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Date: 2024-10-05 Page is: DBtxt001.php txt00000216

Issue ... Rule of Law
Financial Sector Crimes Go Unpunished

Connnelly: With WaMu, white-collar crime goes unpunished - again!

Connnelly: With WaMu, white-collar crime goes unpunished - again!

Washington Mutual billed itself as 'The Friend of the Family' with soft TV ads in years before reckless and fraudulent lending practices - known to WaMu managers - made it the biggest bank in the United States ever to fail.

The federal government has also failed on a big scale. The Office of Thrift Supervision identified 500 serious deficiencies at WaMu between 2004 and 2008 but did not force the bank to change its lending operations. It viewed as 'constituents' the financial instutions it oversaw.

Naturally timing its announcement to a Friday afternoon in high summer, the U.S. Justice Department has just told us that it is not going to prosecute any company bigwigs. The evidence has been reviewed, Justice said in a formal statement, and did not meet 'the exacting standards for criminal charges.'

I can't help but wonder whether the failure to go after architects of this bank failure is itself rooted in a fear of failure.

WaMu was once the most stable of companies. It rose out of the Great Seattle Fire of 1890. It was a mid-sized thrift, specializing in home mortages, a blue chip company -- until CEO Kerry Killinger set out to make WaMu what he called the Wal-Mart of mortgage banking. 'Exacting standards' weren't the stuff of its new home loans.

Our bleed-and-lead local TV news operations love to report on such criminals as puppy mill operators, and such improper behavior as state employees taking a snooze on the job. If you look on the tube, rottweilers would seem to be the greatest source of danger to Puget Sound homeowners.

'Betcha, you've never heard of a 650-page report 'Wall Street and the Financial Crisis: Anatomy of a Financial Collapse' produced by the Senate Permanent Subcommittee on Investigations. It lays out what WaMu laid on America.

Sen. Carl Levin, D-Mich., co-chairman of the panel, described how the 'Friend of the Family' ran its business:

WaMu 'compensated their loan officers and processors for loan volume and speed over loan quality,' he told a hearing on the report. 'Loan officers were also paid more for overcharging borrowers obtaining higher interest rates . . . Loan officers and third party mortgage brokers were also paid more for originating high risk loans than low risk loans.'

The result was a 'mortgage time bomb' that blew up in the face of families who couldn't pay their loans, shareholders in WaMu and the American economy. As it ticked, from 2003 to 2007, CEO Killinger was paid between $11 million and $20 million each year in cash, stock and stock options.

As the 'Friend of the Family' began to crumble, Killinger was asked to leave and paid $25 million, including $15 million in severance pay. 'Another painful example of how executive pay at U.S. financial firms rewards failure,' said Levin.

An astounding fact: While this was going on, WaMu repeatedly performed internal audits on lending, discovering that a high percentage of loans were being based on fraudulent documents.

A former WaMu chief risk officer told the Senate panel that mortgage fraud was 'systematic,' up to 70 percent on new mortgages in some offices.

'WaMu personnel regularly identified fraud problems with its so-called prime loans, but the problems received little attention from management,' Sen. Levin added.

The Senate report details how two WaMu risk managers were marginalized by company brass. One of them told Senate investigators that executives began providing the Office of Thrift Supervision with outdated loss estimates. A risk manager tipped off regulators, and was fired.

The Office of Thrift Supervision did get mad - at the Federal Deposit Insurance Corporation, which downgraded WauMu's safety-soundness rating shortly before its collapse.

The office's top guy, John M. Reich, wrote a snarling e-mail in which he said of F.D.I.C. Chair Sheila Bair: 'I cannot believe the continuing audacity of this woman.' The words were written in September of 2008, just two weeks before WaMu failed. (F.D.I.C. sseized the company and sold it to J.P. Morgan Chase.

Don't any of these activities, the fraudument documents and false information given federal regulators, and the winking and profiting by higher-ups, qualify for prosecution? Shouldn't the federal government be shamed by its record?

As columnist Zach Carter wrote after a Senate hearing on WaMu last year: 'Everything WaMu did could have been stopped not only by an engaged regulator who worried about the company's bottom line, but by a regulator who cared about consumer protection in any degree whatsoever.'

The bottom line: Large-scale white collar crime goes unpunished in America, except for out-and-out Ponzi schemes.

Who, I ask, has gone to jail among those who issued reckless and fraudulent loans that triggered the housing crisis? The practice went on, to use the name of another big player, Countrywide.

Yet, efforts are underway in the U.S. House of Representatives and among Senate Republicans to eviscerate a financial reform bill that Congress enacted just last year. Critics say it places too many burdens on the financial services industry.


BY JOEL CONNELLY, SEATTLEPI.COM STAFF
Published 04:59 p.m., Friday, August 5, 2011
The text being discussed is available at http://www.seattlepi.com/local/connelly/article/Connnelly-With-WaMu-white-collar-crime-goes-1747382.php
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