This editorial will appear in Wednesday’s print edition.
Arguably the most spectacular collapse of the financial crisis that has gripped the nation since late 2007 was the fall of Washington Mutual, the 119-year-old Seattle-based thrift.
Company executives may have been enriched with extravagant pay and bonuses, but thousands of shareholders lost their investments when WaMu stock became virtually worthless overnight. Scores of Northwest WaMu employees lost their jobs when the bank’s remnants were bought by JPMorgan Chase after a federal takeover.
It was the biggest bank to fail in U.S. history – and a major reason was the way WaMu was run, using high-risk, often fraudulent lending practices and a questionable pay system that rewarded cheating.
Now, after an 18-month investigation, Congress is poised to exact at least some retribution. After hearings conclude this week, a Senate subcommittee could formally ask the Justice Department to file criminal charges against WaMu executives who led the thrift into financial ruin, helping deepen the worst recession since the 1930s. The investigation also faulted lax oversight by federal regulators.
Although the company’s former CEO, Kerry Killinger now claims that WaMu should have been allowed to work its way out of the crisis, it’s clear from testimony by some former executives that saving the bank didn’t seem very high on management’s radar screen.
It appears that top executives consistently ignored warnings about WaMu’s risky subprime mortgage loans that were often based on fraudulent information provided by loan officers. Indeed, WaMu’s pay policy rewarded employees for originating loans of questionable quality.
One risk officer testified that he was “fully isolated” and then fired by Killinger for raising concerns. If the CEO was studiously ignoring the warning bells, what are the chances that he would have really tried to save the company?
According to Sen. Carl Levin, D-Mich., chairman of the subcommittee investigating WaMu, the company “flooded the market with shoddy loans that went bad. It built a conveyor belt to dump toxic mortgage assets into the financial system like a polluter dumping toxic substances into the river.”
Polluters face consequences for their actions, and so should WaMu executives who were aware of fraudulent practices and allowed them to continue in an overheated housing market.
The end result was devastating for so many shareholders and employees, and those who helped cause it need to be held accountable. Lessons learned from this fiasco should inform Congress’ efforts to make financial reforms that could prevent future similar collapses.