The True Story of Washington Mutual’s Implosion, from Ground Zero
On a day when JPMorgan Chase‘s Jamie Dimon has announced its “London whale” trader’s losses had grown to $5.8 billion–up about three times from the $1.7 billion previously disclosed, with a possibility of losses reaching $7 billion–and yet JPMorgan Chase also helps “launch a stock market rally,” former WaMu shareholders might feel like screaming or crying, or both.
How does former WaMu head Kerry Killinger feel, when reading in the Los Angeles Times that because JPMorgan Chase’s loss “wasn’t as bad as the most dire predictions,” their “stock shot up $2.07 to $36.12.” What is Dimon’s special sauce? This is also a question raised by The Lost Bank: The Story of Washington Mutual–The Biggest Bank Failure in American History.
It arises on page seven, in the prologue, as a WaMu shareholder sees on TV the news of WaMu’s sale to JPMorgan Chase, after its seizure by the Office of Thrift Supervision. It’s September 25, 2008, and somehow Jamie Dimon has arranged to buy a bank with $307 billion in assets for $1.88 billion. Yes, as the e-generation likes to say (for the next two minutes or so, give the lifespan of these things), “this is a thing that happened.” The seizure and sale wiped out shocked WaMu stock and debt holders.
Kirsten Grind was working for the Puget Sound Business Journal when her coverage of WaMu (née Washington Mutual) grew into its own beat. Her dogged pursuit of the story–whose aftereffects are ongoing–nearly won her a Pulitzer. Her book, The Lost Bank, is more chronicle than analysis, which lends it a gut-wrenching immediacy as it gets down to the bank’s last pages.
It’s well-blurbed by seemingly everyone but Kerry Killinger. (In a recent letter to family and friends, Killinger complains that the book doesn’t take into account the way he managed to lead the bank to its fate via a “smaller and declining part of the company’s business,” which admittedly is no mean trick.) The most frequent criticism is that Grind recounts more than she explains, which is partly a question of your taste for wonkiness.
I eventually tired of Grind’s reportorial reflex to find at least two quotable sides to describe any given situation. Here she is, almost parodying the style, on John Reich of the OTS:
Reich, described as both stubborn and determined, boastful and proud, sympathetic and naive, once claimed that he would rather be right than popular. His critics disagree with that statement.
The FDIC’s Sheila Bair, Reich and WaMu’s nemesis, is said to have a reputation as a “thoughtful, intelligent thinker.” It’s like the thesaurus button is stuck.
On the other hand, Grind’s eye for minutiae helps paint a frustratingly compelling picture of how the bank went bad. It’s easy to dismiss the complexity of life once it’s stopped flooding toward you and appears in the rearview mirror. Killinger is not incorrect when he bridles at being held up as the one idiot who didn’t see the meltdown coming. So Grind’s approach, to go back to the last time Washington Mutual was at death’s door, paint a portrait of the beloved and sage Lou Pepper (sort of a hybrid Yoda-and-Colonel Sanders for latter-day WaMulians), and proceed from there, provides balance.
If you don’t meet Kerry Killinger when he and Washington Mutual are on the way up, it would be inconceivable to imagine why he was granted so much authority when it became clear the bank was deeply troubled. And the story of any stressed institution is that, at any given moment, there are a number of contradictory stories being told about it, internally and externally.
Perhaps fatally, WaMu was a thrift. (Compare and contrast its story with the fate of Citigroup.) Thrifts are supposed to be staid and vanilla, mainly issuing rock-solid 30-year mortgages to the communities they serve. The margins are thin. When Killinger took over from Pepper, he adopted a strategy of acquisitions that may, depending on your age, bring to mind the strategy behind First Citiwide Change Bank: “All the time, our customers ask us, ‘How do you make money doing this?’ The answer is simple: Volume. That’s what we do.”
“Pepper had left Killinger a bank with 50 branches and $7 billion in assets,” writes Grind. By the end of the ’90s, Washington Mutual has amassed $150 billion. Then you turn the page, to a new chapter, and 2003, in which the bank reviews mortgages written by a newer acquisition, the Long Beach Mortgage company, a subprime lender. 40 percent of their sampling contains a “critical error.” To keep this in perspective, they have also grown the worth of loans written to $11 billion, a 400-percent increase since their purchase by WaMu. Grind is great on the parties and excesses, and the winking at outright fraud.
As Grind tells it, WaMu was already in trouble: Its management ran a much larger bank than they had systems in place for, and the pace of acquisition had outrun their ability to do basic things like track documentation. A Fortune article appears in 2004: “What Went Wrong at WaMu.” Killinger is described as a little old lady with a Rottweiler (in reference to WaMu’s pushing more-profitable Option ARMs to people who could have qualified for more reasonable loans), and, in 2007, as the housing market slumped, “a small boy watching a house engulfed by flames.”
The rest is post mortem but engrossing as well, as WaMu struggles to control its image, while government regulators mount a suddenly serious crusade for accountability. The FDIC’s Sheila Bair, past forbearance with OTS “oversight” of WaMu, begins lobbying for WaMu to be sold before its failure can impact the FDIC’s balance sheet, and this provokes interdepartmental wrangling that proceeds until the final pages. (By the end, you get the impression that Bair has gone full-on Buffy, and is determined to take this vampire out, if nothing else. It’s personal.)
Comically, a 27-year-old named Brian Mueller appears. Previously employed at a bowling alley, he has somehow become the whiz kid who tells WaMu executives how much money is leaving as the bank faces runs by spooked customers. He’s doing this with automated Excel spreadsheets. “It was just amazing what you can program Excel to do,” Grind quotes Mueller as telling her. “People actually thought I was working Sunday mornings.” Again, this is a $307-billion-in-assets company. Do not trust bankers in khaki.
WaMu becomes a casualty in the “fog of war” that developed during the subprime meltdown–victim of a liquidity crunch that may or may not have been survivable. There’s much discussion about who knew what when, in the final hours when WaMu was hoping to be sold and the phones went silent, but finally, Grind merely reports that JPMorgan Chase paid its $1.88 billion, and can’t tell you if Dimon had back-channel information.
It still makes you scratch your head: JPMorgan Chase estimated it might need to write down about ten percent of WaMu’s book value, $30 billion. If this is so, that pencils out to…carry the two…a $275-billion profit. In that context, even a $7-billion loss here and there looks like a rounding error. Carry on, Mr. Dimon.