Ex-Washington Mutual CEO cries foul; risky loans slammed

By Reuters Staff
April 14, 2010

   By Dan Margolies
   WASHINGTON, April 13 (Reuters) – The former chief executive of Washington Mutual said banking regulators seized it unfairly in 2008 as the Seattle-based savings and loan fell outside an inner circle of banks that were “too clubby to fail.”
   But the chairman of the Senate’s Permanent Subcommittee on Investigations said Washington Mutual had created a “mortgage time bomb” by writing risky loans and selling them off to investors in its quest for profit.
   Former WaMu CEO Kerry Killinger testified on Tuesday that, while the company suffered from rising loan losses, it was working its way through the financial crisis and would have benefited from measures announced within days of its seizure in the biggest bank failure in U.S. history.
   “It was with great shock and sadness that I read of the seizure and bargain sale of Washington Mutual on Sept. 25, 2008,” he said. JPMorgan Chase & Co <JPM.N> bought WaMu’s banking operations from regulators for $1.9 billion.
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   Killinger, who was paid more than $100 million between 2003 and 2008, was forced out just weeks before WaMu was seized.
   In October of 2008, U.S. officials announced measures including an increase to $250,000 for insured deposits and a federal guarantee of bank debt.
   Killinger also complained that WaMu had been excluded in July 2008 from a list of Wall Street bank stocks protected from abusive short-selling, and was cut out of crisis discussions between Wall Street executives and policy leaders.
   “For those that were part of the inner circle and were ‘too clubby to fail,’ the benefits were obvious,” Killinger said.
   But Senator Carl Levin, the chairman of the subcommittee, blasted the bank’s management for ignoring warning signs that bank employees were making shoddy loans to high-risk borrowers.
   Levin concluded the hearing saying Washington Mutual under Killinger became “just a conveyor belt that dropped into the stream of commerce literally hundreds of billions of dollars of mortgages that were substandard and dubious.”
  
   TIME BOMB
   The Michigan Democrat said WaMu contributed to the financial crisis by selling its loans, which were packaged into securities and sold to investors.
   “To keep that conveyor belt running and feed the securitization machine on Wall Street, Washington Mutual engaged in lending practices that created a mortgage time bomb,” Levin said.
   He told reporters on Monday that he would leave it up to the U.S. Department of Justice whether any executives at Washington Mutual should be charged with criminal wrongdoing.
   A staffer on the subcommittee, asked on Tuesday if any referrals would be made by the committee to the FBI, said a decision had not been made.
   Killinger maintained an easy-going demeanor even as he was confronted with internal emails urging the sale of delinquent loans to investors, and evidence that employees responsible for fraudulent loans were rewarded with paid vacations.
   Levin repeatedly asked him if he was troubled by the emails. Finally, Killinger grudgingly responded, “I would have inquired more.”
   “Well, I guess that’s progress,” Levin muttered.
  
   RISK OFFICER
   James Vanasek, WaMu’s chief risk officer from 1999 to 2005, told the subcommittee that the mortgage industry generally began taking on more risk ahead of financial crisis.
   The dangers were “recognized by some but ignored by many,” said Vanasek, who faulted a broad swath of industry players including loan originators, lenders, regulators, rating agencies and investment banks.
   Vanasek said he had tried to cap the percentage of high risk and subprime loans in the thrift’s portfolio but was thwarted by lower-level managers.
   Regulators seized Washington Mutual less than two weeks after Lehman Brothers filed for bankruptcy and touched off a global panic that led to the freezing of credit markets and the biggest U.S. financial crisis since the Great Depression.
   Washington Mutual was the largest savings and loan in the country with more than $300 billion in assets and $188 billion in deposits.
   The Seattle-based thrift was a traditional home mortgage lender for more than 100 years, focusing on 30-year, fixed-rate and government-backed loans, before it decided to chase after  riskier borrowers.
    Washington Mutual’s parent company, Washington Mutual Inc <WAMUQ.PK>, announced an agreement last month to share about $5.6 billion in tax refunds with the FDIC and JP Morgan Chase.
   Its plan to exit bankruptcy court includes a rights offering to raise an undetermined amount of money to support the company, which would reorganize itself around an investment subsidiary and a mortgage reinsurer. (Reporting by Dan Margolies; Editing by Tim Dobbyn) ((dan.margolies@thomsonreuters.com, +1 202 898 8324)) Keywords: FINANCIAL WAMU/ 
  
Wednesday, 14 April 2010 00:08:47RTRS [nN13244066] {C}ENDS

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