After a year-and-a-half long financial autopsy, the Senate investigations subcommittee today is exploring the demise of the Washington Mutual, once among the US' largest thrift banks with more than $330 billion in assets and the largest bank failure in American history. The hearing will include testimony from former WaMu executives like CEO Kerry Killinger, president Stephen Rotella, past risk officers, and the former president of the Home Loans division at the heart of WaMu's stunning meltdown.

 

The beginning of the end, as the Senate's investigation suggests, came in 1999, when WaMu snapped up a subprime lender named Long Beach Mortgage Company. Long Beach was a major player in the booming securitization business—the origination of loans to be bundled into bonds backed by those pools of loans. These mortgage-backed securities were then sold to Wall Street banks and the two government-sponsored housing corporations, Fannie Mae and Freddie Mac. In 2006, Long Beach injected a staggering $30 billion in subprime loans into the securitization machine, a sixfold increase from only three years before. And by churning out subprime loans to less qualified homeowners, Long Beach fit perfectly into WaMu CEO Killinger's goal, echoing that of executives like Citigroup's Sandy Weill, of making WaMu into a supermarket bank, a one-stop shop for customers of all stripes.

 

Another key date, as the Senate investigation shows, was 2005, when WaMu and Long Beach, as shown in an internal WaMu PowerPoint presentation, settled on a strategy called "gain on sale." That strategy essentially stressed how much more profit could be made on riskier loans as opposed to government-backed, fixed interest-rate loans, and that these riskier, more profitable products—home equity, subprime, and option adjustable-rate mortgages—could be a cash cow for WaMu.

 

This cutthroat, purely profit-driven philosophy meant WaMu and Long Beach increasingly pushed their employees, in the early 2000s, to focus more on volume than quality—selling more and more loans with little regard for the underwriting or potential success of those loans. "WaMu built its conveyor belt of toxic mortgages to feed Wall Street's appetite for mortgage backed securities," Levin said. "To keep the conveyor belt running and feed the securitization machine on Wall Street, Washington Mutual engaged in lending practices that created a mortgage time bomb."