FDIC Files Scorching Complaint|Against Top Executives at WAMU

SEATTLE (CN) - The Federal Deposit Insurance Corp. says three Washington Mutual executives who earned more than $95 million took "extreme and historically unprecedented risks" and caused the bank to lose "billions of dollars." The bank's top officers "focused on short term gains to increase their own compensation, with reckless disregard for WaMu's longer term safety and soundness," the FDIC says, as receiver for the failed bank.

The FDIC sued former CEO Kerry Killinger, former COO Stephen Rotella, and David Schneider, former president of WAMU's Home Loans Division, in Federal Court.

It says the executives are "accountable for the resulting losses" of WaMu, the largest bank failure in U.S. history.

"They focused on short term gains to increase their own compensation, with reckless disregard for WaMu's longer term safety and soundness. Their negligence, gross negligence and breaches of fiduciary duty caused WaMu to lose billions of dollars. The FDIC brings this complaint to hold these three highly paid senior executives, who were chiefly responsible for WaMu's higher risk home lending program, accountable for the resulting losses," the complaint states.

The men led the bank on a "lending spree" using risky loan products such as Option ARMs, home equity lines of credit and subprime mortgages, and ignored "continuing warnings from WaMu's internal risk managers," who said the bank was "putting borrowers into homes that they simply cannot afford" according to the complaint. The FDIC says this was evident in WaMu's advertising slogan, "The Power of Yes."

"Defendants knowingly pushed their Higher Risk Lending Strategy at a point in the housing cycle when prices were unsustainably high. WaMu focused its growth in a few geographic areas - notably California and Florida - where housing prices had escalated most rapidly and were most at risk for significant decline. Defendants thus gambled billions of dollars of WaMu's money on the prospect that the Bank somehow would manage to avoid losses on higher risk loans to high-risk borrowers in high-risk areas, despite their own awareness of the inevitable decline in the overheated housing market.

"Defendants took this gamble knowing that they did not even understand the odds against them. Defendants knew that the Bank had a woefully inadequate infrastructure - including technology, controls, and data quality - to support the high volume of risky loans that were contained in WaMu's HFI portfolio. The Bank could not adequately track and analyze its loans, measure or price for its risks, or timely adjust to changes in the market. Rotella acknowledged in testimony before the United States Senate that WaMu's 'technology was antiquated,' and that the Bank 'was on an explosive growth path with a very weak infrastructure.' Schneider similarly admitted to WaMu's Board in June 2008 that one of his and the Bank's 'misses' was' [m]arket share and growth focus at the expense of building solid infrastructure and controls,'" according to the complaint.

"As the leaders of the Bank and its critical Home Loans Division, defendants had a duty to manage risk and establish sound lending policies and practices. Instead, their fixation on short-term profits fueled a myopic focus on growing the HFI residential mortgage portfolio, which rewarded them for the Bank's short-term gains. During the period from January 2005 to September 2008, defendants collectively received more than $95 million in compensation. As the losses mounted in the Spring and Summer of 2008, Killinger and Rotella recognized the potential problems and took steps to move at least part of their wealth beyond the reach of their creditors," the FDIC says.

The FDIC also sued Killinger's wife, Linda, and Rotella's wife, Esther, claiming they helped transfer assets. The complaint charges the executives with gross negligence, ordinary negligence and breach of fiduciary duty. The Killingers and Rotellas are also charged with fraudulent conveyance. The FDIC says Killinger and his wife transferred their homes in California and Washington to irrevocable trusts in order to duck creditors. Rotella transferred more than $1 million to his wife and they transferred their New York home to an irrevocable trust to hinder creditors, the FDIC says.

The FDIC wants to freeze the Killingers' and Rotellas'. It asks that damages be established at trial.

The FDIC is represented by Bruce Larson with Karr Tuttle Campbell.

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