WASHINGTON — The former chief executive of Washington Mutual, the biggest U.S. bank ever to fail, on Tuesday defended the bank’s actions to reduce risks from the looming housing bust.
Kerry Killinger, who led the Seattle-based thrift, also argued that WaMu had adequate capital and shouldn’t have been seized by the government and sold for a “bargain” price of $1.9 billion in September 2008. The bank “should have been given a chance to work its way through the crisis,” Killinger testified at a hearing by a Senate panel.
The panel’s 18-month investigation found that WaMu’s lending operations were rife with fraud and that management failed to stem the deception despite internal probes.
Killinger rejected that conclusion. He argued that even before the crisis struck with force, the government treated WaMu unfairly.
He noted it was excluded from a list of large financial firms whose stock couldn’t be sold short under a temporary government ban in July 2008. In short-selling, traders bet a stock price will drop and use borrowed shares to profit from any decline.
“For those that were part of the inner circle and were ‘too clubby to fail,’ the benefits were obvious,” Kil linger said. “For those outside of the club, the penalty was severe.”
Sen. Carl Levin, D-Mich., head of the panel investigating WaMu’s failure, asked two other former senior executives why they failed to act when they were aware of loan fraud at the bank.
David Schneider headed WaMu’s home-loans division. And David Beck was in charge of selling mortgages packaged into securities to Wall Street investors.
“You knew all this,” Levin told Beck. “You’re telling us you didn’t notify the investors” that loans with a high chance of default were being sold to them as securities, he said.
Beck replied that while he didn’t notify the investors of problems with the loans, it’s possible the loans weren’t as risky as company officials had indicated in e-mails.
Two former chief risk officers of Washington Mutual said they tried to curb risky lending practices by the bank. But they said they met resistance from top management when they brought their concerns to them.
Fueled by the housing boom, Washington Mutual’s sales to investors of packaged subprime- mortgage securities leapt from $2.5 billion in 2000 to $29 billion in 2006.
Between 2003 and 2007 under Kil linger’s tenure, WaMu cut in half its staff in the home-loans division and sold 30 percent of its portfolio of loans, Killinger said in his testimony.
WaMu’s pay system rewarded loan officers for the volume and speed of the subprime-mortgage loans they closed on. Extra bonuses went to loan officers who overcharged borrowers on their loans or levied stiff penalties for prepayment, according to a report released Tuesday by the Senate panel.
“Washington Mutual engaged in lending practices that created a mortgage time bomb,” Levin said at the start of Tuesday’s hearing. “WaMu built its conveyor belt of toxic mortgages to feed Wall Street’s appetite for mortgage-backed securities. Because volume and speed were king, loan quality fell by the wayside.”
By the numbers
$307 billion
Washington Mutual’s assets when it failed in September 2008
$1.9 billion
What banking giant JPMorgan Chase paid for the 119-year-old thrift in a deal brokered by the Federal Deposit Insurance Corp.
$29 billion
WaMu’s packaged subprime- mortgage securities in 2006, up from $2.5 billion in 2000
