The collapse of WaMu wasn't a sideshow to the financial panic of a decade ago. It contained almost all the elements that brought on the panic.
On Sept. 25th, 2008, the financial crisis detonated in Seattle.
Federal regulators closed Washington Mutual at the end of the day, marking the largest banking failure in American history. JPMorgan Chase bought the bulk of the operations.
Newcomers who only know the overdrive Seattle economy of recent years can’t understand the real and symbolic consequences of the event.
Real: 5,000 well-paid headquarters jobs were lost. Shareholders and most bondholders were wiped out.
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The kill zone radiated out to uncounted professional-services firms and other vendors dependent on WaMu. A sparkling new skyscraper emptied out. All the economic benefits of a major headquarters — from capital formation to talent and philanthropy — were gone, just like that.
Symbolic: The destruction of a beloved hometown institution founded in 1889 after the Great Fire. Washington Mutual survived the Great Depression, the savings and loan collapse, and numerous recessions. The loss marked the end of Seattle as a major financial center. It was a body blow to downtown, which had already been losing market share to the Eastside.
These were days of fear.
Amazon’s move to the central core and Microsoft roaring out of its “lost decade” were yet to come. So was Seattle’s cost advantage over the Bay Area, which would lure here some high-end offices of leading tech outfits after the economy began a fitful expansion.
Instead, WaMu’s collapse was followed by a recession that saw unemployment peak at 10.1 percent in the Seattle-Tacoma-Bellevue metropolitan area. Other bad news followed. Boeing was struggling with the much-delayed 787 Dreamliner. In January 2009, Microsoft announced its first-ever mass layoffs.
The Washington Mutual saga is largely a footnote to the financial crisis of a decade ago. The only major treatment came in the book “The Lost Bank” by Kirsten Grind, a former reporter at The Seattle Times and Puget Sound Business Journal, now at The Wall Street Journal.
This inattention is a mistake. The failure of Washington Mutual is central to understanding the crisis that propelled the world economy to the edge of a second Great Depression.
Subprime loans, often with no documentation, bundled as securities and sold on Wall Street to hungry investors; opaque financial derivatives that posed a systemic threat; an unsustainable housing boom; banking executives pulling down fat compensation to take on ever-more risk; lap dog regulators late to the scene. WaMu was a critical link in this supply chain to hell that overheated in the 2000s.
It was sharp departure from the old Washington Mutual, especially under the leadership of the beloved Lou Pepper. That institution had been a prudent survivor.
This began to change under the leadership of Kerry Killinger, groomed by Pepper, who became chief executive in 1990.
In WaMu lore, there’s a good Kerry — Pepper’s endearingly shy successor — and a reckless Kerry, who lost his moorings and set the course for disaster. No doubt both are generalizations that carry truth and bias. But by the turn of the century, Killinger was determined to turn WaMu into a giant of the subprime boom.
In 2003, he said, “We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”
It was an eerily prescient comment, but not in the way he meant.
It was also inaccurate: Washington Mutual was not a bank, but a thrift.
To be sure, through a series of mergers and workarounds it had become a bank in all but the technical designation. But one important difference loomed: It was regulated by the especially lax and uninfluential Office of Thrift Supervision, rather than the Federal Reserve. This proved critical in its demise.
Killinger rolled out a new marketing slogan, “The Power of Yes.” WaMu didn’t merely drink deep of the financial deregulation of the 1990s, but also of the sales culture beginning to permeate every nook of American life.
It embraced extreme risks made possible by deregulation. With Wall Street’s appetite for the loans, the frenzy proved very lucrative for top executives, giving incentives for their recklessness. Killinger received $25 million in WaMu’s final year.
Where one once dealt with dour and tightfisted loan officers, by the 2000s they were under pressure to sign off on virtually every subprime application.
Key to the gathering storm were a string of imprudent acquisitions, especially of Long Beach Mortgage in 1999. Some WaMu executives were startled to find the lax standards at Long Beach. “The Power of Yes” set these devils loose in the entire WaMu system.
As long as the housing boom lasted, all appeared well. WaMu’s home-lending unit saw revenues skyrocket from $707 million in 2002 to $2 billion a year later. From 2000 to 2003, WaMu also reached across the country, with 2,200 retail branches in 38 states.
But when the bubble popped, WaMu was especially vulnerable. Even a spring infusion of billions from the capable private equity firm TPG and Killinger’s ouster just three weeks before the final curtain were unable to stop the tailspin.
By September, WaMu faced a bank run, perhaps the worst in America since the Depression. More than $17 billion flew out the door between Sept. 5 and 25; according to Grind, depositors pulled out $2.8 billion in a single day. WaMu complained about a whisper campaign against it in New York, making the thrift’s situation seem worse than it was.
Indeed, a good financial institution was humming beneath WaMu’s subprime troubles. This included a strong branch network and large deposits. Alan Fishman, who succeeded Killinger, “believed WaMu could have been saved,” according to Grind.
“People were running for cover,” Fishman said, “but if (Treasury Secretary Hank) Paulson or someone else said, ‘Let’s settle this thing now,’ it would have been solved.”
But here Washington Mutual’s lack of pull in New York and D.C. became fatal.
Sheila Bair, chair of the Federal Deposit Insurance Corp., demanded a quick resolution that would avoid any risk of FDIC payouts. Amid the desperate improvisation of that fall’s cascading disasters, such as the collapse of Lehman Brothers and the shotgun wedding of struggling Merrill Lynch with Bank of America, she prevailed. WaMu was closed and sold.
Little more than a week after the failure of Washington Mutual, the Fed extended its lender-of-last resort protection to all commercial banks. WaMu would have had a life preserver.
In a tense meeting including Bair, Timothy Geithner, president of the New York Fed and future Treasury secretary, shouted, “The policy of the U.S. government is that there will be no more WaMus.”
Alas, it was too late for Seattle’s last financial star.