The Failure Of Washington Mutual Essay

999 words - 4 pages

Founded in Seattle in 1889, Washington Mutual (WaMu) originated as a mutual savings and loan institution that went public in 1983 and as a result of lending practices, hiring techniques, and other poor decisions failed in 2008. A leader in bank acquisitions from 1983 through 1992, the organization surged to 2,200 branches before its failure. Offering innovative technologies, such as ATMs and “step-rate” loans in the mid-1970’s, and techniques at the time, the firm eventually buckled under the culture generated by Killinger, the president up to the beginning of WaMu’s downward spiral.
WaMu’s culture, cultivated by Killinger during the Occasio Project in 2000, sought to focus on “…relating and selling to customers…” and in turn took questionable actions in lending practices. (Dewar, 2006, p. 6) Prior to Killinger’s efforts, WaMu had strived to offer service to lower and middle class clients through the “step rate” loans of the 1970s and the relaxed identification requirements in specific markets. “For example, most banks required a driver’s license for identification… WaMu also accepted the Mexican Metricula ID.” (Dewar, 2006, p. 4) During Killinger’s tenure, the firm sought to hire staff for the “brand” as opposed to banking skills and acumen. Rallies and morale building exercises as well as community relations were the normative behavior, as the organization sought to increase sales of loan products to clients. “WaMu offered exotic pay-option loans (that) allowed borrowers to roll many of their interest payments onto their principal instead of paying them.” (Palmeri, 2008) Combined with sales strategies regarding loan product sales to unqualified and under-qualified applicants, this was a recipe for disaster.
The source of WaMu’s failure stems from a lack of liquidity conjoined with the bursting of the bubble within the real estate market and mortgage securitization. WaMu had for a long period of time overemphasized the application of home loans within its accounting equation. “Stuart Plesser, a banking analyst at Standard & Poor’s, said, ‘This is a terrible credit-quality bank. Its problem had more to do with credit than deposits.’” (Palmeri, 2008) At the time of WaMu’s collapse, they held a total of $310B in assets, where $239B stemmed from its real estate portfolio, $176B of which was from home mortgages. WaMu had failed to learn from the lesson from the fallout of multiple savings and loans in the early 1980’s. During this time period, the firm relied too heavily on mortgages and underwent dramatic cost cutting efforts to stay afloat. By the early 2000’s, 1 of 8 home loans was serviced by WaMu.
For nine days starting on September 19th, 2008, customers began to make a “run” on the bank, withdrawing over $16.7B of deposits. The Office of Thrift Supervision (OTS) determined that WaMu was left with “insufficient liquidity” and (was) in “unsafe and unsound condition.” (Palmeri, 2008) WaMu’s credit rating was downgraded to...

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