The Seattle Times has a must-read piece on Washington Mutual today which reveals a lot of the fine detail on how the company was run and what led to its demise (hat tip calculated Risk).
As with many of the other busted financial giants like Northern Rock and Lehman Brothers, indications that something was amiss were apparent long before their ultimate demise. However, in an environment of easy money and lax regulatory standards those signs were overlooked as share prices kept rising.
Here are a few of the verbatim quotes from the article which I found most telling.
- In its headlong pursuit of growth, WaMu systematically dismantled or weakened the internal controls meant to prevent the bank from taking on too much risk
- WaMu’s riskiest loans raked in money from high fees, but because the bank skimped on making sure borrowers could repay them, they eventually failed at disastrously high rates.
- WaMu’s subprime home loans failed at the highest rates in nation. Foreclosure rates for subprime loans made from 2005 to 2007 — the peak of the boom — were calamitous. In the 10 hardest-hit cities, more than a third of WaMu subprime loans went into foreclosure.
- By the summer of 2004, nearly 60 percent of the loans WaMu was making were the riskiest sort — option ARMs, subprime mortgages and home-equity loans.
- Talk to people who worked with Killinger, and the same phrases and adjectives keep coming up. Ambitious. Quick study. Smartest guy in the room. And always, always optimistic. "He’s a cockeyed optimist to the nth degree," one former associate said. "He always thought he could get out of whatever trouble he was in." But Killinger also is repeatedly described as avoiding confrontation and uninterested in the nuts-and-bolts details of WaMu’s business.
- And even more than most chief executives, insiders say, Killinger was focused on WaMu’s stock price as the company’s — and his — primary gauge of success. "Kerry’s view of himself was tied to a constant increase in the stock price," Chapman said. "He was fixated on it."
This article is the first of two parts. The link to the article is below. It is a good read and documents fairly extensively how all-encompassing the originate-to-sell model of securitization was at WaMu and how this relaxed internal controls and risk management, leading to its demise. What tipped me off to what was happening was the change in Washington Mutual’s lending profile as it rushed headlong into option ARMs. The whole episode is rather sad because WaMu was a great company with an amazing brand. And from most anecdotes I hear, Killinger was a brilliant man as well.
But, smarts are not enough when you are taking on too much risk, thinking you have somehow magically hedged yourself against those risks. No, you do not have to dance, if the music is playing. Given the bubbles now building again and the likelihood of a nasty end to this particular episode as well, this is something that bears remembering.
Reckless strategies doomed WaMu – Seattle Times
See also “A Giant Downfall” from Portfolio.com last month. It documents WaMu’s last days and demonstrates that WaMu was the subject of a bank run – the major reason it was seized by regulators.