Et Tu, WaMu? Seattle Bank Was Subprime 'Polluter'
Tuesday's all-day Senate hearing, conducted by Sen. Carl Levin, aired enough dirty laundry to stink up all of Capital Hill. WaMu, according to the Senate investigation, pursued a deliberate strategy of peddling high-risk, often fraudulent loans, and selling them off to investors. Employees were compensated on quantity, not quality, and even some accused of fraud were lavished with trips to Hawaii. All the while, officials ignored warnings. In fact, when the housing market started to deteriorate, the bank ratcheted up its efforts to push the ill-fated loans in a final push for profits. WaMu was seized by federal regulators in September 2008 and later acquired by JPMorgan Chase in a fire sale, but not before handing its departing CEO a $15 million gift.
"Washington Mutual built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison into a river," said an outraged Levin (pictured). In its wake, WaMu and its peers have left the financial equivalent of a Superfund site that will take years and billions of dollars to clean up.
The hearing, the first of a series planned by the U.S. Senate Permanent Subcommittee on Investigations looking into the financial crisis, focused on Washington Mutual as a case study in what went wrong. Through the testimony of former WaMu execs and hundreds of pages of internal documents and emails, a picture emerged of a company fueled by greed and profit with lax management and even laxer federal oversight.
It wasn't until the mid-2000s, according to the investigators, that Seattle-based WaMu made a strategic decision to focus on lucrative subprime loans, including option-adjustable rate mortgages (ARMs), Alt-A and home equity loans. Key to that strategy was the 1999 purchase of Long Beach Mortgage Co. in Southern California, where some of the most egregious practices occurred.
Loan officers apparently routinely helped borrowers fudge applications -- in so-called "no doc" or "liar loans." Even a mariachi singer with a supposed six-figure income (but no proof) was approved for a mortgage by a meth-snorting loan officer, according to a 2008 article by the New York Times.
From 2000 to 2007, WaMu and Long Beach sold more than $115 billion in Option Arm loans, and packaged some $77 billion subprime loans into toxic securities. In the five years before the bank's collapse, WaMu CEO Kerry Killinger raked in more than $100 million in compensation.
There were several warnings. An internal review in 2005 of loans originated by two top WaMu loan officers, for example, found that more than half were fraudulent -- and up to 83 percent in the case of one officer. Yet, as the Senate subcommittee pointed out, "no steps were taken to address the problems." In fact, the officers were awarded prizes for their performance.
Some executives, such as Ronald J. Cathcart, the company's chief risk officer starting in 2005, said they raised alarms, to no avail. Instead, Cathcart was fired.
As late as June 2007, when the housing market was starting to show signs of distress, the bank was still pushing ahead with its subprime strategy. In a memo titled "WaMu Strategic Direction, Mr. Killinger wrote to directors "we will continue to emphasize higher-risk adjusted return products such as home equity, subprime first mortgages, ALTA mortgages and proprietary products such as Mortgage Plus," according to the Wall Street Journal. Killinger noted declining home prices and the potential for the housing bubble to deflate, but said there was "no way for the company to achieve earnings targets without more loan activity."
Incredibly, Killinger (he of the golden parachute) used his testimony in part to complain about what he believes was unfair treatment of the bank compared to the "too clubby to fail" TARP recipients. "I just don't think the company was treated in the same equal-handed, fair manner that all other financial institutions were," he told Sen. Levin.
Former WaMu officials testified that they tried to rein in the reckless lending starting as early as 2005 but ultimately failed or ran out of time. "WaMu took a series of steps to adopt more conservative credit policies and to move away from loan products with greater credit risk," testified David Schneider, WaMu's president of home loans from 2005 to 2008.
In the end, Levin's evidence and vivid imagery of WaMu's "toxic conveyor belt" leaves the lasting impression. And he rightfully points out that WaMu did not act alone. "Down river, there was Wall Street, with its huge appetite for these mortgage-backed securities," said Levin. "They bottled that polluted water, slapped a label on it from the credit rating agencies that said it was safe drinking water, and sold it to investors."
And let's not forget the watchdogs. On Friday, the inspectors general for the Treasury Department and the FDIC are expected to release a report criticizing the two agencies' oversight of Washington Mutual.