DigitalDave

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The Washington Mutual Decision - Puget Sound Business Journal (Seattle): - by Kirsten Grind Staff Writer

BACK STORY: In September, at the first anniversary of Washington Mutual’s closure, the Puget Sound Business Journal reported that as executives fought to sell the bank during its final days, regulators undercut those efforts by signaling to bidders that the bank would soon be seized and sold at a much lower price. Now, further investigation reveals that, contrary to regulators’ assertions at the time of the seizure, WaMu had sufficient liquidity and capital to meet regulatory standards and survive. Why, then, was it shuttered?

On a sunny Sunday afternoon in late September, a year and two days after regulators closed Washington Mutual, the bank’s former leaders gathered for an improbable, and tragic, reunion at a Seattle restaurant.

Among those present: Lou Pepper, the CEO who guided WaMu through the 1980s; and Kerry Killinger, the CEO who presided over both its vast expansion in the 1990s and its later deep dive into risky mortgage lending.

They came to honor a widely respected WaMu veteran who had been let go this year after decades at the bank. Just 10 days earlier, wracked in part by his family’s growing financial pressures, he took his own life at his Seattle home, according to a police report. He left behind a family and scores of colleagues who revered him. (Out of respect for the family, the Puget Sound Business Journal is not publishing his name.)

For nearly two hours at the memorial, speakers shared memories of the man’s many accomplishments.

The speakers didn’t address the looming questions, however. These were broached in hushed tones among some WaMu employees: Why exactly did the government seize our bank? Was all this financial pain and personal hardship necessary?

WaMu’s regulators said they based their decision to close the bank and sell it to JPMorgan Chase on lack of liquidity — its access to ready cash — and the mounting pile of failed mortgage loans that were expected to cripple the bank’s earnings for months to come.

But new information — gathered from internal documents and interviews with scores of former WaMu executives, regulators and other experts — shows that WaMu had plenty of cash on the day it was seized, and a regulator-vetted plan to operate with even less money if necessary.

WaMu also had ample capital — more than the regulatory levels for a “well-capitalized” bank.

Cash and secrecy

These documents and sources, part of a Puget Sound Business Journal investigation, raise questions about whether the regulators acted precipitously in seizing a bank that could have survived, and in the process wiped out billions of dollars of wealth with widespread personal consequences.

“Someone needs to take a serious look at this because they weren’t illiquid,” said a senior federal official with direct knowledge of WaMu’s circumstances.

Regulators, the official added, “pulled the trigger too soon.”

Yet more than a year later, the details of the decision remain shrouded from view. WaMu’s main regulators — the Federal Deposit Insurance Corp. and the Office of Thrift Supervision — continue to decline requests to discuss their actions, release liquidity figures or give any other evidence that the bank was in a precarious situation that demanded immediate action. In refusing the disclosures, the regulators cite confidentiality regulations for a bank that no longer exists except in a liquidation proceeding and as a basis for numerous lawsuits.

Similar secrecy surrounds other bank failures. As the toll of closed banks mounts — more than 140 have been shut by regulators since the housing bubble burst in early 2008 — and as Congress prepares to overhaul the regulatory structure, more people are asking what exactly was wrong with these banks, and whether regulators always acted appropriately in closing them.

After regulators shut down First Bank of Idaho in April, for example, congressmen Mike Simpson and Walt Minnick said regulators had “intentionally destroyed” a pillar of the community “through inappropriate use of their powers.” The Idaho lawmakers asked why regulators acted so abruptly when the bank was close to raising a needed $10 million.

“We are concerned that the OTS and the FDIC did not give the bank enough time to capitalize properly, even though it is our understanding that they were nearing the end of negotiations with a willing investor,” they wrote in a letter to the agencies. “Not only have investors lost millions in personal investments, but many of the businesses that have banked with First Bank of Idaho for years have found their credit lines frozen.”

The FDIC and OTS responded by providing the official reasons for closing the bank, but no new details, according to Simpson’s office.

It appears that Washington’s two senators didn’t seek much more information about WaMu — and they have not responded to requests for comment. However, in October, Gov. Chris Gregoire questioned why regulators failed to approve a plan to recapitalize Everett-based Frontier Financial, the state’s largest commercial bank, through a merger. The deal fell apart and the bank is still seeking crucial capital.

Some see a much broader and more worrisome effect from the government’s discretionary and murky process. As one WaMu executive put it: “If you’re a shareholder in any bank you’d have to really look at it and say, ‘What are the parameters here? Can they just seize any bank at any time?’”

Widespread problems and pain

The closures have had enormous repercussions. Had regulators acted differently in WaMu’s case, they might have preserved at least some of the $7 billion in shareholder wealth that remained just before the seizure, and tens of billions more in bondholder wealth. If WaMu executives had been able to sell the bank to a healthy financial institution, as they were energetically trying to do, far more wealth — perhaps $30 billion more — would have been revived as bank stocks rose with the tide of a surging stock market during the spring and summer of 2009.

Here is an email obtained by the FOIA that Sheila Bair sent out two weeks prior to the seizure. A whole lot of nothing says a lot to me.