Regulators Asleep at the Wheel on Washington Mutual

The New York Times has gotten hold of a draft report blaming the FDIC and the Office of Thrift Supervision for not moving on Washington Mutual by lowering their rating. The official report will be released to the public next Friday. It appears the Office of Thrift Supervision received 15% of their assessment fees from Washington Mutual.

The two agencies that oversaw Washington Mutual, the investigation found, feuded so much that they could not even agree to deem the company “unsafe and unsound” until Sept. 18, 2008.

By then, it was too late. A week later, amid a wave of deposit withdrawals, the government seized the bank and sold it to JPMorgan Chase for $1.9 billion. It was by far the largest bank failure in American history.

Even Jim Cramer knew Washington Mutual was in terrible trouble, so this report's findings are no surprise. The real question is why were regulators asleep at the wheel while Rome burned? Perhaps the surprise is any branch of the government states the obvious in a report, after the fact.

The thrift supervision office was supposed to ensure the company’s safety and soundness, while the F.D.I.C. was tasked with assessing risks to its deposit insurance fund.

The report found that Washington Mutual had failed primarily “because of management’s pursuit of a high-risk lending strategy that included liberal underwriting standards and inadequate risk controls.” The strategy accelerated in 2005 and came to a crashing end in 2007 with the drop in the housing market.

But the report also leveled unexpectedly sharp criticism at the F.D.I.C., which by July 2008 concluded that the bank needed $5 billion in capital to withstand future potential losses. The report said the F.D.I.C., which had questioned the Office of Thrift Supervision’s assessments of the bank’s soundness, could have stepped in earlier and acted as the primary regulator, but decided “it was easier to use moral suasion to attempt to convince the O.T.S. to change its rating.”

There are more hearings this week in the Permanent Subcommittee on Investigations, Sen. Carl Levin, Chair. The hearing will be putting former Washington Mutual Executives in the griller.

What I want to know is how a regulator gets part of it's funding from the very businesses they are supposed to regulate? The roasting the WaMu executives show is on Tuesday, the real questions to the OTS and FDIC are on Friday.

Recall the Financial Reform legislation, including the Dodd bill, shuts down the OTS (Office of Thrift Supervision). So does the House bill.

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WaMu No Angel, But Burn It?

WaMu was no angel, but its loan portfolio was no demon. Where are all of the losses that prompted JP Morgan to take a $30 billion dollar negative goodwill when it "purchased" WaMu? Instead just 8 months later JP Morgan stated it could make up to $29 billion on the WaMu loans.

Why did the FDIC sell WaMu for a meer $1.9 billion when they sold IndyMac for $13.9 billion? IndyMac had only 1/10th the assets of WaMu. With that evaluation WaMu should have sold for $139 billion. It looks like JP Morgan got a very nice gift compliments of the FDIC at the expense of the unsecured creditors and equity holders.

Is that really fair?

Let me also remind you that many banks were engaging in the same practices as WaMu so are they any better? Or were they just not seized? Most of the industry and people around here are just pots calling the kettle black.

very good points

and on top of it, Chase went and changed loan terms of existing perfectly fine WaMu customers. I don't know how you are but maybe you would care to create an account and write up these details.

We've seen more than one "raw deal" and then an unbelievable "good deal" (say Goldman Sachs, 100% CDS payout plus acquiring underlying assets) that isn't across the board treatment by the numbers.