Kerry Killinger said he wanted to create the Wal-Mart of banks. He attempted to do it in a curious way, by ruining the very customers he said he wanted to serve.
The spectacular train wreck that was Washington Mutual continues to be dissected a year after the 119-year-old institution became the nation’s biggest bank failure.
The latest study is The Seattle Times’ two-part report this week that offers a case study of how fast greed can turn a good company bad.
It lays much of the blame for the company’s collapse on a reckless business strategy CEO Killinger and other executives launched as late as 2003. The idea was to boost profits by marketing risky and overpriced loans to borrowers
The tactic bared a blatant disregard for the bank’s customers and a stunningly myopic business plan.
Late last year, The New York Times detailed how WaMu’s once-responsible corporate culture morphed into a three-ring circus of liar-lending. Borrowers were allowed, even encouraged, to exaggerate their income and creditworthiness.
But the company wasn’t just capitalizing on borrowers’ greed; it was manufacturing its own.
The Seattle Times reports that WaMu became one of the nation’s biggest predatory lenders after 2003. Its “signature loan” was an option ARM that offered introductory rates as low as 1 percent.
Such teaser rates lasted but a month, after which rates soared above what conventional fixed-rate loans were charging. Borrowers had the option of paying only a fraction of their interest, digging them deeper into debt. When the balance reached a certain threshold, the bank would cancel the minimum payment option, making borrowers’ payments double or triple.
Option ARMs – dubbed “toxic mortgages” by consumer advocates who say they are ideally suited for misrepresentation – are nearly custom-designed to bankrupt all but the most prudent or savvy borrowers.
If the loans weren’t bad enough, the incentives WaMu offered its sales force were doubly appalling. Brokers got higher commissions for customers who took out option ARMs to begin with, but they would get even more money for persuading borrowers to agree to higher interest rates.
The loans devastated many homeowners – and eventually WaMu. While it was successful early on in bundling the loans and reselling them as securities, investors eventually took notice of growing delinquencies. Big depositors fled when they saw the number of bad loans sitting on WaMu’s books.
The only things stopping a bank from taking a page from WaMu’s play book today are the bad economy and a deflated housing market. Neither will last forever.
Congress and federal regulators are under heavy pressure to leave banks to their own devices. They should look again at this state’s banking “success” story to see the merits of that approach.
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