Former WaMu head defends actions; his former employees do not

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Kerry Killinger, the former chief executive of Washington Mutual, which executed the biggest banking failure in American history, defended his actions before a Senate panel today.

Two of his former top employees, however, did not.

Washington Mutual, or WaMu, was a Seattle-based thrift that had more than $300 billion in assets. It failed spectacularly in the summer of 2008, choked by bad sub-prime home loans it made and sketchy securitization. The federal government took over WaMu in September 2008 and orchestrated a sale to J.P. Morgan Chase for $1.9 billion.

WaMu specialized in the "option ARM" mortgage that let mortgage-holders make payments so low the amount of their loan actually rose as the years went on.

In testimony before Sen. Carl Levin's (D-Mich.) Permanent Subcommittee on Investigations today, Killinger said his bank should have been given a chance to work through the crisis before getting taking over by the government. He said that his bank had adequate capital reserves and that he had aggressively pared down his bank's sub-prime exposure from 2003 to 2007.

Two of his top former risk officers, also testifying, said otherwise.

"I was increasingly excluded from senior executive meetings and meetings with financial advisers when the bank's response to the growing crisis was being discussed," as the housing crisis escalated, said Ronald Cathcart. He said that by January 2008 he was "fully isolated" and was eventually fired by Killinger.

James Vanasek, the other risk officer, testified that he tried to stop the bank from making loans to high-risk borrowers and the loans that were made without verifying the income of borrowers. But "without solid executive management support," he said, his proposals had no chance.

Levin's committee, which assembled data on WaMu for the past 18 months, said that the bank's employees were given bonuses for the volume and speed at which they sold risky mortgages. In 2000, WaMu booked $2.5 billion in sales of securitized sub-prime mortgages. By 2006, that number was up to $29 billion.

Levin's committee believes it has found fraud in WaMu's actions and may make a referral to the Justice Department to pursue criminal charges against former WaMu officials.

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