Remember the iconic Depression-era movie "Mr. Smith Goes to Washington,
in which Jimmy Stewart plays the wholesome young man in Washington out
to do good? Well, Mr. Smith could just as easily have been your
friendly banker at Washington Mutual. Unfortunately, Mr. Smith lost his
way and turned predatory lender – and that's the subject of the second
part of a Seattle Times expose on the rise and fall of WaMu.
I posted yesterday on part one, which you should definitely read to get a sense of how WaMu culture changed. Now comes part two – also a must-read.
The lead-in says it all:
For decades, Washington Mutual lived up to its image as
a staid, straight-laced Seattle institution. Its motto: "The Friend of
the Family."
By the time WaMu made history last year as the nation's biggest bank failure, it bore no resemblance to this homey image.
What few people knew was that bank executives crafted a radical new
business strategy in 2003 that was intended to boost profits. The new
WaMu used huge sales commissions and misleading marketing to hawk risky
and overpriced loans to borrowers.
In short, WaMu became one of the nation's biggest predatory lenders.
Here are a two quotes from the article:
- WaMu lured borrowers with a very low interest rate of about 1
percent. But this "teaser" rate was good only for one month. After
that, the option ARM could have far higher interest rates than
conventional 30-year fixed-rate loans. With each minimum payment,
unpaid interest piled up. Once the debt grew too large, WaMu canceled
the minimum-payment option. You could suddenly get a new bill for two
or three times what you had been paying.
- "I always felt like I worked for a really honest industry that
cared for the borrowers they dealt with," she said. The corporate
culture changed to: "We just want to do the most we can to make money
for the bank."
- The 1 percent interest rate Houk thought he was getting was only
good for the first month. It had reset to 7.4 percent, nearly 3
percentage points above his previous WaMu loan. This was buried in the
fine print in a sheaf of legal documents he had signed. "Who in their
right mind would give up a 4.6 percent loan?" Houk said. "I felt
totally duped."
The overall gist of the article (in conjunction with the previous
one) is of a company whose CEO was obsessed with the share price as
validation of success. As a result, the company morphed from an
institution worthy of Mr. Smith to just another profit-oriented bank.
The key changes came in crisis after profits were devastated by the
recession of 2001 and the jobless recovery afterwards. WaMu was forced
into huge layoffs.
It is often said true character is shown in crisis and at WaMu it
would be no different. Instead of accepting a temporarily lower share
price and reduced earnings from its bread and butter mortgage products,
WaMu went all-in, wading into sub-prime and option-ARM products which
were not its mainstay. That is when the predatory lending began,
ultimately setting the firm up for failure.
