WASHINGTON (CN) – Former Washington Mutual CEO Kerry Killinger blamed the “clubby culture” of Wall Street and federal regulators for the bank’s collapse while testifying Tuesday before a Senate committee examining the nation’s largest bank failure. Senator Carl Levin rejected that view, saying, “The financial crisis was not a natural disaster; it was a man-made economic assault.”
Levin, Democrat from Michigan and chairman of the Senate Permanent Committee on Investigations, disagreed with Killinger, and named a host of the bank’s failures that served as an “eerie replay” of the 1934 Senate investigation into the 1929 stock market crash.
The committee presented its findings Tuesday after an 18-month investigation into WaMu’s lending practices.
Levin said the primary cause of WaMu’s collapse was its practice of packaging risky loans and selling them to investors while willfully ignoring underlying fraud. WaMu, once the sixth-largest bank in the United States, fell into the hands of federal regulators in September 2008 and was later sold to JPMorgan Chase for $1.9 billion.
According to the subcommittee’s report, WaMu and its affiliate, Long Beach Mortgage, poured more than $77 billion of risky subprime home loans into the financial system, using Wall Street as a funnel to shell the risky loans out to investors and exposing the global financial system to high degree of loss.
“WaMa built its conveyor belt of toxic mortgages to feed Wall Street’s appetite for mortgage-backed securities. Because volume and speed were king, loan quality fell by the wayside,” Levin said.
“Using a toxic mix of high-risk lending, lax controls and destructive compensation policies, Washington Mutual flooded the market with shoddy loans and securities that went bad,” Levin said. “And all of us are still paying the price.”
“As CEO, I accept responsibility for our performance and am deeply saddened by what happened,” Killinger said at the hearing Tuesday. But Killinger added that the bank should not have been seized by the government, and that it “should have been given a chance to work its way through the crisis.”
Killinger called it “unfair” that WaMu did not receive the same treatment, like increased limits on deposit insurance, that other banks enjoyed in the fall of 2008.
Killinger said the company started scaling down its residential mortgage lending business in 2005, before home values started falling.
Former WaMu president and Chief Operating Officer Stephen Rotella said he worked to reduce the company’s exposure to the collapsing housing market, and pinned the failure on company growth that was “magnified and exacerbated by the extreme conditions in the economy.”
“The executive team and all of our people worked very hard to mitigate those risks right up until the seizure and sale of the bank,” Rotella said.
Other former WaMu executives were more willing to point out errors made by the lending giant, saying they expressed concerns leading up to the financial crisis but met resistance from management.
Former chief risk officer James Vanasek said the “appetite of Wall Street and investors created a huge demand” for what used to be a sliver of the securities market: household finance.
Vanasek said he strongly discouraged executives from “rewarding quantity over quality” and scrutinized high-risk loans but was warned that he was risking his career by vocalizing his concerns.
Vanasek said he warned the company against the danger of its marketing slogan “The Power of Yes,” which he said suggested the company management’s lax attitude toward mortgage lending. “It needed to be balanced by ‘The Wisdom of No,'” Vanasek said.
Vanasek said the “high risk profile of the entire industry was recognized by some but ignored by many,” including regulators.
Former chief risk officer Ronald Cathcart said he saw banks “became conduits for Wall Street” and regulators get “lulled into a sense of complacency” as the demand for residential mortgage assets grew. Cathcart said he saw the culture of the lending industry change as lenders made it acceptable for the source of loan repayment to become asset-based, or the underlying home, and not based on the borrower’s credit rating. Cathcart said he was “increasingly excluded” from top level meetings as the housing bubble started to burst and was eventually pushed out.
Killinger fired Cathcart in April 2008.
Levin said WaMu’s biggest problem was its practice of securitizing loans that the bank identified as likely to go delinquent or had confirmed fraud. The bank was aware of rampant fraud among borrowers but did not tell purchasers, Levin said.
From 500 pages of exhibits, Levin cited an audit of 187 loans in which 132 had been reviewed, 115 confirmed as frauds, and 80 were labeled with unreasonable income.
“Even with a red flag marked for fraud, that didn’t stop the loans from being sold,” Levin said. “Getting them sold became an urgent goal.”
He added that the practice was evidence of “massive, deep seated problems” at the bank.
“Something is wrong when you need more documentation to rent a movie than to get a million dollar home loan,” Republican Senator Tom Coburn of Oklahoma said during the hearings. “Anyone and everyone could get a loan.”
“Why didn’t WaMu clean this up?” Levin asked witnesses.
“I can’t speak for management actions,” Cathcart said. Other witnesses also deferred to upper management.
“Inside the bank, problems were communicated to senior management but were not fixed,” Levin said.
Coburn also pointed to the role of Congress in its failing to oversee regulators.
“The mistakes didn’t have to be made if Congress had done its job,” Coburn said. “We failed miserably.”