Ex-WaMu CEO Complains Of 'Too Clubby To Fail'

http://online.wsj.com/article/BT-CO-20100413-712034.html
APRIL 13, 2010
Ex-WaMu CEO Complains Of 'Too Clubby To Fail'
Patrick Yoest

WASHINGTON (Dow Jones)--Former Washington Mutual chief executive Kerry Killinger on Tuesday blamed federal regulators and an insular Wall Street culture for the demise of the bank, saying firms that were "too clubby to fail" were protected during the financial crisis in 2008.

Killinger, who is testifying before the Senate Homeland Security and Governmental Affairs Committee's investigating panel, in prepared testimony complained of "unfair treatment" of Washington Mutual, the largest bank failure in U.S. history in 2008, when it was seized and sold to J.P. Morgan Chase & Co. (JPM).

Killinger argued that the seizure "was unnecessary" and said the company "should have been given a chance to work through the crisis." Regulators didn't give Washington Mutual benefits afforded to other banks in crisis, Killinger said, pointing to injections of capital through the Treasury Department's Troubled Asset Relief Program, Federal Deposit Insurance Corp. guarantees and Federal Reserve injections of liquidity.

Similarly, Killinger said, Washington Mutual was excluded from "hundreds of meetings and telephone calls between Wall Street executives and policy leaders that ultimately determined winners and losers in this financial crisis."

"For those that were part of the inner circle and were 'too clubby to fail,' the benefits were obvious," Killinger said. "For those outside the club, the penalty was severe."

The Permanent Subcommittee on Investigations, part of the Senate Homeland Security and Governmental Affairs Committee, is focusing its hearing Tuesday on Washington Mutual. According to the panel's findings, "higher risk loans"--including negative amortization loans--gradually came to dominate the company's balance sheet from 2003 to 2008 because the loans were more profitable.

E-mails unearthed by the panel show that company executives were concerned that subprime and other risky loans, which were increasingly delinquent, became harder to securitize and sell within the United States. A February 2007 e-mail to company executives David Schneider and David Beck expressed concerns about a "meltdown in the subprime market that is creating a 'flight to quality,'" but noted that Asian investors were still interested in buying the securities.

One type of mortgage that was encountering particularly high delinquency rates, according to the e-mails, were option ARMs. Those mortgages gave homebuyers numerous ways to pay off their home debt, but often resulted in "payment shock" when required payments and interest rates increased rapidly.

"There is still strong interest around the world in USA residential mortgages," said the e-mail, sent by Washington Mutual executive Cheryl Feltgen. "This seems to me to be a great time to sell as many Option ARMs as we possibly can."

Former risk personnel at Washington Mutual on Tuesday testified the company emphasized its abilities to draw up loans for high-risk customers, despite their warnings. James G. Vanasek, the company's chief credit officer and chief risk officer from 2001 to 2005, testified that he "on many occasions" tried to alter the company's lending practices and stem high-risk and subprime loans.

Vanasek said those warnings were met with resistance from managers at the company who were authorizing mortgage loans and that "loan originators constantly threatened to quit and go to" the troubled Countrywide Financial, which was purchased in 2008 by Bank of America Corp. (BAC).

Arguments between line managers and risk personnel were not tackled by Killinger, Vanasek said.

"We had no way to resolve that because the chairman would not engage in conflict resolution," Vanasek said. "He was very conflict-averse."

Vanasek is not the only former Washington Mutual executive to express regret about the company's collapse. Stephen Rotella, a former Washington Mutual chief operating officer who joined the company in 2005, said in prepared testimony that he tried to put the brakes on the growth of its subprime lending, but that in hindsight, "I would have tried to move even faster than we did in all the areas over which I had control."

Killinger's compensation likely will be a topic of conversation, as an investigation memo points to "millions of dollars paid to Washington Mutual senior executives even as their higher risk lending strategy began to lose money and increase the risk in bank's own investment portfolio."

In 2008, the year in which Killinger was asked to leave the bank, he received $21 million in total compensation, and he received nearly $100 million in compensation between 2003 and 2008.

-By Patrick Yoest, Dow Jones Newswires; 202-862-3554; patrick.yoest@dowjones.com