The Lost Bank

1. A Folksy Bank Rescued from Failure by a Lawyer, Not a Banker

The one thing I know is that if you’re here to foreclose a mortgage from Washington Mutual, you’ve done everything you can to help them save their home.

Facing collapse. In 1981, Washington Mutual, a century-old community bank, was losing $5 million a month and nearing failure due to high interest rates and bad investments. Its management was paralyzed, and no one on the board had time to step in.

Unlikely savior. Lou Pepper, the bank's outside general counsel and a respected banking attorney with no management experience, reluctantly took the helm for what he thought would be six months. He was driven by a fondness for the bank, which had a reputation for helping customers, even during the Great Depression.

Frugality and culture. Pepper implemented cost cuts, including banning potted plants, and took the bank public to raise capital. More importantly, he fostered a culture centered on human values:

• Ethics, Respect, Teamwork, Innovation, Excellence
• Employees felt like family, calling him "Great and Powerful Lou"
• The bank became known as the "Friend of the Family"

2. Rapid Growth Fueled by Acquisitions and a Relentless "Energizer Banker"

He’s the Alexander the Great of the thrift industry.

Acquisition spree. Under Kerry Killinger, who took over from Pepper, WaMu transformed from a regional player into a national behemoth through aggressive acquisitions. Killinger, a former investment analyst, saw potential in buying smaller, often troubled, banks across the country.

Ruthless integration. WaMu's executive team, known for their diverse backgrounds and close-knit dynamic, became adept at integrating acquired companies quickly and efficiently. They were known for:

• Flying incognito for due diligence
• Ruthlessly cutting costs and corporate perks at acquired banks
• Developing a highly effective process for merging complex computer systems

Becoming a giant. Key acquisitions like Great Western and H.F. Ahmanson propelled WaMu to become the largest savings and loan in the U.S. by the late 1990s. This rapid expansion earned Killinger the nickname "Energizer Banker" and widespread praise from analysts and investors.

3. The Shift to High-Risk Lending: Embracing the "Power of Yes"

The Power of Yes. Whatever your dream home is, we have your loan.

Seeking higher profits. As traditional fixed-rate mortgages became less profitable, WaMu, under pressure to maintain growth and stock performance, shifted aggressively into higher-risk lending products. This included subprime mortgages, home equity loans, and particularly Option ARMs.

The Option ARM. This complex loan offered borrowers low initial payments but allowed the principal balance to increase (negative amortization). It was highly profitable for WaMu, especially when sold to investors on the secondary market.

• Enticed borrowers with teaser rates as low as 1%
• Offered four payment options, including a minimum payment that didn't cover interest
• Recast to a much higher payment after five years

"The Power of Yes". WaMu launched a marketing campaign emphasizing ease of loan approval and speed. This reflected an internal push to increase loan volume, often with limited documentation from borrowers, especially in the Home Loans Group, nicknamed the "Dark Side."

4. Internal Warnings and Audits Highlighted Dangerous Lending Practices

My credit team and I fear that we are considering expanding our risk appetite at exactly the wrong point and potentially walking straight into a regulatory challenge and criticism from both the Street and the Board.

Voices of dissent. Despite the push for growth, some within WaMu raised concerns about the increasing risk. Chief Risk Officer Jim Vanasek warned against expanding into high-risk loans as the housing market showed signs of overheating.

Audits reveal problems. Internal audits and reviews repeatedly flagged issues within the Home Loans Group and its subprime subsidiary, Long Beach Mortgage.

• High rates of "critical errors" and fraud in loan files
• Lack of proper documentation and underwriting
• Managers pressured to approve bad loans

Warnings ignored. These concerns were often downplayed or dismissed by senior management focused on sales targets. Killinger, while acknowledging the risks of a housing bubble privately, continued to pursue a strategy that relied on market appreciation.

5. A Culture of Sales and Volume Trumped Caution and Underwriting

We are ALL in Sales.

Sales-driven culture. WaMu's internal structure and compensation plans heavily incentivized loan officers and managers based on volume, particularly for high-risk products like Option ARMs and subprime loans. This created immense pressure to close deals, sometimes at the expense of sound underwriting.

Underwriting compromised. Underwriters who flagged problematic loans faced pressure to approve them through "exceptions." This undermined risk controls and allowed loans with questionable documentation or borrower capacity to proceed.

• Loan officers earned higher commissions on riskier loans
• Some managers received under-the-table payments for pushing loans through
• Fraud became commonplace, sometimes referred to as "bad fraud"

Ignoring the customer. Market research revealed that customers often didn't understand the complex terms of Option ARMs, but the focus remained on selling the product by emphasizing low initial payments, not long-term risks.

6. Mounting Losses and Regulatory Scrutiny Intensified as the Housing Market Turned

This scenario has now turned into a reality. Housing prices are declining in many areas of the country and sales are rapidly slowing. This is leading to an increase in delinquencies and loan losses.

Bubble bursts. By 2006, the housing market began to cool, and home prices started to decline in key markets like California and Florida. This exposed the fragility of WaMu's high-risk loan portfolio, which relied heavily on continued appreciation.

Losses accelerate. As home prices fell, borrowers, particularly those with Option ARMs or subprime loans, began defaulting in increasing numbers. WaMu's loan losses soared, wiping out billions in earnings and shareholder value.

• Delinquencies and foreclosures doubled year over year
• WaMu set aside billions to cover expected losses
• The bank's stock price plummeted

Regulators raise alarms. Federal regulators, particularly the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corp. (FDIC), grew increasingly concerned about WaMu's condition. They issued warnings and enforcement orders, but the bank struggled to implement effective changes quickly enough.

7. The IndyMac Failure Triggered a Devastating Bank Run on WaMu

This is my life savings here. What do you resort to now, putting money back in the mattress?

Panic spreads. In July 2008, the failure of IndyMac Bank, triggered by a letter from Senator Chuck Schumer questioning its health, sent shockwaves through the financial system. The images of panicked customers lining up to withdraw deposits fueled fears about other banks.

WaMu's silent run. Despite having adequate capital and liquidity by regulatory standards, WaMu became the target of a massive, quiet bank run. Customers, spooked by the news and rumors, withdrew billions through ATMs and online transfers.

• Customers pulled $9.4 billion in just two weeks in July
• The run peaked at $1.8 billion withdrawn in a single day
• Many withdrawing customers had deposits below the FDIC insurance limit

Unseen crisis. Unlike the visual spectacle at IndyMac, WaMu's run was largely invisible to the public and media, managed internally by a small team tracking deposit outflows. The bank's efforts to project calm and reassure customers about FDIC insurance had limited effect.

8. Regulatory Agencies Clashed Over WaMu's Condition and Fate

It seems as if the FDIC is behaving as some sort of super-regulator—which you, and it, are not.

Interagency conflict. As WaMu's condition deteriorated, a deep rift emerged between its primary regulator, the OTS, and the FDIC, which insures deposits. They disagreed on the severity of WaMu's problems and the necessary course of action.

Rating dispute. The FDIC pushed to downgrade WaMu's health rating to a 4 (troubled), which would trigger stricter oversight and potentially limit its access to funding. The OTS insisted WaMu was a 3 (borderline troubled) and should be given time to fix its problems.

• OTS wanted to protect its largest regulated bank
• FDIC wanted to protect the deposit insurance fund from a potential failure
• The conflict reached the highest levels, involving Sheila Bair (FDIC) and John Reich (OTS)

Differing strategies. The OTS favored giving WaMu time to raise capital or find a buyer on its own. The FDIC, increasingly worried after the IndyMac failure, began contingency planning for WaMu's potential seizure and sale, sometimes without informing the OTS.

9. Frantic Attempts to Sell the Bank or Raise Capital Failed

We think there is no reason to take such a drastic step when our proposal would, quickly and simply, create $19 billion more capital for WaMu and reposition it to easily withstand the current market turmoil—all without a penny of government assistance.

New leadership, urgent task. Alan Fishman was brought in as CEO with the mandate to quickly sell the bank or raise significant capital. He faced immense pressure from regulators, particularly the FDIC, which set tight deadlines.

Private auction. WaMu's team, led by Fishman, frantically pitched potential buyers and investors, including Citigroup, Santander, Wells Fargo, and JPMorgan Chase. They highlighted WaMu's core retail franchise despite its toxic mortgage assets.

Offers fall short. Potential buyers were wary of WaMu's loan portfolio and the rapidly worsening financial crisis. Offers were low, often contingent on government assistance or further due diligence, and ultimately failed to materialize in Fishman's private auction.

• JPMorgan Chase initially offered $5/share, later withdrew
• Santander considered a $10 billion offer but backed out
• Citigroup and Wells Fargo were interested only with government loss sharing

10. WaMu Was Seized by Regulators and Sold to JPMorgan Chase

This is to notify you that the director, Office of Thrift Supervision, by Order Number 2008–36, dated September 25, 2008, appointed the Federal Deposit Insurance Corporation receiver for Washington Mutual Bank… The receiver is now taking possession of the bank.

Accelerated timeline. As the bank run intensified and news of WaMu's precarious state leaked, regulators, particularly the FDIC, accelerated their timeline for intervention. The OTS, under pressure, agreed to downgrade WaMu to a 4 rating.

FDIC auction. With Fishman's private sale failing, the FDIC initiated its own secretive auction process, inviting select banks to bid on WaMu as a failed institution. This process bypassed WaMu's management and board.

JPMorgan's winning bid. JPMorgan Chase, which had been monitoring WaMu closely, submitted the winning bid of $1.888 billion for WaMu's banking assets and liabilities (excluding the holding company). They were the only bidder willing to take on the toxic loan portfolio without government guarantees.

• WaMu's shareholders and bondholders were wiped out
• It was the largest bank failure in U.S. history
• The sale cost the FDIC's deposit insurance fund nothing

11. The Aftermath: Bankruptcy, Lawsuits, and the End of an Era

WaMu wasn’t deemed to be a systemic risk and was not bailed out.

Holding company bankruptcy. Washington Mutual Inc., the holding company, filed for bankruptcy, leading to years of legal battles over the remnants of the company and the fate of shareholders and bondholders.

Lawsuits and investigations. Numerous lawsuits were filed against WaMu executives, directors, and JPMorgan Chase, alleging negligence, fraud, and improper handling of the failure. Government investigations scrutinized WaMu's lending practices and regulatory oversight.

• FDIC sued Killinger, Rotella, and Schneider for negligence
• Shareholders sued over the loss of their investment
• Criminal investigations were launched but ultimately dropped

Regulatory changes. The financial crisis and WaMu's failure contributed to sweeping regulatory reforms, including the Dodd-Frank Act, which eliminated the OTS and consolidated thrift supervision under the Office of the Comptroller of the Currency. The era of the independent savings and loan effectively ended.

Last updated: June 29, 2025