I Like Big Bucks and I Cannot Lie
Inside the terrible variety show that was Washington Mutual.
WaMu’s ability to out-defraud the boiler rooms was a function of its formidable internal and external marketing efforts, along with the hopeless dysfunction that characterized every realm of operations that didn’t involve branding. Merged banks’ computer systems went un-integrated, until the bank was running 12 separate non-compatible loan processing software systems. Thousands of new computers sat mysteriously in warehouses gathering dust, while thousands of mortgage payments sat inexplicably in safe deposit boxes without getting processed. Killinger canvassed the country in his Cessna jet handing out WaMurabilia like limited edition Kerry Killinger bobbleheads, while his company conducted its affairs on an archaic pre-email internal communication application that cost $2,000 to install. Hilariously, Killinger at one point took to habitually posing the question: What would a real company do in this situation?
At WaMu, the answer was invariably: “fuck reality,” as a 2003 focus group report subpoenaed by Levin’s staff on a product WaMu would market as its “flagship loan”—the Option ARM—demonstrates. Option ARMs, once referred to as “NegAms” for the negative amortization they entail, were a kind of mortgage of last resort—offering struggling borrowers a few years of low introductory payments in exchange for ballooning balances and payments that would often triple when the introductory period expired. They were profitable for WaMu for all the reasons they were toxic to borrowers—high rates, high fees—and additionally, because some quirk of accounting alchemy allowed lenders to book as profit the amount by which customers’ loan balances increased each month. So WaMu’s strategic marketing department convened a few groups of Option ARM borrowers to attempt to divine their innermost thoughts and feelings about their mortgages, whereupon it learned: Option ARM borrowers were for the most part totally ignorant about how the loan actually worked, but had usually been told they were the only loans they qualified for. Negative amortization? “Most [participants] were not very clear on what it was … they generally thought that negative amortization was a moderately or very bad concept.” It was thereby redacted from the official sales pitch.
The critical symbiosis of marketing and fraud so fundamental to what’s rotten about our national situation is concisely embodied in Kevin Jenne, conductor of those focus groups. Complaining to Grind that the mortgage division censored his findings, which had led him to believe the Option ARM was an “evil” product, he then adds: “After a while, I lost that feeling.” But when the home loans team dispatched Jenne on a new mission four years later—figure out how to get delinquent ARM borrowers to start paying their bills again—he became the rare WaMu employee who ever confronted the nightmares their flagship loans had caused. “And then I thought, ‘No, no. This product is definitely evil.’ ” Faced with 80 hours of harrowing interview footage of terrified clients harassed all day by foul-mouthed collection agents, the bank resolves to develop “a friendlier approach to collections.” (And start selling off its Option ARMs as fast as possible.) Grind does not tell us what became of Jenne’s mortgage misery tour footage and does not suggest she made any efforts to obtain it. Jenne is now a consultant and “frequent guest lecturer” of marketing classes.
Photo by Sultan Khan.
Grind’s cognitive dissonance about the cognitive dissonance she is documenting can occasionally infuriate. She concludes the book with a platitude from the bank’s former chief legal officer Fay Chapman about how “there’s no law against stupidity,” as if neither of them are supposed to remember the passage a few hundred pages earlier in which Chapman explains that fraud was so rampant that WaMu actually coined a specific designation—"bad fraud"—for loans so obviously fraudulent it was "unbelievable." She inexplicably characterizes Killinger as “a good listener” despite his near-unrivaled record of almost deranged failure in this regard. Of employees who show up to one of Killinger’s brand rallies, she writes: “Some couldn't believe they worked at a company—a bank, even!—that was just so cool.” Every serious management snafu or personal crisis seamlessly bleeds into another elaborate party scene: Even when Killinger leaves his wife of 31 years (but tells her not to say anything because he doesn’t want it affecting the company’s stock price) it’s presented as a footnote to his totally epic 50th birthday bash.
Her discussion of fraud comes largely within the context of a particularly grotesque convention of the President’s Club, wherein top mortgage producers were flown each year to a luxury resort and showered with gifts, shadowed by fake “paparazzi,” and otherwise indulged as though they were, in the words of one attendee, “dignitaries.” At the 2006 President’s Club gathering in Kauai, Killinger bestowed a “lifetime achievement award” upon a 17-year mortgage consultant described as a man who has achieved "Henry Fonda, Burt Lancaster, John Wayne legendary status" within the business. It was Tom Ramirez, who had been the subject of an internal investigation the year earlier that determined that 58 percent of the loans he’d originated over the past two years contained fraud. Another awardee had an 83 percent fraud rate for the same time period.
And when customers started fleeing their WaMu accounts in September 2008—well, a few weeks were occupied attempting to vanquish Jamie Dimon, whose team at JPMorgan is likened by an anonymous source to a "cruel, vindictive pack of wolves." The irony here, of course, is that the diabolical Dimon seems to have underestimated WaMu's diabolical lending practices: Its now-famous botched "hedge" was originally designed to offset the spectacularly bad performance of the $230 billion in mortgages it assumed when it bought the seized WaMu. As of 2010, $75 billion of those mortgages were officially "nonperforming"; the bank refuses to release more recent loan performance data. In any case, though, that’s all someone else’s problem now; WaMu failed on Sept. 28, 2008, occasioning another series of parties replete with a final musical performance bidding farewell to the friendly “fair, caring, hardworking, honest and fun … folks of WaMu.” As the prescient WaMuse Britney Spears once observed, I’m not that innocent.
The Lost Bank: The Story of Washington Mutual — The Biggest Bank Failure in American History by Kirsten Grind. Simon & Schuster.
Moe Tkacik is a financially strapped finance writer in Brooklyn.