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Posted by on Apr 13, 2010 in Bailout, Neg-Am | 10 comments | Print Print

WaMu Exposed

Carl Levin is the chairman of the subcommittee that investigated the WaMu disaster – from the

“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. . . . It is critical to acknowledge that the financial crisis was not a natural disaster, it was a man-made economic assault.

Today the WaMu executives are testifying before Congress:

“As CEO, I accept responsibility for our performance and am deeply saddened by what happened,” said Kerry K. Killinger, WaMu’s former chief executive. But he and other executives said in their prepared remarks that they had worked to limit the company’s mortgage lending as the housing market began slowing and that, more than anything else, the bank was overtaken by economic events out of its control.

“Beginning in 2005, two years before the financial crisis hit, I was publicly and repeatedly warning of the risks of a housing downturn,” Killinger said. “Unlike most of our competitors, we aggressively reduced our residential first-mortgage business.”

Stephen J. Rotella, WaMu’s former president and chief operating officer, testified in his prepared remarks that he and others worked to reduce the company’s exposure to the deteriorating housing market but were unable to do enough — or to anticipate the historic market collapse.

“As the former COO of WaMu, I would like to be able to say that after my arrival at the bank in 2005, every decision that was made was correct,” he said. “But I was neither more prescient about the future than the chairman of the Federal Reserve Bank or the secretary of the Treasury, nor did I have complete decision-making authority at the company.”

In his first public statement since the bank was seized by regulators and sold for $1.9 billion to JP Morgan Chase, Rotella said the failure was principally the result of the company’s risky concentration in the housing market and rapid growth “magnified and exacerbated by the extreme conditions in the economy.”

“The executive team and all of our people worked very hard to mitigate those risks right up until the seizure and sale of the bank,” Rotella said.

But the two former WaMu risk officers said the bank took too many chances as it attempted to become the nation’s dominant subprime lender and said they tried to warn of the potential consequences.

“I stood in front of thousands of senior Washington Mutual managers and executives at an annual management retreat in 2004 and countered the senior-executive speaker ahead of me on the program who was rallying the troops with the company’s advertising tag line, ‘The Power of Yes,’ ” said James G. Vanesek, who was WaMu’s chief risk officer from 1999 to 2005. “The implication of this statement was that Washington Mutual would find some way to make a loan. The tag line symbolized the management attitude about mortgage lending more clearly than anything that I can tell you.”

He testified that he was confident that “at times borrowers were coached to fill out applications with overstated incomes or net worth adjusted to meet the minimum underwriting policy requirements.”

Sen. Carl Levin (D-Mich.), the panel’s chairman, said the investigation found that WaMu executives, seeking greater profits, decided to take more and more risks in the housing market, and its compensation practices rewarded employees based on volume, not quality, of loans. He said millions of pages of internal documents showed it failed to rein in the riskiest practices until it was too late.

“WaMu held itself out as a well-run, prudent bank that was a pillar of its community. But in 2005, WaMu formalized that it had already begun to implement — a movement from low risk to high risk home loans,” Levin said. “That move to high-risk lending was motivated by three little words: gain on sale.”

The investigation uncovered an April 2008 memo from an internal WaMu corporate-fraud investigator that said a sales associate admitted some associates would “manufacture” statements about a potential borrower’s assets “because the pressure was ‘tremendous,’ and they had been told to get the loans funded, ‘whatever it took.’ ”

“Sales associates manufacturing documents, large numbers of loans that don’t meet credit standards, offices issuing loans in which 58[%], 62[%] or 83% contain evidence of fraudulent borrower information, loans marked as containing fraud but then sold to investors anyway,” Levin said. “These are massive, deep-seated problems. And they are problems that, inside the bank, were communicated to senior management but were not fixed.”



  1. ““But I was neither more prescient about the future than the chairman of the Federal Reserve Bank or the secretary of the Treasury”

    Hmm . . . the COO of WaMu couldn’t see the housing downturn, but I could, and I’m not even a senior executive of my own house (dog ranks above me.) So he basically prepared a statement to say he was unqualified. Nice.

  2. If Levin’s statement has sufficient evidence to stand-up in court then it will be interesting to see if anyone is actually prosecuted. It’s a fairly meaningless statement when a COO/CEO says that he/she “takes responsibility” but then walks away with millions of dollars to live out a life of luxury.

  3. Amazing how through the entire pseudo perp-walk going on in the Senate the overriding theme = “Everyone was guilty but it was nobodies fault”

  4. Nobody at Wells Fargo cared about loan standards because they were playing with Other People’s Money-that is, they planned on selling off most of the loans quickly, so who cared if they went south five years down the line?

  5. With $1MM per Representative riding on blocking reform, I think it’s extremely important for would-be commentators in the debate to be aware of which side of the bread has the butter.

    In the case of creating arch criminals (who violated existing regulations), it’s important to be aware that that is the story the Goldmans and Morgans WANT. They don’t want the story that there is a systemic lack of regulation allowing non-Criminals to do very bad things.

    The Lehman and WaMu stories are distractions.
    The real story – pedestrian Wall Street screwing the customer (and economy) – isn’t as glamorous or headline grabbing but is vastly more important.

  6. Wamu was a huge bank, and if these claims are true I just hope we remember that the vast majority of employees there were not aware or involved in this. A bank does a lot more than process mortgages.

  7. Kerry K Killinger
    Total Compensation
    $13.76 mil (#99)

    5-Year Compensation Total
    $54.16 mil

    Kerry K Killinger has been CEO of Washington Mutual (WM) for 16 years. Mr. Killinger has been with the company for 30 years .The 56 year old executive ranks 6 within Banking

    Kerry K Killinger, CEO Compensation –


    Stephen J. Rotella serves as President of Chase Manhattan Mortgage Corporation. Mr. Rotella has been Chief Executive Officer of Chase Home Finance, LLC and Executive Vice President of JP Morgan Chase since 2001. He served as the Chief Operating Officer and President of Washington Mutual Inc. from January 10, 2005 to October 2008. He served as the President of Retail Banking at Washington Mutual Inc. from June 2008 to October 2008. Mr. Rotella was responsible for oversight … of the retail, commercial and mortgage lines of business as well as Washington Mutual Inc.’s technology group and day-to-day administration. He was also responsible for JP Morgan Chase’s Community Development Group. He served as an Acting Head of Home Loans Division of Washington Mutual Inc. from March 2005 to June 2005. He served as Chief Operating Officer of Chase Home Finance from 1998 to 2001. Mr. Rotella served as Head of Chase Home Finance of JPMorgan Chase & Co. since July 16, 2003. He served as an Executive Vice President of Servicing at Chase Manhattan Mortgage Company from 1991 to 1998. He held various positions with Chase’s mortgage business including Senior Vice President of Marketing , Finance and Product Development from 1987 to 1991. Prior to joining Chase, he worked in the retail brokerage, mutual fund, and systems consulting industries. He served as president of the Consumer Mortgage Coalition. He served as Chair and Director of a large regional arts company in Columbus, Ohio called BalletMet. He serves as Chair of Chase’s Housing Advisory Council, which focuses on increasing lending to underserved communities and a Member of the Board of Directors of the Mortgage Bankers Association. He served as Member of Consumer Mortgage Coalition. Mr. Rotella attended State University of New York in Stony Brook, and received his Bachelor’s degree in Economics in 1975. He earned his MBA in Finance and Information Systems from State University of New York in Albany in 1978. .

    Stephen Rotella: Executive Profile & Biography – BusinessWeek


    Compensation. Mr. Rotella’s compensation shall be determined by the Human Resources Committee of the Company’s Board of Directors (the “HR Committee”) and will be reviewed annually. During his employment, however, there may be no reduction in Mr. Rotella’s base salary, target bonus, stock options, restricted stock and performance share grant amounts without his consent and the Company has no implied obligation to raise his compensation at any time. Mr. Rotella’s starting annual salary will be $900,000 and his 2005 target cash performance bonus will be $2,500,000. The bonus will be paid pursuant to the Company’s Leadership Bonus Plan, and for 2005 is guaranteed to be not less than $2,000,000. In addition, the Company will pay Mr. Rotella a one-time cash payment of $2,600,000 upon his commencement of employment. Mr. Rotella will also be enrolled as a participant in all employee benefit plans (including retirement and insurance plans) available to other Company officers, and will be entitled to receive such other perquisites as the Board or the HR Committee may from time to time deem appropriate.

    SEC Info – Washington Mutual Inc – 8-K – For 12/20/04

  8. Just wanted to point out that these executives, like so many others, were paid for their supposed “talent.” Apparently, they didn’t have as much “talent” as the pesky bloggers (whose occupations ranged from housewife to surgeon) from many years ago who predicted **exactly** how things were going to pan out as a result of the credit/housing bubble. None of the bloggers were “surprised” or “shocked” by what happened.

    Either these executives are idiots, or they are sociopathic criminals (what I tend to believe — they should be in jail for the rest of their lives, stripped of all their personal assets).

    I’d like for someone to honestly explain why these bankers are paid so much money. IMHO, the entire financial/banking industry is a scam — he who controls the money flow makes the most money. Compensation has very little to do with how “productive” one is.

  9. “And Mr. Killinger took home over $25 million in his last year at WAMU.”

    Wow. I wonder how much he would have made if the bank had actually been successful – you know – hadn’t failed and all that?

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