Story of a bank failure

Close to the end of The Lost Bank: The Story of Washington Mutual--The Biggest Bank Failure in American History, the previous paragraph is found. The paragraph became, for me, the climax in a book that continually brought to mind the phrase: “You just cannot make up this stuff.”

If indeed this book had been fiction, it would have been branded unrealistic, outlandish, and out of the realm of reality.  It is, however, a factual account with endnotes, references, and detailed documentation of sources used.

It is an incredible story. The 400-page book was written by Kirsten Grind, now a reporter for The Wall Street Journal. It is apparent she extensively researched this huge bank failure that occurred in the midst of the financial crisis in late 2008. The book reads very much like a novel and holds the reader’s interest. (Grind wrote a series of articles while with Puget Sound Business Journal that led to her being a finalist for the Pulitzer Prize and Gerald Loeb award.)

 

Beginning in 1981, the leadership of the bank is outlined and the bank culture is established. Coming very near to failing after nearly 100 years of existence, Washington Mutual began again with new leadership. The Lost Bank follows a time line from that point through 2008. Each chapter focuses on a particular time period but also, as each chapter is titled, an attitude or emotional state of the institution at the time. Chapters titled “Friend of the Family,” “Remove the Corporate Jets,” and “The Power of Yes” provide a preview and a feeling of a changing culture and positive attitudes.

The more ominous chapter titles, such as “The Dark Side,” “The Growing Trouble,” and “Scenes from the Great Depression,” prepare the reader for the downward fall that has been expected--after all, we know from the title how the story ends--but not to the extent that is found in these pages.

 

The details of how the company grew miraculously, which was later found to be so recklessly, are when the unbelievable regularly happened.

For example, when asked when their variable rate mortgage rate would change, a sampling of WaMu borrowers replied that they were unsure, but thought it was pegged to the Nikkei Index.

Underwriting of loans became less and less of a concern, to the point that a company slogan of providing a high level of service embodied in “The power of yes” became an excuse to approve bad loan applications. Grind writes that loan officers were happily informed that “A thin file is a good file.”

Throughout the rise and fall of WaMu were the evolving management styles and characteristics of the CEOs. Grind’s story begins as Lou Pepper becomes the chairman, president, and chief executive officer to save the company from failure. Pepper develops a real appreciation for the bank and its value to the communities it serves. He works to establish a culture of interior communication and a feeling of family with the employees. His love for the company and its employees never faltered even after he retired. 

At Pepper’s retirement, Kerry Killinger takes over the company and proceeds to rapidly grow the company and, in the process, apparently loses control of the culture. A great deal of the book concentrates on Killinger’s tenure as CEO. WaMu’s failures on his watch are huge in scope and consequences.

His apparent pride to maintain market share clouded his decisions, as Grind tells the story. In 2004, it was apparent that loan quality was slipping fast throughout the home lending industry. When a suggestion was made to Killinger to take a full-page ad in The Wall Street Journal “decrying all this ridiculous lending and urging companies to adopt responsible practices,” Killinger declined to risk losing market share if WaMu changed their loan practices. The ad was never purchased and WaMu continued on the same, ultimately destructive, path.

WaMu originally focused on traditional 30-year fixed-rate mortgages. But after purchasing a subprime mortgage company, the profit potential from these types of mortgages as well as home equity loans and adjustable rate mortgages became very tempting. They became the company’s focus.

For a $300,000 loan, an option ARM loan paid a lender a commission of $1,200, while a traditional mortgage of that size would pay $960.  The loan officers went for the money.

 

The success of this reckless process depended on an ever-growing housing market, but signs of a slowing market were seen in early 2005. Former CEO Pepper warned the WaMu leadership of possible problems that housing speculation could cause. Killinger even noted the growing concerns of a housing bubble, but never changed the focus of the bank.

The Lost Bank periodically mentions what happened at congressional hearings that followed the WaMu failure. U.S. Senators were apparently just as confused as I was, as a reader, in trying to understand how Killinger could have the foresight to see a bubble but do virtually nothing to stop the coming disaster.

The Lost Bank is also a horrid picture of a Board of Directors who did nothing but collect huge amounts of compensation in the form of cash, stock, and options.  Killinger had firm control of the board. As a result, there were very few questions or concerns coming from the boardroom as common sense seemed to elude them with earnings growth quickly expanding early in Killinger’s tenure. Grind portrays a governance picture where information was withheld, inaccurate, or inconsistent as the news turned negative.

The board did fire Killinger in 2008. It was too late.

 

The Lost Bank also covers the chaos that consumed WaMu in its last days as it searched for a buyer. Here we see J.P Morgan Chase’s Jamie Dimon as his company considers the purchase. It is seen as a real culture clash. It is a very interesting episode, especially considering the news of JP Morgan in recent weeks.

In addition to being a very interesting and at times gripping story, The Lost Bank has many lessons to give--primarily regarding how not to run a bank.

Board members would do well to read how inaction may lead to serious consequences. The necessity of common sense and ethical practices is very essential in banks but were so lacking at WaMu. Excess pride, ego, and greed can be poison to an institution. There will be many other points of instruction to each reader.  

I thoroughly enjoyed reading The Lost Bank and highly recommend it. I learned a great deal along the way which is a fabulous bonus for any book to provide.

 

 

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