What happened to Washington Mutual?
Headquartered in Henderson, Nevada, Washington Mutual (WaMu) was America’s largest savings and loan association before it failed on September 25, 2008. It had assets of $309 billion, nearly half of which were connected to the housing industry.
A bubble had formed in the housing sector, and as the Federal Reserve attempted to tame inflationary pressures by hiking interest rates from 2004 to 2006, the once red-hot housing market quickly chilled. But while other banks were exiting the mortgage sphere, incredibly, WaMu only expanded its quest for profits from risky loans and mortgage-backed securities. This would prove to be its undoing.
As the biggest bank in United States history to fail, WaMu became the poster child for subprime lending, originating and securitizing hundreds of billions of dollars in high-risk, low-quality mortgages. In fact, its CEO, Kerry Killinger, proudly described his company as the “Walmart of Banking” because it focused on the lower- and middle-class customers that other banks had shunned.
“We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”
—Kerry K. Killinger, chief executive of Washington Mutual, in a 2003 interview from The New York Times
WaMu had $188 billion in deposits, 43,000 employees, and 2,300 banking branches across 15 states, mainly in the West, at the time of its collapse in September 2008. Killinger was dismissed by its board of directors on September 8, 2008. Shares, which had traded as high as $45 in 2006, plummeted to $1.75 on September 11, 2008. WaMu had posted three consecutive quarters of losses totaling $6.1 billion and received a credit downgrade. While executives said the company remained solvent, they began to seek bidders; when none emerged, WaMu’s depositors sparked a bank run, demanding $16.7 billion of their money back between September 16 and September 25, 2008.
WaMu was placed into the federal receivership of the Federal Deposit Insurance Corp. (FDIC) on September 25, 2008. Fearing more widespread financial contagion if a buyer was not found, the Federal Reserve held a secret auction of WaMu, announcing the buyer, JPMorgan Chase, that same day.
Why did Washington Mutual fail?
Subprime mortgages were at the heart of the financial crisis of 2007–2008. This new mortgage category, introduced in the early 2000s, made it possible for people with less-than-perfect credit to become first-time homebuyers with little to no down payment. Banks and mortgage lenders assumed greater risk for making such loans; therefore, they charged subprime customers adjustable rates of interest, which were often much higher than the rates associated with fixed-rate mortgages awarded to homebuyers with better credit.
The premise sounds simple, but in actuality, subprime mortgages had lots of complex fine print and were rarely explained to the person signing the loan. In fact, predatory lenders targeted many low-income, minority, and elderly individuals, who lived in neighborhoods where traditional banking branches refused to operate.
According to the Senate Subcommittee on Homeland Security and Governmental Affairs report entitled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” in a 2004 memo to WaMu’s board of directors, Killinger cited subprime and adjustable-rate mortgages as the primary driver of his company’s growth. Its flagship product, the option adjustable-rate mortgage, originated $42.6 billion in 2006 alone; WaMu then securitized these loans into derivatives (selling $115 billion that year, as well) and sold them to investment banks as well as to government-sponsored enterprises like Fannie Mae and Freddie Mac.
The report also revealed that by 2007, WaMu’s home loan business had ballooned 103%, but many of the loans fueling this boom stemmed from “shoddy lending practices,” which included granting mortgages for larger loans than customers could actually afford, persuading fixed-rate mortgage holders to obtain adjustable-rate products, and failing to do due diligence on qualifying applicants—in one instance reported by The New York Times, the mortgage applicant claimed to make six figures as a mariachi singer, and the only proof of income Washington Mutual asked for to approve their mortgage application was a photo of them in costume.
Washington Mutual was rewarding its loan officers for the volume of loans they approved as well as how quickly they approved them. They often overcharged customers—no one seemed to care. The most productive loan officers gained entrance into the “President’s Club,” where they received perks and bonuses, such as all-expense paid trips to Hawaii. CEO Killinger himself made $25 million in 2008, the year his company failed.
“WaMu built its conveyor belt of toxic mortgages to feed Wall Street's appetite for mortgage-backed securities.”
—Senator Carl Levin, Chairman of the Senate Subcommittee on Homeland Security and Governmental Affairs
When did Washington Mutual fail?
By June 2006, interest rates had risen 17 consecutive times to 5.25%, and since adjustable-rate mortgages were pegged to prevailing interest rates, by the summer of 2008, the fallout was apparent throughout the housing sector. Homeowners could no longer afford to make their new, higher monthly payments and entered into default. 10 percent of U.S. homeowners had negative equity in their homes by August 2008.
As the mortgage industry imploded, the securities tied to them, like credit default swaps and collateralized mortgage obligations, also lost value, shaking the entire financial system to its core.
Bear Stearns, one of the biggest investment banks heavily leveraged in toxic subprime securities, was the first to topple in March 2008—it received a $12.9 billion bailout from the federal government. Then, Lehman Brothers, another big investment bank that actually got into the mortgage origination business, collapsed on September 15, 2008; this time, the feds let it fail.
American International Group (AIG), the world’s largest insurance company, was next in line to falter—it needed an astonishing $85 billion lifeline and was placed under federal control. Incensed over sending taxpayer money to Wall Street firms instead of punishing them for their excessive risk-taking, Congress initially vetoed the Troubled Asset Relief Program (TARP), but after the stock market crashed on September 29, 2008, Congress reconsidered and acted swiftly. TARP would pass on October 3, 2008.
With so much turmoil unfolding in the financial markets, Washington Mutual’s bankruptcy on September 25, 2008, and subsequent selloff to JPMorgan Chase went relatively under the radar.
Who bought Washington Mutual?
JPMorgan Chase acquired the deposits, assets, and certain liabilities of Washington Mutual from the FDIC on September 25, 2008, for just $1.9 billion. All of Washington Mutual’s banking branches were rebranded under the JPMorgan Chase umbrella by the end of 2009, giving JPM a combined total of 5,400 branches in 23 states and expanding its footprint into California, Florida, and Washington state.
“JPMorgan Chase is strongly committed to both a strong banking system and our responsibility as a good corporate citizen. We are active in the states and local communities where we do business,"
—JPMorgan Chase CEO, Jamie Dimon
And while the Senate Subcommittee delivered a scathing review of Washington Mutual’s CEO, Kerry Killinger, threatening action from the Justice Department, criminal charges were never brought against him.
