Questions still abound in WaMu’s 2008 seizure
Two federal investigations into Washington Mutual’s regulators released Thursday paint a stark picture of warring federal agencies that disagreed on policing the Seattle bank, but the findings fail to answer key questions about why the nation’s largest savings-and-loan was shut down in September 2008.
In one particularly heated email released as part of one investigation, the former head of the Office of Thrift Supervision, WaMu’s main regulator, wrote to another OTS official: “I cannot believe the continuing audacity of this woman,” referencing Sheila Bair, the chairwoman of the Federal Deposit Insurance Corp. (FDIC).
Both John Reich, the former head of the OTS who sent the email, and Bair will testify about their role in WaMu’s oversight at a congressional hearing Friday morning, beginning at 6:30 a.m. Pacific Time.
In a Washington, D.C., news conference Thursday, the Senate Permanent Subcommittee on Investigations said that Washington Mutual’s extensive foray into risky lending led to the bank’s failure on Sept. 25, 2008, and that regulators were forced to move in because of its shaky financial position.
The congressional group’s own investigation was bolstered by the long-anticipated release of a separate government examination into the bank’s seizure. In that report, the Office of the Inspector General of the FDIC and the U.S. Treasury Department also pointed toward WaMu’s pursuit of a high-risk lending strategy as the reason for its failure. The groups were not working together, according to the subcommittee.
The abrupt closure of Washington Mutual wiped out an estimated $7 billion in shareholder wealth nationwide and internationally, including the value of millions of shares held by WaMu employees and Seattle residents. The bank’s assets were sold to JPMorgan Chase for a fraction of their worth. The two investigations did not look into JPMorgan’s role.
The Senate Permanent Subcommittee, which is holding hearings this week into WaMu’s collapse, has so far not released details of the bank’s financial picture at the time the government seized it, saying that the focus of its investigation was on WaMu’s mortgage lending operations. The IG’s report also lacks that information, although it provides data on WaMu’s mortgage lending.
The subcommittee said WaMu was left holding an extensive amount of subprime loans that it couldn’t offload when it collapsed, and it blamed a $16.7 billion bank run in the two weeks before its seizure as another factor for its takeover. Also at play, according to the subcommittee, was WaMu’s inability to access funds from the Federal Reserve’s discount window and Federal home loan banks.
“They could not sell anything, basically, anymore in the subprime area,” said Sen no faxing pay day loans. Carl Levin, D-Michigan, who is the chair of the committee.
When asked if he thought WaMu was improperly seized, Levin said he didn’t know.
“That wasn’t really our focus,” he said.
The Puget Sound Business Journal, in an investigation into WaMu’s failure published last year, found that the bank had sufficient liquidity — fast access to cash — when the government stepped in.
WaMu’s net liquidity level on the day of its seizure — 9.4 percent of total assets — was significantly higher than some community banks that are currently operating. That number also takes into account the amount of bills WaMu had coming due.
What’s more, its two-week bank run was tapering off at the time of its seizure and its access to a least one funding source through the government was wholly intact, according to multiple sources familiar with the bank’s final days. The bank also met government standards to qualify as well-capitalized.
The IG report and the investigation by the Senate Permanent Subcommittee focus heavily on the role of the OTS, WaMu’s main regulator, and the FDIC, its backup regulator, in policing the bank’s risky mortgage loans.
Both investigations fault the OTS more heavily for allowing WaMu’s lending to spiral out of control, although the FDIC also is criticized in the IG report. Specifically, the IG report faults the OTS for failing to lower WaMu’s CAMELS rating — an internal measure of a bank’s health — until just before the bank was closed.
“We concluded that OTS should have lowered WaMu’s composite CAMELS sooner and taken stronger enforcement action sooner to force WaMu’s management to correct the problems identified by the OTS,” the IG report concludes.
Both investigations depict the heated disagreement between both agencies over WaMu’s oversight, particularly in its final months, a tension that was reported in the Puget Sound Business Journal’s articles last year. The material was gathered from hundreds of internal emails that are expected to be released April 16.
According to the investigations, the OTS withheld information from the FDIC about WaMu because the agency did not believe that the FDIC met the terms of an inter-agency agreement in place between the two agencies.
Excerpts of emails released by the Senate Permanent Subcommittee illustrate the OTS withholding information from the FDIC about WaMu and the FDIC’s frustration. The Puget Sound Business Journal received copies of these emails as part of a Freedom of Information Act last year, but they were largely blacked out.
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