Former WaMu Exec: Bank Excluded from ‘Too Clubby to Fail’ Group

BY Larisa Epatko  April 13, 2010 at 5:20 PM EDT

The former CEO of Washington Mutual came under tough questioning in a Senate hearing Tuesday, as accusations of mortgage fraud and the selling off of questionable loans emerged from a report by a subcommittee investigating the causes of the financial crisis. When WaMu collapsed in September 2008, it became the largest bank failure in U.S. history.

“Washington Mutual engaged in lending practices that created a mortgage time bomb,” said Sen. Carl Levin at the hearing. “WaMu built its conveyer belt of toxic mortgages to feed Wall Street’s appetite for mortgage-backed securities. Because volume and speed were king, loan quality fell by the wayside.”

Kerry Killinger, CEO of WaMu for 18 years prior to his departure just weeks before the bank’s collapse, denied knowing the specifics or extent of fraud or bad loan sales, but he defended the bank and asserted that it had received “unfair treatment” and was unnecessarily seized by regulators.

“[WaMu] was…excluded from hundreds of meetings and telephone calls between Wall Street executives and policy leaders that ultimately determined the winners and losers in this financial crisis,” according to Killinger’s written statement to the subcommittee. “For those that were part of the inner circle and were ‘too clubby to fail,’ the benefits were obvious.”

According to the subcommittee’s findings, WaMu relied on “shoddy lending practices” and unnecessarily pushed customers toward high-risk loans, all while rewarding those overseeing mortgages with a compensation system that “paid extra to loan officers who overcharged borrowers or added stiff prepayment penalties, and gave executives millions of dollars even when its high risk lending strategy placed the bank in financial jeopardy.”

Killinger and former WaMu CEO Steve Rotella were pressed Tuesday as to why delinquency-prone and fraudulent loans were allowed to be packaged and sold to investors as mortgage-backed securities, a strategy that the subcommittee charged was aimed at increasing profits. Between 2000 and 2007, WaMu securitized some $77 billion in subprime loans. Killinger and Rotella testified that beginning in 2005, in response to changes in the housing market, WaMu sought to wind down portions of the bank’s mortgage business in order to reduce exposure.

Earlier Tuesday, several former WaMu risk officers testified that they tried to rein in risky lending but were squelched by the top management.

Tuesday’s hearing is the first of four hearings the Senate Permanent Subcommittee on Investigations plans to hold over the next two weeks on the causes of the financial crisis. On Friday, the role of U.S. bank regulators will be examined.

According to the New York Times, which has obtained an advance of the Friday report, the subcommittee will assert that U.S. regulators such as the Office of Thrift Supervision and the FDIC “feuded” and “failed for years to properly supervise” WaMu prior to its collapse.