Former mortgage giant Washington Mutual loaded up its portfolio with hundreds of billions of high-risk loans, which eventually leading to its demise, a Senate investigative panel has found.
Washington Mutual made a series of major missteps that led to the largest-ever failure of a bank in 2008, the Senate Permanent Subcommittee on Investigations found. Once the nation's largest thrift with assets of more than $300 billion, $188 billion in deposits and 43,000 employees, Washington Mutual flooded the market with hundreds of billions in shoddy loans, according to the panel.
The panel begins a series of four hearings on Tuesday examining the causes and consequences of the financial crisis that brought the economy to the brink in 2008, necessitating a massive financial bailout for some of the nation's largest financial institutions.
"Washington Mutual built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison in into a river," said Sen. Carl Levin, chairman of the investigating panel.
The hearings will examine the role of regulators, credit rating agencies, investment banks and the use of complex financial instruments. The panel began its investigation into the financial crisis in November 2008.
The investigation found that the bank employed a high-risk lending strategy, had error-filled and fraudulent lending practices riddled with issues that contained excessive risk, fraudulent information or errors, and steered borrowers into loans they couldn't afford by offering enticing low initial payments followed by much higher payments based.
The company also securitized loans that would likely have gone delinquent without telling investors and used bad compensation policies that relied on volume instead of the quality of loans.
The investigation found that the bank made a decision in the mid-2000s to focus on high-risk mortgages because of the potential for greater profits behind higher interest rates.
During that time, the company increased its securitization sixfold, primarily through its subprime lender, Long Beach Mortgage Corp. Over a four-year period, the companies increased securitization from about $4.5 billion in 2003 to $29 billion in 2006. Altogether from 2000 to 2007, they securitized at least $77 billion in subprime loans, according to the panel's findings.
Documents also show that the bank selected loans for their securities because they were likely to default and failed to tell investors and included loans with fraudulent borrower information.
In many cases, the high-risk loans didn't comply with the bank's own credit requirements and contained fraudulent or incorrect borrower information and had high numbers of early payment defaults on the part of borrowers.
A 2005 review of loans of two of the company's top producing loan officers found fraud in 58 percent of the loans from one and 83 percent form the other. The loan officers not only remained at the bank for three years, they also received accolades for their production.
Others manufactured borrower information. Most were paid on volume not on quality of the loans and were paid for issuing higher risk loans.
Those testifying on Tuesday include former WaMu executives James Vanasek and Ronald Cathcart, chief risk officers; former general auditor Randy Melby; former home loans president David Schneider; former head of Capital Markets David Beck; former president and chief operating officer Stephen Rotella; and former chairman and chief executive officer Kerry Killinger.