Killinger captained loose ship to financial demise

Kerry Killinger spent seven years in Spokane in the late 1970s and early 1980s.

He was an executive at Murphey Favre Inc., a small investment company that managed two small mutual funds and gave investment advice to individual and institutional investors. On the side, he bought and fixed up homes for resale at a profit. It was a cottage industry during that era, among the worst for local real estate.

After helping arrange the sale of Murphey Favre to Washington Mutual in 1982, Killinger careened by the corporate ladder, making WaMu president in 1988, chief executive officer in 1990, and chairman less than a year later.

He returned from time to time early in his WaMu tenure, talking up the local economy, the bank’s prospects and, in 1991, welcoming reforms proposed by the first Bush administration that would loosen restrictions on U.S. banks.

His ambitions for WaMu seem almost comically modest, in retrospect. The bank crossed the border into Oregon that year. In 1992, he projected branch expansion at the rate of eight per year. WaMu was still looking for an opportunity to get into Idaho a year later, when it boasted $10 billion in assets.

Flash forward 15 years, and WaMu was a $300 billion behemoth with a national footprint, handsome downtown Seattle headquarters, and loan policies that would shame a pawnbroker. The Federal Deposit Insurance Corp. induced JPMorgan Chase to take WaMu over in September 2008, one of a series of moves that saved, or socialized, the global banking system, depending on your perspective.

Last week, Killinger told the Senate Permanent Subcommittee on Investigations that the regulators had acted too hastily, that WaMu officials were on their way to resolving the bank’s problems, and that his West Coast institution did not get the same consideration Wall Street banks “too clubby to fail” got.

Maybe, but WaMu clearly brought about its own downfall. Loan officers in its far-flung branch system were out of control, peddling now-infamous option-ARMs, mortgages that allowed borrowers to pick payment plans that allowed principal to increase. And the signals they got from Seattle were go-go-go.

Fraud was so endemic that AIG, itself a house of cards, would not insure some of WaMu’s mortgages in 2007. Bank executives concerned about where WaMu might end up if lending policies did not change testified last week the upper echelons did not want to hear it.

The hearings, as they often are, were an exercise in finger-pointing that closed with regulators saying it was not their fault either.

Friday, the U.S. Securities and Exchange Commission accused Goldman Sachs of fraud, possibly substantiating what might have been one of Killinger’s too few insights during WaMu’s implosion.

To a suggestion by an executive vice president that WaMu might want to seek help from Goldman, Killinger responded that he did not trust the Wall Street powerhouse. Goldman, he said, was shorting Countrywide Financial Corp. mortgages – betting they would lose value – at the same time it was acting as the company’s financial adviser.

“This is swimming with the sharks,” he wrote.

The SEC complaint alleges similar behavior in its handling of other securities backed by sub-prime mortgages. Goldman supposedly allowed hedge fund manager John Paulson to select the mortgages behind the collateralized debt obligation, then helped Paulson sell them to unwary investors.

Paulson made a killing, and Goldman raked in fees.

If the SEC allegations are true, imagine what Goldman might have done with WaMu’s sub-prime concoctions. Think shark-feeding frenzy.

Killinger, no minnow, cashed out of WaMu for $25 million. Bet he’s not flipping houses anymore.