Before Washington Mutual collapsed in the largest bank failure in U.S. history, its executives knowingly created “a mortgage time bomb” by steering borrowers to subprime mortgages and turning the loans into securities the company knew were likely to go bad, one of the most extensive investigations into the causes of the financial crisis has found.
Washington Mutual executives were aware in 2006, at the height of the mortgage boom, of problems at its Southern California-based subprime unit, which the company used to fuel its rapid growth in home lending, according to excerpts of internal e-mails and reports released Monday by the Senate’s Permanent Subcommittee on Investigations after an 18-month probe. The documents offer a view of the warning signs that were ignored as the bank tumbled toward failure.
The company’s chief risk officers called the subprime subsidiary, Long Beach Mortgage Corp., “a real problem for WaMu.”
Stephen Rotella, Washington Mutual’s former chief operating officer, described it as “terrible.”
“Short story is this is not good,” David Schneider, Washington Mutual’s former president of home loans, wrote in a December 2006 e-mail. “We are all rapidly losing credibility as a management team.”
The e-mails and bipartisan committee findings come as the Senate panel launches hearings looking at Washington Mutual’s 2008 failure as a case study of the financial crisis. At a Senate panel hearing Tuesday, former Washington Mutual executives defended their performance in the years before the bank’s 2008 collapse, saying they tried to reduce the huge risks it was taking in the subprime market.
Friday, there will be testimony from regulators and later this month from credit rating firms and investment banks that contributed to the bank’s problems.
Former Chief Executive Officer Kerry Killinger defended WaMu’s actions at the Tuesday hearing and insisted the government should not have seized it at the height of the financial crisis in September 2008. Killinger argued that WaMu had adequate capital and shouldn’t have been shut down and sold for a “bargain” price of $1.9 billion.
Two former WaMu chief risk officers said they tried to curb risky lending practices by the bank. But they said they met resistance from top management when they brought their concerns to them.
A report to be released Friday from the inspectors general of two Treasury Department agencies that regulated Washington Mutual — the Office of Thrift Supervision and the Federal Deposit Insurance Corp. — is expected to fault the regulators for their oversight of the bank.
The hearings could help President Barack Obama and congressional Democrats make the case for a proposed sweeping overhaul of financial regulations, which the Senate is set to consider this spring, said Sen. Carl Levin, D-Mich., the committee’s chairman.
“Washington Mutual built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison into a river,” Levin said. “Using a toxic mix of high-risk lending, lax controls, and destructive compensation policies, Washington Mutual flooded the market with shoddy loans and securities that went bad. … As the debate on financial reform begins, it is critical to acknowledge that the financial crisis was not a natural disaster, it was a man-made economic assault.”
Nearly a third of Washington Mutual’s 2,200 branches were in California, and it was a major player, along with its chief rival Countrywide Financial Corp., in helping fuel the state’s housing boom, reaping major profits from it.
Senate committee staff members said they would decide after the hearings whether to refer their findings to the Justice Department for possible criminal prosecution. The committee also will share its findings with the Financial Crisis Inquiry Commission.
The committee’s investigation found that Washington Mutual jumped into subprime and other risky lending in 2003 to increase profits. The company and its Long Beach unit “used shoddy lending practices … to make tens of thousands of high-risk home loans that too often contained excessive risk, fraudulent information or errors,” according to a committee memo.
Washington Mutual and Long Beach Mortgage frequently steered borrowers who qualified for prime loans into riskier subprime loans, the committee found. Washington Mutual then spread the risk to investors by packaging the subprime loans into $77 billion worth of securities it sold to investors, the committee found.
By Jim Puzzanghera – modbee.com
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