The Lost Bank
On Sept. 25, 2008, the government took control of Washington Mutual, a bank which had been started in Seattle exactly 119 years earlier. The bank had lost $16.7 billion in the weeks before its closure and regulators brokered a sale of the savings and loan to JPMorgan Chase for $1.9 billion. It was the biggest bank failure in American history.
What happened?聽 Kirsten Grind tells us in her illuminating book, The Lost Bank, which gives a detailed account of the bank鈥檚 trajectory from being a company known for 鈥渂orrower-friendly loans鈥� with a concentration on 鈥渉uman value鈥� to becoming a symbol of the subprime mortgage madness. A Wall Street Journal reporter who wrote an investigative series on Washington Mutual for her former employer, the Puget Sound Business Journal, Grind provides a descriptively rich account of the bank鈥檚 final two decades.
When Kerry Killinger became Washington Mutual鈥檚 chief executive in 1990, he kept to a tight operating budget, insisting on flying commercial and telling employees 鈥渇rugal is sexy.鈥� He then went on an acquisitions spree, buying eight small banks within two years then taking over Great Western and Ahmanson, doubling the bank鈥檚 size twice over. After Killinger had turned Washington Mutual into the country鈥檚 largest savings and loan, he set his sights on becoming the biggest mortgage lender. This goal was drilled into the company鈥檚 thousands of loan writers, whose compensation was tied to the volume of loans they made.
In part to meet this goal, the bank鈥檚 subprime lending subsidiary, Long Beach Mortgage, which had been bought almost as 鈥渁n afterthought,鈥� began loosening its guidelines. Account executives started making more 鈥渟tated income鈥� loans, which meant borrowers told the bank what they made, without offering documentation. Rather than ask for proof of income, one loan manager in San Diego took pictures of a mariachi singer and a gardener to show that the borrowers, both claiming six-figure incomes, had jobs.
鈥淒id I ever check to see if a maid was really making $6,000 a month?鈥� said one Long Beach account executive later. 鈥淣o.鈥�
Though the book is long on details, it鈥檚 short on analysis. Instead of situating Washington Mutual within a broader context, Grind spends much time detailing the company鈥檚 increasingly extravagant and bizarre culture. At an annual gathering for top loan writers known as the President鈥檚 club, actors performed 鈥�The Rocky Horror Picture Show鈥� at a renovated sugar refinery on the island of Kauai. At a revival-themed meeting in Atlanta, an 鈥渆vangelist鈥� in a white suit praised the bank鈥檚 mortgage products and a gospel choir was flown in from Los Angeles to sing about 鈥淭he Power of Yes.鈥�
鈥淭he Power of Yes鈥� was an advertising campaign that the bank鈥檚 chief risk office, Jim Vanasek, cautioned had to be countered with 鈥淭he Wisdom of No.鈥� Vanasek earned the nickname 鈥淒r. Doom鈥� and his advice went unheeded in the frenzy of making short-term profits with predatory lending.
In a fascinating if unexamined parallel, Killinger鈥檚 biography mirrors the trajectory of the bank; as Washington Mutual continued to expand, his lifestyle became more lavish. He began flying private jets and spent more time out of the office, which became a sore point for executives and managers. He divorced his wife of 31 years and acquired new homes with the woman he married eight months later. As fraudulent loan-making escalated rapidly, so did Killinger鈥檚 compensation. In five years, he made nearly $80 million.
Killinger changed the company鈥檚 structure, decentralizing power by dividing Washington Mutual into three autonomous units. And it was increasingly the Home Loans Group that had his ear.
Though it was apparent that the astonishing rate of mortgage lending couldn鈥檛 continue, Killinger announced a five-year plan he called 鈥淲ashington Mutual鈥檚 high-risk lending strategy.鈥� The plan was to increase production of Option ARMS but also to make more home equity loans and more subprime mortgages. As losses stacked up with the downturn in the housing market in 2007, Killinger remained relentlessly optimistic, shocking other executives as he continued to avoid making decisions. He was forced out two weeks before Washington Mutual was sold.
At a Senate hearing in April 2010, Killinger said that Washington Mutual had been mistreated because it was not one of the banks considered 鈥渢oo clubby to fail." An executive who had resisted any regulation blamed the government for failing to rescue the bank that he had steered to ruin.
The FDIC sued Killinger and two other Washington Mutual executives accusing them of reckless lending. In December 2011, the executives settled with the government for $64.7 million; almost all of the money came from their bank-funded insurance policies.
Amy Rowland is a freelance writer in Brooklyn, N.Y.
