To the presumable cheers of stockholders, customers, and others who saw their century-old bank go down the toilet while the lenders walked away with small fortunes, the feds today announced they are suing former Washington Mutual CEO Kerry Killinger and two other top WaMu officials--and two of their wives--for the loss of "billions" in bank assets due to their gross negligence. It's the follow-through of warning letters sent in February by the Federal Deposit Insurance Corp. notifying the threesome they were the targets of potential legal action for helping bring down WaMu in 2008, the biggest bank failure in U.S. history.
An op-ed piece in the Los Angeles Times asserts that Killinger promoted reckless and wildly speculative lending and labels the CEO as "the man who destroyed WaMu." To wit:
Having milked WaMu for, reportedly, more than $100 million in compensation (including $24 million in 2006), Killinger had good reason to want to keep the bank independent. But with the possible exception of Angelo R. Mozilo of Countrywide Financial Corp., arguably no banking executive did more harm to the fabric of the U.S. mortgage industry . . . Revealingly, he boasted to an interviewer in 2002 that he viewed WaMu "as more retail than banking. That's where the big payoff is."
Charged besides Killinger was his wife, Linda; Stephen Rotella, a former president and chief operating officer, and his wife Esther; and David Schneider, the former president of home loans for WaMu, who now works for Chase.
According to the 63-page FDIC suit, filed in Seattle's U.S. District Court, the U.S. is seeking $900 million in damages for alleged gross negligence and other failures by the former executives. They are accused of taking "extreme and historically unprecedented risks with WaMu's held-for-investment home loans portfolio. They focused on short-term gains to increase their own compensation, with reckless disregard for WaMu's longer-term safety and soundness.
Pursuant to a Higher Risk Lending Strategy developed by Killinger and encouraged and implemented by Killinger, Rotella and Schneider, WaMu's Home Loans Division recklessly made billions of dollars in risky single family residential ("SFR") loans, dramatically increasing the risk profile of loans in WaMu's held-for-investment ("HFI") loan portfolio. Defendants Killinger, Rotella, and Schneider led WaMu on this lending spree knowing that the real estate market was in a 'bubble' that could not support such a risky strategy over the long term, that WaMu did not have the technology to adequately manage and evaluate the higher risks associated with the portfolio, and in the face of continuing warnings from WaMu's internal risk managers. This relentless push for growth was exemplified by WaMu's advertising slogan, "The Power of Yes," which promised that few borrowers would be turned away.
In a statement reported by The Wall Street Journal, Killinger attacked the lawsuit as "baseless and unworthy of the government . . . The factual allegations are fiction."
The Journal notes that the suit is the FDIC's highest-profile action so far against bank executives for alleged wrongdoing during the financial crisis. As of March 15, the FDIC had authorized the filing of lawsuits seeking to recover $3.57 billion from 158 officers and directors at failed banks.