Advertising

The Seattle Times Company

NWjobs | NWautos | NWhomes | NWsource | Free Classifieds | seattletimes.com

Business / Technology


Our network sites seattletimes.com | Advanced

Originally published Saturday, April 10, 2010 at 10:01 PM

Comments (0)     E-mail E-mail article      Print Print      Share Share

WaMu executives to face grilling at D.C. hearing

In a U.S. Senate hearing room this week, seven former Washington Mutual executives will speak publicly for the first time about what happened as the giant Seattle thrift careened toward ruin.

Seattle Times business reporter

Coverage of the hearings

Seattle Times reporter Drew DeSilver will be in Washington, D.C., to cover the hearings, which start Tuesday. Read his stories this week and follow the hearings live at seattletimes.com.

A live webcast will be at hsgac.senate.gov beginning at 6:30 a.m. Tuesday.

Former WaMu execs testify Tuesday

6:30 a.m. PDT

First panel:

James Vanasek: Joined WaMu in 1999 as chief credit risk officer; named chief enterprise risk officer in 2004. He was responsible for enforcing the bank's standards and procedures for not taking on too much risk; reportedly unhappy at WaMu's decision to make riskier loans. Retired in late 2005.

Ronald Cathcart: Succeeded Vanasek in 2005 as executive vice president and chief enterprise risk officer, with same responsibilities. Left WaMu in April 2008.

Randy Melby: Senior vice president and general auditor for WaMu from 2004; stayed with JPMorgan Chase until November 2009. Reported to board of directors, rather than management. Led the audit team that checked whether WaMu's business units were following its rules. Now executive vice president and chief risk officer at BankUnited in Florida.

Second panel:

David Schneider: Joined WaMu in July 2005 as president of home loans; oversaw much of WaMu's expansion into subprime lending, option ARMs and other high-risk mortgages. Currently head of mortgage servicing at JPMorgan Chase.

David Beck: Joined WaMu in April 2003 as chief investment officer; promoted to head of capital markets group in March 2004. Led the team that bundled WaMu mortgages into securities and sold them to investors.

Third panel:

Kerry Killinger: WaMu's chief executive from 1990 to September 2008; chairman from 1991 to June 2008. Built the company from a regional thrift into a national powerhouse.

Stephen Rotella: Joined WaMu in 2005 as president and chief operating officer, the company's second-highest executive position. Also ran WaMu's retail banking business from June 2008 until the bank was closed that September.

WaMu's regulators testify Friday

6:30 a.m. PDT

Officials from the Office of Thrift Supervision and the Federal Deposit Insurance Corp. are expected to testify about their oversight of WaMu and its subprime-lending unit, Long Beach Mortgage. A full witness list will be released Monday.

Source: Bloomberg News, Seattle Times research

advertising

In a U.S. Senate hearing room this week, seven former Washington Mutual executives will speak publicly for the first time about what happened as the giant Seattle thrift careened toward ruin.

They will be under oath, and under an intense national spotlight.

The Senate's influential Permanent Subcommittee on Investigations will hold up WaMu as a case study in how high-risk home loans, allegedly made with little concern for the borrowers' ability to repay, contributed to the financial system's near-meltdown in the fall of 2008.

"The recent financial crisis was not a natural disaster; it was a man-made economic assault," Sen. Carl Levin, D-Mich., chairman of the subcommittee, said in a statement Friday. "People did it. Extreme greed was the driving force. And it will happen again unless we change the rules."

A second hearing on Friday will examine the role of regulators in overseeing WaMu and its subprime-lending unit, Long Beach Mortgage.

Beyond exposing what went on inside one of the nation's biggest home lenders, the hearings clearly are intended to build public pressure for an overhaul of financial-industry regulation.

"I think they want to do with Washington Mutual kind of what they did to Enron," said Lara Brown, a political scientist at Villanova University, referring to the last big financial scandal the subcommittee examined.

One former lobbyist, who spoke on condition he not be identified, said the investigations subcommittee is known as a tough place to testify.

"They can be brutal," he said.

Former Chief Executive Kerry Killinger and former Chief Operating Officer Stephen Rotella will be star witnesses in what is likely to be a daylong piece of political-economic theater.

Both men have kept low public profiles since September 2008, when in the space of a few weeks Killinger was fired as CEO, WaMu's banking operations were seized by regulators and sold to JPMorgan Chase, and Rotella was let go by the new owners.

WaMu's collapse cost thousands of workers their jobs — both before and after the seizure — and wiped out some $30 billion in shareholder value.

Killinger and Rotella may try to argue that WaMu was on the mend when it was taken over, though regulators likely would contest any such claim during Friday's follow-up hearing. Killinger previously has maintained that WaMu was brought down by a once-in-a-lifetime "perfect storm" of circumstances he foresaw and tried to avoid.

The two executives face investor lawsuits, and there's a continuing federal criminal probe of WaMu's collapse. That may limit what they are willing to say.

The subcommittee will press Killinger and Rotella on what they knew, or should have known, about WaMu's dubious lending practices.

Setting the stage will be the first group of witnesses, three of WaMu's internal watchdogs.

Insiders say these three warned the company's top executives about the increasingly risky course WaMu was charting during the housing boom. They're expected to confirm that WaMu systematically weakened its lending standards and pressured employees to make loans at almost any cost.

The second witness panel consists of the executives who ran two crucial parts of WaMu — its home-loans business, and the unit that bundled WaMu mortgages into securities and sold them into the financial system.

Mortgage-backed securities generated huge short-term profits for lenders and investment banks, but they proved to be financial kryptonite once the U.S. housing boom peaked. Homebuyers began to default at levels far beyond anyone's predictions — not just "subprime" borrowers but those whose creditworthiness and collateral appeared to be solid.

Political push

The Senate subcommittee hearings, as well as parallel hearings by the independent Financial Crisis Inquiry Commission, occur at a key point in Congress' lurching efforts to change the way big financial firms are regulated.

Congress returns from its Easter recess Monday, and at the top of the Senate's to-do list is the banking-reform bill drafted by Sen. Christopher Dodd, D-Conn. That bill has met considerable resistance — from the industry, which thinks it's too restrictive, and from reform advocates who say it doesn't go far enough.

Depending on the information that emerges and the level of public outrage that's generated, this month's hearings could solidify Democratic support for the Dodd bill and possibly even convince a few Republicans to back it.

"The investigative hearing plays into Dodd's hands at this point," said one former WaMu executive, who spoke on condition of anonymity.

In recent years, the investigations panel has probed issues ranging from offshore tax havens and Medicare fraud to student loans and volatile gasoline prices.

Its Enron hearings in 2002 helped spur the passage of the Sarbanes-Oxley Act, a package of accounting and corporate reforms aimed at some of the abuses of the dot-com era. Last year's hearings on abusive credit-card practices laid the groundwork for new restrictions in that corner of the financial industry.

Possible questions

Investigators for the subcommittee have spent more than a year looking into the crisis. As part of that work, they have gone through thousands of pages of internal WaMu e-mails, reports and memos, and interviewed former WaMu executives and employees. Only seven, though, were chosen to testify publicly and under oath.

Tuesday's first panel of witnesses — former chief risk officers James Vanasek and Ronald Cathcart and general auditor Randy Melby — are likely to be considered friendly. Former WaMu executives said those three men were in a position to learn about the erosion of WaMu's lending standards and the prevalence of exceptions to what standards there were.

Vanasek was uniformly described as a scrupulous, old-school credit officer who was troubled by WaMu's looser approach to lending. "He is as honest as the day is long — principled, very ethical," a former colleague said. "He will not pull his punches."

Cathcart succeeded Vanasek as WaMu's chief risk officer but left abruptly in April 2008. Some people said he was effectively forced out because he was raising too many questions about the company's lending practices.

Melby, as general auditor, was responsible for checking that WaMu employees followed the proper practices and procedures. He reported to the board of directors rather than to senior management.

He might be asked how and when the board became aware of problems in WaMu's mortgage lending, and what he found when he looked into those problems.

Particular attention is likely to be directed to WaMu's subprime unit, Long Beach Mortgage. A 2008 analysis by the federal Office of the Comptroller of the Currency found that, among the 10 cities with the worst foreclosure rates on subprime loans made from 2005 to 2007, Long Beach Mortgage had the highest failure rate in eight. Overall, more than a third of the unit's loans went into foreclosure in those 10 markets.

David Schneider, the former head of WaMu's home-loans business, may be asked what he knew about WaMu's alleged pressuring of appraisers to inflate home values. The inflated appraisals, revealed in 2007 by New York Attorney General Andrew Cuomo, enabled WaMu to make bigger loans while still staying within its formal lending guidelines.

David Beck, WaMu's former head of capital markets, could be asked about the flimsy quality of many of the mortgages underpinning the securities he was selling to outside investors.

Subcommittee chair Levin has made clear his goal for the WaMu hearings, as well for two subsequent sessions planned for later this month: "building better defenses to protect Main Street from the excesses of Wall Street."

Drew DeSilver: 206-464-3145 or seattletimes.com">ddesilver@seattletimes.com

E-mail E-mail article      Print Print      Share Share

More Business & Technology

UPDATE - 09:46 AM
Exxon Mobil wins ruling in Alaska oil spill case

UPDATE - 09:32 AM
Bank stocks push indexes higher; oil prices dip

UPDATE - 08:04 AM
Ford CEO Mulally gets $56.5M in stock award

UPDATE - 07:54 AM
Underwater mortgages rise as home prices fall

NEW - 09:43 AM
Warner Bros. to offer movie rentals on Facebook

More Business & Technology headlines...

Comments
No comments have been posted to this article.


Get home delivery today!

Video

Advertising

AP Video

Entertainment | Top Video | World | Offbeat Video | Sci-Tech

Marketplace

Advertising