hearing. "WaMu built its conveyor belt of toxic mortgages to feed Wall Street's appetite for mortgage-backed securities. Because volume and speed were king, loan quality fell by the wayside."
The Senate investigation found that in late 2006, Washington Mutual's primary regulator, the U.S. Office of Thrift Supervision, allowed the bank an additional year to comply with new, stricter guidelines for issuing subprime loans. The report cited an internal bank e-mail stating that Washington Mutual would lose about a third of the volume of its subprime loans if it applied the stricter requirements.
WaMu built its conveyor belt of toxic mortgages to feed Wall Street's appetite for mortgage-backed securities. Because volume and speed were king, loan quality fell by the wayside.
By 2007, problems were so serious that Washington Mutual closed affiliate Long Beach Mortgage Co. and assumed at least $77 billion in subprime lending operations, investigators found.
In another telling incident from 2007, American International Group Inc. refused to cover some of WaMu's mortgages because the insurance giant viewed them as too risky. AIG, one of the world's largest insurers, complained to both California state and federal regulators, according to Senate investigators. AIG itself, which was heavily exposed to the subprime mortgage market, collapsed in 2008 and received about $180 billion in federal bailout money.
Even so, Killinger told lawmakers that it was "unfair" for Washington Mutual to have been seized and sold. He charged that other institutions that were "too clubby to fail" got the benefits of a government bailout that were not available to WaMu.
"For those outside the club, the penalty was severe," he said.
Two former chief risk officers of Washington Mutual said they met resistance when they tried to curb WaMu's risky lending practices.
Ronald Cathcart, who helped oversee risk at the thrift until April 2008, testified that as the housing bust deepened in late 2007 and early 2008, "I was increasingly excluded from senior executive meetings and meetings with financial advisers when the bank's response to the growing crisis was being discussed." He said he had become "fully isolated" by January 2008 and was fired by Killinger a few months later.
The other risk officer, James Vanasek, testified that he tried repeatedly to limit the percentage of high-risk loans for borrowers who were unlikely to be able to repay and the number of loans made without verifying borrowers' income. But his efforts fell flat "without solid executive management support," Vanasek said.
The Senate report said the top producing loan officers at WaMu — those who made high-risk loans or packaged them into securities for sale to Wall Street — were eligible for trips to exotic resorts as a reward.
Investigators also found that senior executives at the bank were aware of the prevalence of fraud but investors who bought the mortgage-backed securities were not.
WaMu "dumped the polluted water" of toxic mortgage securities into the stream of the U.S. financial system, Levin said. In some cases, sales associates in WaMu offices in California fabricated loan documents, cutting and pasting false names on borrowers' bank statements, according to the Senate report.
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