By Frank Ahrens
Washington Post Staff Writer
Wednesday, April 14, 2010; A16
The former chief executive of Washington Mutual, which underwent the biggest bank failure in U.S. history, defended his actions before a Senate panel on Tuesday, blaming the federal government for picking winners and losers during the financial crisis, as well as Wall Street insiders for locking him out of key conversations.
Two of his top lieutenants, however, disputed his account.
"For those that were part of the inner circle and were 'too clubby to fail,' the benefits were obvious," said Kerry Killinger, the former chief executive. "For those outside the club, the penalty was severe."
Washington Mutual, often known as WaMu, was a Seattle-based thrift with more than $300 billion in assets. It failed in the summer of 2008, choked by its bad subprime home loans, which were sketchily securitized. The federal government took over the bank in September 2008 and orchestrated a sale to J.P. Morgan Chase for $1.9 billion.
Washington Mutual specialized in the "option ARM," a type of mortgage that let borrowers make payments so low that the amount of their loan actually rose with time.
In testimony before Sen. Carl M. Levin's (D-Mich.) permanent subcommittee on investigations on Tuesday, Killinger said his bank should have been given a chance to work through the crisis before the government's takeover. He said that Washington Mutual had adequate capital reserves and added that he had aggressively pared his bank's subprime exposure from 2003 to 2007.
Levin's committee asserts that it has found fraud in WaMu's actions and that it may refer the case to the Justice Department, which could pursue criminal charges against former WaMu officials.
Two of the bank's former risk officers, also testifying, disagreed with their former boss.
"I was increasingly excluded from senior executive meetings and meetings with financial advisers when the bank's response to the growing crisis was being discussed," said Ronald Cathcart. He said that he was "fully isolated" by January 2008 and that he was eventually fired by Killinger.
James Vanasek, the other risk officer, testified that he tried to stop the bank from making loans to high-risk borrowers and loans that were made without verifying an applicant's income. However, he said, "without solid executive management support," his proposals had no chance.
Levin's subcommittee, which assembled data on Washington Mutual for the past 18 months, said the bank's employees were given bonuses for the volume and speed at which they sold risky mortgages. In 2000, WaMu booked $2.5 billion in sales of securitized subprime mortgages. By 2006, that number was up to $29 billion.
"WaMu built its conveyer belt of toxic mortgages to feed Wall Street's appetite for mortgage-backed securities," Levin said at the hearing. "Because volume and speed were king, loan quality fell by the wayside, and WaMu churned out more and more loans that were high risk and poor quality."