Carl Levin is the chairman of the subcommittee that investigated the WaMu disaster – from the latimes.com:
“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.”