If you were to ask most people the names of the firms at the heart of the 2008 financial crisis, you’d probably hear Lehman Brothers, AIG and the favorites among right-wing conservatives, Fannie Mae and Freddie Mac. A few cognoscenti might conjure up Bear Stearns, Merrill Lynch, Countrywide or New Century Financial. At the top of the list for left-wing conspiracy theorists would surely be Goldman Sachs.
What’s interesting about that list is that none of those institutions was a vanilla-variety bank, the kind that takes in government-insured deposits and makes consumer and business loans. But that’s not because such banks avoided the crisis. Citigroup was recapitalized by the Treasury Department and lives on as the shining example of the bank that is too big to fail. Wachovia was saved from insolvency by an 11th-hour takeover bid by the much healthier Wells Fargo. And Washington Mutual, facing huge losses from risky mortgage lending and a run by depositors, became the biggest bank failure in U.S. history, taken over against its will by the federal government and quickly sold to JPMorgan Chase.
For anyone who still believes the banking industry’s fantasy that it was only Wall Street sharpies who caused the financial crisis, the refutation can now be found in Kirsten Grind’s “The Lost Bank,” which chronicles the rise and fall of Washington Mutual. As a reporter for the Puget Sound Business Journal, Grind spent the better part of two years covering the demise of the giant Seattle savings and loan and building a network of sources inside the organization. Expanding on that reporting, Grind, now at the Wall Street Journal, has produced a compelling case study of corporate incompetence and of how regulators are politically captured by the businesses they are meant to oversee.
“The Lost Bank” is largely the story of the overweening ambition and willful blindness of WaMu’s longtime chief executive, Kerry Killinger, who through a flurry of bold acquisitions turned the well-run local thrift into a national banking powerhouse. Unfortunately, the sophistication and competence of WaMu’s management did not keep up with its ambition, to say nothing of the size and complexity of its balance sheet.
By the time the housing bubble was in full swing, a large portion of the bank’s profit growth, so admired on Wall Street, was coming from what amounted to sleazy boiler-room lending operations run by commission-soaked sales executives. That growth was fueled by a long-running marketing campaign — “The Power of Yes” — that came to define the bank’s culture and establish it in the minds of consumers as the lender that never said no.
Grind demonstrates that, time and again, subordinates warned Killinger about ridiculously risky lending practices, poor mid-level management, inadequate information systems and risk-management controls — even widespread fraud. And time and again, Killinger failed to take interest in these problems or insist that they be fixed. His way of dealing with them was to refuse to acknowledge them for as long as possible and then declare that they had been dealt with, eventually cutting himself off from anyone who insisted on bringing them up.
He routinely withheld bad news from employees, shareholders, the news media and especially the bank’s ever-so-compliant directors. Indeed, it was only several weeks before WaMu was taken over by the government — and only after the board hired management consultants from McKinsey to find out what was really going on at the bank — that the outside directors got around to replacing Killinger as chief executive.
Not surprisingly, Killinger refused to speak with Grind beyond an initial meeting, at which he concluded, he says, that the book “would not be fair and balanced.” And in a self-justifying rebuttal sent privately to family and friends last month, he relies largely on the defense that everyone else in the industry was doing it — before complaining that WaMu was not bailed out along with the big Wall Street banks.
In his letter, Killinger criticizes Grind for relying on sources “with personal, business or political agendas or unbalanced points of view” — as if we are to believe that he has no bias or agenda, or that an accurate inside account could be written without relying on such sources.
Although he didn’t say so, perhaps what really irritates Killinger about Grind’s book is that she calls attention to his midlife crisis, complete with the predictable divorce, remarriage and headlong rush into the corporate fast lane: private jet travel, lavish homes, a fancy new headquarters and, of course, a big boost in executive compensation.
If Killinger was clueless about the amateur way his company was being run, it wasn’t long before even some of the normally sympathetic bank examiners at the Office of Thrift Supervision took notice. They were, in their own words, “concerned” about the quality of mortgages in WaMu’s portfolio, “concerned” about the bank’s underwriting standards and “concerned” about the concentration of higher-risk loans on its balance sheet.
But where tough and serious regulators would have ordered the bank to cease and desist from such practices or would have downgraded its public rating, the OTS seemed to be so blinded by WaMu’s growing profits and increasing institutional importance that it did nothing to act on its oft-expressed concerns.
At one point in 2007, one OTS official noted in an e-mail that Washington Mutual had run through nine chief compliance officers in just seven years — another “cause for concern,” she called it. “The board of directors should commission an evaluation of why smart, successful effective managers can’t succeed in this position,” she continued. “If you would like my opinion, just ask (Hint: It has to do with top management not buying into the importance of compliance and turf warfare and [Killinger] not liking bad news).” Too bad nobody higher up in the OTS put much stock in her opinion.
Having botched the regulation of its largest client, the OTS then found itself in a defensive crouch, engaged in a desperate, behind-the-scenes bureaucratic battle to prevent the Federal Reserve, the Treasury Department and, in particular, the Federal Deposit Insurance Corp. from finally stepping in, closing down WaMu and forcing its sale to another institution. The e-mails unearthed by Grind make it clear that OTS Director John Reich was more concerned with protecting his agency’s prerogatives than with protecting taxpayers or the health of the banking system. Now, like WaMu, the OTS no longer exists, a political casualty of the financial crisis.
While her reporting is extensive, Grind’s writing is often plodding and inartful. The book would have benefited from less detail and fewer anecdotes from inside the bank, and a more thorough and sophisticated effort to connect its story to what was going on elsewhere in the financial system.
Grind is much more comfortable telling stories than drawing broad analytical conclusions about finance, corporate culture or public policy. These shortcomings, along with her reluctance to use her own voice to characterize the main characters and their actions, make this a less memorable or definitive account than, say, Bethany McLean and Peter Elkind’s masterful chronicle of Enron’s demise, “The Smartest Guys in the Room.”
That said, the “The Lost Bank” fills in a missing piece of the puzzle of the 2008 financial crisis with a tale of a bank that grew too big to manage but was too small to bother saving.
THE LOST BANK
The Story of Washington Mutual —
the Biggest Bank Failure in
By Kirsten Grind
Simon & Schuster. 389 pp. $27