Reviewed by Michele Perrin, CPA, CMB, of Perrin & Associates, a Mortgage Banking/Warehouse Lending consultant and former First Vice President of Washington Mutual's Mortgage Banker Finance Division.
Reading The Lost Bank, journalist Kirsten Grind's in-depth investigation into the demise of Washington Mutual, was an emotional experience for me as a former "Wamulian" and a named character in the book. I knew that Kirsten had really done her homework based on how many times she called me with questions as she relentlessly pursued the story, but I never imagined how much truly stunning information she would dig up. I laughed, I cried (at least twice), and I gasped out loud as I read a story I thought I knew so well. Who knew a book about a bank could be such a gripping read? Who knew there was so much more to tell?
Kirsten Grind is a Wall Street Journal reporter today, but she was covering Washington Mutual for the Puget Sound Business Journal during the tumultuous final years of WaMu's dominance of the Seattle economy and skyline. She was a finalist for the Pulitzer Prize for her work covering the FDIC's takeover of Washington Mutual in September of 2008. She estimates that she read over 10,000 documents related to WaMu and interviewed hundreds of people, and her diligence paid off.
The books starts with a prologue from September 25, 2008, the day WaMu was taken over by the FDIC, but then steps back to 1981 when Lou Pepper reluctantly finds himself at the helm of a unprofitable $2 billion thrift with 35 branches in Washington State. He sets about making the place into the "Friend of the Family." Lou comes up with folksy WaMu values for the employees, like "Ethics, Respect, Teamwork, Innovation & Excellence," some of which they were still using when Bank United, where I was working, was acquired by WaMu in 2000. But sadly for the Bank, by 1986 Lou was nearing 65 and must pick a successor.
Enter Kerry Killinger, who according to Grind, was "more comfortable with numbers than with people," but by the end of 1988, became president of the Bank. The book fast-forwards to 1997, when Killinger was working to purchase Home Savings, which was to make WaMu the largest savings & loan in the nation. Killinger had been buying up banks at an unprecedented rate ever since he became president, catapulting the sleepy Seattle thrift from $7 billion in assets to $150 billion in just 10 years. But Kerry had only just begun.
Killinger seems to have gotten a taste of being the "biggest" and now wanted to top every list. His next target: biggest mortgage lender in the US. In addition to an average of two large acquisitions per year, including subprime lender Long Beach Mortgage, one of his strategies was to loosen lending standards. Stated income loans (fondly referred to as "Liar Loans") were one of the star products, even at Long Beach Mortgage, where they also increased LTVs on subprime mortgages to 95% (sounds crazy now, doesn't it?). In 2003, powered by the Bank's "Higher Risk Loan Strategy" and the WaMu ad campaign, "The Power of Yes," the volume of mortgage loans tripled, reaching an astonishing $155 billion. "It wasn't the largest lender yet, but it was getting close," writes Grind.
Killinger's ego appears to have been inflating along with the Bank's balance sheet, as he decides to build a giant skyscraper in Seattle in 2003 for WaMu's headquarters. Killinger starts holding giant "brand rallies" for huge groups of employees across the country where he dances out onto the stage like a rockstar. He hosts opulent President Club retreats for top performers in Hawaii and Punta Mita (I was fortunate enough to attend a number of those and she didn't report the half of what went on!).
Grind quotes songs and skits from WaMu sales meetings to illustrate the culture, including one sung to the tune of "Baby Got Back," "We like big bucks and we cannot lie." The Home Loans Group staged a mock funeral for top competitor Countrywide, accusing them of "reckless behavior." One presenter at a brand rally pretended to be a holy roller preacher and kept shouting "Wamulujah!" as a choir sang behind him. These situations show how Killinger changed the culture at WaMu from "Ethics, Respect..Excellence" to greed, ego and unrealistic optimism.
By 2005, in spite of WaMu's concerns that there was a housing bubble brewing, they began to focus on Option ARM loans (negative amortization loans). I knew that Option ARMs accounted for 65% of WaMu's loans by 2007, but I never imagined that high-risk stated income loans made up as much as 80% of WaMu's Option ARMs and up to 90% of WaMu's home equity loans. Grind quotes Senator Ted Kaufman (D-Del) reading those statistics out loud in a later congressional hearing, then repeating them. "'I keep saying these numbers over again because I hope they're going to change,' he said drily."
With the real estate boom finally beginning to cool in 2006, as you might expect, defaults began to grow and then to skyrocket, and as delinquencies and losses increased into 2008, the stage was set for the FDIC's takeover of the Bank.
Here is where Grind is at her best, putting the reader into the action as the FDIC works behind the scenes to orchestrate the Chase takeover of the bank. Grind points the finger at a number of culprits for the bank's demise, including the Board of Directors for not getting involved and Killinger for his failure to consider risk, but she also uncovers some surprising villains in the whole affair. And former WaMulians may be happy to find that perhaps JPMorgan Chase didn't get such a bargain when they bought the Bank from the FDIC for $1.8 billion.
What Grind does not attempt to provide is the bigger picture of what was going on in the entire mortgage industry during these years. I wish it were only Killinger and WaMu that were so egotistical, greedy and overly optimistic. But Grind does a great job getting to the bottom of what really caused the largest bank failure in US history.
