For generations, Washington Mutual was "the friend of the family," a coffee-and-doughnut hometown bank renowned throughout the Pacific Northwest for its anything-for-our-customers philosophy.
But in September 2008, on the eve of America's economic meltdown -- and quickly overshadowed by it -- the once-revered WaMu was seized by federal regulators, a victim of its leadership's greed, mortgage-lending madness and outright balderdash.
Rather than "the friend of the family," WaMu bears a new title: the largest banking failure in U.S. history.
Wall Street Journal reporter Kirsten Grind was new to her banking beat at the Puget Sound Business Journal in Seattle when the Federal Deposit Insurance Corp. seized the bank with $308 billion in assets and sold it to JPMorgan Chase for $1.9 billion. Her Pulitzer-nominated reportage of the debacle led to her new book, "The Lost Bank," her immensely readable chronicle of the rise and fall of a great American bank.
CreditCards.com: What happened? WaMu was one of the good guys, right?
Kirsten Grind: Absolutely. This is what a lot of people don't know; they only know WaMu as the largest bank failure in American history. But it was a great bank for more than 100 years. In the '80s, it was this small, very customer-oriented Pacific Northwest community bank that was known as "The Friend of the Family," and that's how it was known, even through its merger and acquisition spree in the '90s.
CreditCards.com: How important was beloved CEO Lou Pepper to that warm, fuzzy feeling?
Grind: Lou Pepper was the bank's cornerstone CEO. He came in and rescued WaMu when it was on the verge of failure before the savings and loan crisis in the '80s and built it up into a stable position. Even after he left in 1990, he remained on the board for a number of years.
CreditCards.com: Did the downfall begin when he chose Kerry Killinger as his successor?
Grind: The funny thing about choices is, they often don't seem wrong at the time. And at that time, Killinger was a very different person than the one who existed in 2002. When Lou Pepper chose him, he was a very humble guy, very smart, knew a ton about banking. He was completely different later on.
CreditCards.com: Is it accurate to say Killinger bet the bank on risky mortgages and lost?
Grind: I would not object to you saying that. The bank of course took an absolute deep dive into risky mortgage lending and made a conscious effort to build up its mortgage operation. Kerry Killinger really wanted to have the largest mortgage operation in the country, so it became all about market share. He were constantly competing with Countrywide and all the other mortgage lenders and you just started to see the quality of the loans erode. It ultimately became this huge machine that was just spitting out mortgages.
CreditCards.com: Certainly bells went off when WaMu got in too deep. Why didn't Killinger change course?
Grind: That is a question that even people at the bank to this day cannot answer. Kerry Killinger and the executives at WaMu legitimately saw the housing bubble coming. I'll never forget, at later congressional hearings, one of the senators asked, "So you're saying that you saw this giant crash coming, this bubble, and instead of running away from it, you essentially jumped into the middle of it? Why?" There is no good response to that; even the executives who were there can't answer it. Lou Pepper tried to warn them, multiple executives tried to warn them, and still they went headlong with the strategy.
CreditCards.com: Would the collapse of WaMu been viewed differently had the economic meltdown not stolen the front-page headlines?
Grind: The problem with WaMu is, it's not a stand-alone incident. WaMu was very reflective of the entire industry at that time; it just happened to be the worst of an entire industry that had turned into these short-term lenders who were just after a profit and weren't interested in their customers anymore. Without the crisis, it's hard to say how long the bank would have continued because how long can you really continue with any business when you're that distanced from your customers?
CreditCards.com: The second mortgage loan that WaMu made to O.J. Simpson after he'd lost the civil suit over his wife's death was certainly a nadir of sorts.
Grind: I know. You can credit the Seattle Times for that disturbing piece of information, but there was stuff like that going on all the time. The people I spoke with had stories about dead people getting loans. Really, anyone was getting a mortgage.
CreditCards.com: So, in fact, you didn't even have to "fog a mirror" to get a mortgage loan.
Grind: No, you didn't! It was just unbelievable.
CreditCards.com: Where were you when the bank was seized by the feds?
Grind: It was a Thursday. I had been covering WaMu for the Puget Sound Business Journal in Seattle for about six months and we knew this was coming; we'd pulled together all this copy and interviewed people in advance, all of it. So I was actually at the San Diego wedding of my very best friend in the world, and I get a text from my editor back in Seattle that said, "You will not believe this," because we all thought it was going to happen on Friday. Everyone who covers banks calls it "bank failure Friday." I was still able to cover it from afar but it was the worst timing ever.
CreditCards.com: Many customers mark that day as the start of a very different banking experience.
Grind: It was. I have heard that from a lot of people. Even the bank that WaMu had become in its later years, which was much more focused on growth and less customer friendly, it still was nothing like an East Coast bank. JPMorgan sort of swooped in and poof, gone were all of these lovey-dovey branches that WaMu had created all over the country.
CreditCards.com: Did the bank's credit card business factor into WaMu's demise?
Grind: WaMu's mortgage problems were so big that I didn't spend a lot of time focused on the credit card end, but it certainly fell by the wayside. The bank bought that credit card business fairly late in the game, so while it was adding to losses, it didn't directly contribute to its downfall by any stretch of the imagination. Afterward, I heard that JPMorgan has had some problems integrating that.
CreditCards.com: In retrospect, was it ironic that WaMu would be acquired by JPMorgan?
Grind: I think it was ironic in the sense that JPMorgan was everything that WaMu was trying not to be. I don't know if it was ever Lou Pepper's vision to have a branch on every street corner. I think he was more focused on making sure that the customer had a good experience, which was something that got lost along the way.
CreditCards.com: The FDIC came under fire for how it handled the WaMu seizure. Why?
Grind: There are two sides to this story. There is a lot of controversy about the way WaMu was shut down, the FDIC's role in that, and how it handled the sale to JPMorgan Chase, which I go into extensively in the book. The new CEO of the bank was trying to sell WaMu on the open market at the same time that the FDIC was trying to handle its sort of secret distressed-asset sale, and anytime there is a situation like that, it diminished the ability of the open-market sale to actually be effective.
CreditCards.com: Were there any winners in this cautionary tale?
Grind: The attorneys made a lot of money from it; WaMu's bankruptcy lasted 3-1/2 years and it has only recently been resolved. And certainly JPMorgan was a big winner. It got thousands of branches across the West Coast and a bank with $307 billion in assets for $1.9 billion.
CreditCards.com: What lesson do you hope readers take away from "The Lost Bank?"
Grind: There's a lot that anyone running a company, not just bankers, can take away from this. It's a great example of what happens when you lose touch with your customer and what happens when you grow so big. Of course, businesses are in business to make money, but they also have to be watching out for their customers. As great as WaMu's culture was, it eroded over time. That led directly to its downfall. You could see how the culture was sort of chipped away as the bank got larger and as people stopped caring about employees and customers. It just wasn't the bank it used to be.
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