WaMu Aftermath: Could Have Been Worse

Ex-FDIC Chair Reacts to Report on WaMu Failure In the wake of finger pointing and defensive posturing over how banking regulators managed the former Washington Mutual bank, one former regulatory leader says that if not for WaMu's failure in 2008, other big banks might also have fallen.

William Isaac, former chairman of the Federal Deposit Insurance Corp. (FDIC), says that the questions surrounding the WaMu failure and the relationship between regulators and the giant mortgage bank are less important than the fact that WaMu was the only large bank to fail. WaMu, a $307 billion institution, was acquired by JP Morgan Chase for $1.9 billion in September 2008.

Report Points Out WaMu's Failures
A joint government report by the FDIC and Treasury department shows that Washington Mutual, the largest bank failure in U.S. history, was due in large part to a high-risk lending strategy pursued by the company's management.

The regulators also fault the Office of Trust Supervision (OTS) for failing to adequately curb WaMu's risky lending.

"WaMu failed primarily because of management's pursuit of a high-risk lending strategy that included liberal underwriting standards and inadequate risk controls," says the report.

Regulators say WaMu's strategy, combined with the housing and mortgage market collapse in 2007, culminated in huge losses for WaMu, and in turn drove its stock price down and prompting liquidity crisis caused by withdrawals by nervous customers.

Regulators Wary of Rating Big Banks
Historically, federal regulators have been careful in how they rank the country's largest banks, says Isaac, who is now chairman of LECG Global Financial Services, a consulting firm. The problem is that the FDIC discloses the number of problem banks and their assets on a quarterly basis, he says, "So let's say moving a big bank from a 3 to a 4 rating -- it leads to a lot of public speculation," Isaac says. "You add a $300 billion dollar asset bank to the troubled bank list, and you would raise a lot of eyebrows."

The timing of the rating change and failure of WaMu created questions, but that is a normal discourse between the regulators. "Right or wrong, there will always be tension and concern between the FDIC and the other regulators when a big bank is moved from a 3 rating to a 4 or 5," he explains.

There are other large banks that could be on the troubled bank list -- it was not just WaMu, Isaac points out. "It is easy to look back after the fact, to say, 'Oh, they didn't downgrade WaMu until just before it was taken over,'" he adds.

It had been long rumored in the industry that WaMu had its problems. But there were other banks that could have failed, he says.

These banks weren't ranked as problem banks, and Isaac speculates that regulators didn't have much choice. "By that point the markets and the industry could stand no more bad news and consternation. The financial system worldwide had pretty much frozen up," he says. "Clearly there are banks still with us today that probably should have been downgraded sooner than WaMu."

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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