WASHINGTON – Former top executives at failed savings-and-loan Washington Mutual on Tuesday defended their performance in the years before the bank’s 2008 collapse, saying they tried to reduce the huge risks it was taking in the subprime market and they, like virtually everyone else, failed to foresee the huge housing downturn that led to the financial crisis.
The executives testified at a hearing by a Senate panel investigating Washington Mutual’s downfall, the largest bank failure in U.S. history. After an 18-month review, the Senate’s Permanent Subcommittee on Investigations found the company had created a “mortgage time bomb” by making subprime loans they knew were likely to go bad and then packaging them into risky securities.
Many of the problems stemmed from shoddy loans originated by the bank’s Southern California-based subprime unit, Long Beach Mortgage Co.
Those findings were partly confirmed in testimony by two former Washington Mutual risk officers.
“As CEO, I accept responsibility for our performance and am deeply saddened by what happened,” said Kerry K. Killinger, Washington Mutual’s former chief executive. But he and other executives said in their prepared remarks that they had worked to limit the company’s mortgage lending as the housing market began slowing and that, more than anything else, the bank was overtaken by economic events out of its control.
“Beginning in 2005, two years before the financial crisis hit, I was publicly and repeatedly warning of the risks of a housing downturn,” Killinger said. “Unlike most of our competitors, we aggressively reduced our residential first-mortgage business.”
Stephen J. Rotella, Washington Mutual’s former president and chief operating officer, testified in his prepared remarks that he and others worked to reduce the company’s exposure to the deteriorating housing market but were unable to do enough – or to anticipate the historic market collapse.
“As the former COO of WaMu, I would like to be able to say that after my arrival at the bank in 2005, every decision that was made was correct,” he said. “But I was neither more prescient about the future than the chairman of the Federal Reserve Bank or the secretary of the Treasury, nor did I have complete decision-making authority at the company.”
In his first public statement since the bank was seized by regulators and sold for $1.9 billion to JPMorgan Chase, Rotella said the failure was principally the result of the company’s risky concentration in the housing market and rapid growth “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.
But the two former Washington Mutual risk officers said the bank took too many chances as it attempted to become the nation’s dominant subprime lender and said they tried to warn of the potential consequences.
“I stood in front of thousands of senior Washington Mutual managers and executives at an annual management retreat in 2004 and countered the senior-executive speaker ahead of me on the program who was rallying the troops with the company’s advertising tag line, ‘The Power of Yes,’ ” said James G. Vanasek, who was chief risk officer from 1999 to 2005. “The implication of this statement was that Washington Mutual would find some way to make a loan. The tag line symbolized the management attitude about mortgage lending more clearly than anything that I can tell you.”
He testified that he was confident that “at times borrowers were coached to fill out applications with overstated incomes or net worth adjusted to meet the minimum underwriting policy requirements.”
Sen. Carl Levin, D-Mich., the panel’s chairman, said the investigation found that Washington Mutual executives, seeking greater profits, decided to take more and more risks in the housing market, and its compensation practices rewarded employees based on volume, not quality, of loans. He said millions of pages of internal documents showed it failed to rein in the riskiest practices until it was too late.
“That move to high-risk lending was motivated by three little words: gain on sale,” Levin said.
In a lengthy opening statement, Levin laid out the panel’s findings as the former Washington Mutual executives sat and listened. Levin said the committee found that the bank steered customers into high-risk subprime and adjustable-rate mortgages. He also said that, in some cases, the bank took loans in which it had discovered fraudulent activity – such as misstated income by borrowers – and rolled them into mortgage securities sold to investors without disclosing the fraud.
The committee’s findings were bipartisan, and Sen. Tom Coburn, R-Okla., the panel’s top Republican, also slammed Washington Mutual’s management for its decision “to dive headfirst into high-risk lending.”
But Coburn also criticized Congress for failing to properly oversee banking regulators who allowed the problems at Washington Mutual and other financial firms. The commission will hear testimony from regulators on Friday about their role in Washington Mutual’s failure.