All Americans should be angry or curious, because ultimately WaMu's collapse was more than the failure of management and corporate governance or the loss of a major headquarters in Seattle. It was a colossal national policy debacle, and the system that caused it is still broken.
Last week I was on stage at Town Hall Seattle with Kirsten Grind to discuss her new book, “The Lost Bank,” about the rise and fall of Washington Mutual. The hall was crowded and the questions could have gone for hours.
Grind covered the collapse for the Puget Sound Business Journal, where her work was a finalist for a Pulitzer Prize. She’s now at The Wall Street Journal. But her homecoming at Town Hall is a reminder that WaMu remains an open wound here nearly four years after it became the biggest banking failure in U.S. history.
People at Town Hall were still hurt, angry, curious. All Americans should be, because ultimately this was more than the failure of management and corporate governance or the loss a major headquarters in Seattle. It was a colossal national policy debacle, and the system that caused it is still broken.
Kerry Killinger, the one-time wonder-boy chief executive, amply earned condemnation for the disaster. But it’s also telling that Killinger was a money manager when Lou Pepper hired him as likely heir apparent. Real bankers have much for which to answer, but Killinger’s lack of banking experience provided no check on his hubris.
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Of course, this didn’t matter when WaMu was flying high in the mid-2000s.
Alan Greenspan’s Federal Reserve reacted to the 2001 recession by driving huge amounts of money and easy credit into the economy. The result, combined with the deregulation of recent years, was the biggest housing and mortgage bubble in history.
While the party was going, it was especially good for WaMu. One reason: Washington Mutual was not a “real” bank. It was a savings and loan (or thrift), an unlikely and gigantic survivor of the S&L meltdown of the early 1990s.
As such, it was required to be more in the mortgage business than a commercial bank. Suddenly, in the bubble, this was no longer a liability but a boon. And with deregulation and the vast appetite for mortgages to securitize on Wall Street, WaMu had slid ever more into the mainstream of the banking system.
But even when Wall Street loved WaMu, it wasn’t a real bank. I believe this, along with its lack of political heft in D.C., had profound consequences when the music stopped.
WaMu’s chief regulator was captured by the era’s laissez-faire and obsolete. The Office of Thrift Supervision was suited to oversee the tiny thrift of George Bailey in the movie “It’s a Wonderful Life,” not one of the largest financial institutions in the nation.
To be sure, even Ben Bernanke, who had succeeded Greenspan, was saying that the fall of housing prices and subprime mortgages wouldn’t be that big a deal. But the Fed regulated and protected banks. It paid no attention to WaMu’s risky business.
Most people at Town Hall knew that on Sept. 25, 2008, WaMu was closed by the Federal Deposit Insurance Corp. and its assets sold to JPMorgan Chase for $1.9 billion. The wider context is interesting.
Lehman Brothers had been allowed to fail on Sept. 14 — to teach the market a lesson about the consequences of foolish risk. Unfortunately, this unleashed a panic, credit seized up and assets were being unloaded at fire-sale prices. All this hurt WaMu, which was attempting to save itself with new capital.
Two days later, the Fed lent $85 billion to save AIG, which couldn’t cover its insurance on credit-default swaps for banks. On Sept. 21st, Goldman Sachs and Morgan Stanley, the last big investment banks, were allowed to become bank holding companies, coming under the protection of the Fed.
Meanwhile, WaMu was facing a run on its deposits, the jitters intensified by short selling of WaMu stock. The Securities and Exchange Commission had already banned naked short selling of banks, Fannie Mae and Freddie Mac.
When the FDIC closed WaMu, Chairman Sheila Bair had one objective: To save the FDIC from shelling out a penny. She succeeded. Later she would say WaMu was “practically a nonevent” and “barely a blip.” No matter that shareholders were wiped out and bondholders looked to lose everything.
But it became an event. The bond market was stunned. And amid the frantic improvisation during those weeks, Bernanke, New York Fed President Tim Geithner and Treasury Secretary Hank Paulson objected to Bair’s myopia. Their views eventually prevailed.
On Oct. 3, the $700 billion TARP bailout was passed by Congress and signed into law by President George W. Bush. Four days later, deposit insurance was raised from $100,000 to $250,000. The Fed also extended lender of last resort privileges to all commercial banks and also to nonfinancial corporations.
According to David Wessel’s book “In Fed We Trust,” Geithner shut down Bair’s arguments, shouting, “The policy of the U.S. government is that there will be no more WaMus.”
When Wachovia, the fourth-largest bank, faced collapse, the Fed invoked emergency powers to save it. A sale was arranged, preserving at least some shareholder and, especially, bondholder, investment and enhancing confidence.
From then on, the Fed injected capital into the big banks and took bad loans off their books.
Could WaMu have been saved if the timing had been different and it had the regulatory and political allies of the big banks? Grind writes that the thrift’s short-lived CEO Alan Fishman “believed WaMu could have been saved — if the government wanted to save it.”
Indeed, besides the cancer of bad mortgages, there remained a healthy WaMu, in its retail banking side. JPMorgan Chase certainly thought so.
I talked to a retired senior WaMu executive who was of the same mind, and spoke of the backroom deal-making on the East Coast that only contributed to WaMu’s demise.
“But,” he said, “you’ll never be able to prove it.”
What is not in doubt is that the rescue left the big banks larger and more dangerous than ever. No major player went to jail or even faced criminal prosecution. The bailout was not followed with reform. The same complex, risky practices and that caused the crash continue.
One recent example is the trading blunder at JPMorgan Chase that cost $2 billion on a hedge that was intended to reduce risk. Last week, it was reported that the eventual loss might reach $9 billion. All this from the best-run major institution.
The big banks increasingly resemble the description of Lord Byron, without the poetry: “Mad, bad and dangerous to know.” Just ask the people hurt by the collapse of Washington Mutual.
You may reach Jon Talton at email@example.com. On Twitter @jontalton.