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FDIC Sues Washington Mutual Executives for $900 Million

graphic: Wikimedia

The FDIC, one of the stronger bank regulators in recent years, has sued the former chairman of Washington Mutual, Kerry Killinger, for the irresponsible and reckless lending that led to its collapse. The agency seeks $900 million in a civil lawsuit, and marks the first FDIC lawsuit against a bank CEO during this financial crisis.

Kerry K. Killinger, Washington Mutual’s longtime chief executive, led the bank on a “lending spree” knowing that the housing market was in a bubble and failed to put in place the proper risk management systems and internal controls, according to a complaint filed on Thursday in federal court in Seattle.

David C. Schneider, WaMu’s president of home lending, and Stephen J. Rotella, its chief operation officer, were also accused of negligence for their roles in developing and leading the bank’s aggressive growth strategy.

“They focused on short-term gains to increase their own compensation, with reckless disregard for WaMu’s long-term safety and soundness,” the agency said in the 63-page complaint. “The F.D.I.C. brings this complaint to hold these highly paid senior executives, who were chiefly responsible for WaMu’s higher-risk home lending program, accountable for the resulting losses.”

This is really the first attempt at the federal level to hold responsible the executives who made the decisions that crashed their own businesses and the greater economy. The Angelo Mozilo lawsuit by the SEC ended up going nowhere, and former Bank of America CEO Ken Lewis could face a lawsuit by the New York Attorney General’s office. But the FDIC’s action, which they are under a legal obligation to bring if they find wrongdoing at a bank they wind down, clearly takes this up a notch. [cont’d.]

Felix Salmon read the complaint and notes that WaMu’s strategy was pretty transparent: they sought to write a lot of subprime mortgages and sell them up the securitization chain. They knew full well they were sticking themselves with a lot of risk, and they didn’t care. They were following the industry model. Salmon wonders if this just makes them bad businessmen rather than criminals. And he doesn’t think much of the FDIC coming in after the fact with these charges when they failed to properly regulate WaMu in the first place. But he measures that against the need to hold the banking industry, the keepers of the nation’s wealth, to some kind of common-sense standard:

But at the same time, it’s unconscionable that these guys should be able to get away with what they did just because they did it out in the open, in front of supine regulators. They knew that they were too big to fail; they knew that ultimately WaMu’s liabilities (or at least its deposits) were being backstopped by the US government; and they knew that if they wanted to get their total compensation up into the $100 million range they were just going to have to take enormous risks and gamble with the money they had essentially unlimited access to at the Fed’s discount window.

The bottom line is simple: WaMu failed its investors and bondholders by failing to operate according to the prudent standards expected of the banking industry. For that, their executives, the ones who made the decisions, need to accept some of the losses they caused, at the very least. And this lawsuit should reveal clear findings of fact that could be applied to other executives who engaged in most of the same practices throughout this period.

CommunityThe Bullpen

FDIC Sues Washington Mutual Executives for $900 Million

The FDIC, one of the stronger bank regulators in recent years, has sued the former chairman of Washington Mutual, Kerry Killinger, for the irresponsible and reckless lending that led to its collapse. The agency seeks $900 million in a civil lawsuit, and marks the first FDIC lawsuit against a bank CEO during this financial crisis.

Kerry K. Killinger, Washington Mutual’s longtime chief executive, led the bank on a “lending spree” knowing that the housing market was in a bubble and failed to put in place the proper risk management systems and internal controls, according to a complaint filed on Thursday in federal court in Seattle.

David C. Schneider, WaMu’s president of home lending, and Stephen J. Rotella, its chief operation officer, were also accused of negligence for their roles in developing and leading the bank’s aggressive growth strategy.

“They focused on short-term gains to increase their own compensation, with reckless disregard for WaMu’s long-term safety and soundness,” the agency said in the 63-page complaint. “The F.D.I.C. brings this complaint to hold these highly paid senior executives, who were chiefly responsible for WaMu’s higher-risk home lending program, accountable for the resulting losses.”

This is really the first attempt at the federal level to hold responsible the executives who made the decisions that crashed their own businesses and the greater economy. The Angelo Mozilo lawsuit by the SEC ended up going nowhere, and former Bank of America CEO Ken Lewis could face a lawsuit by the New York Attorney General’s office. But the FDIC’s action, which they are under a legal obligation to bring if they find wrongdoing at a bank they wind down, clearly takes this up a notch.

Felix Salmon read the complaint and notes that WaMu’s strategy was pretty transparent: they sought to write a lot of subprime mortgages and sell them up the securitization chain. They knew full well they were sticking themselves with a lot of risk, and they didn’t care. They were following the industry model. Salmon wonders if this just makes them bad businessmen rather than criminals. And he doesn’t think much of the FDIC coming in after the fact with these charges when they failed to properly regulate WaMu in the first place. But he measures that against the need to hold the banking industry, the keepers of the nation’s wealth, to some kind of common-sense standard:

But at the same time, it’s unconscionable that these guys should be able to get away with what they did just because they did it out in the open, in front of supine regulators. They knew that they were too big to fail; they knew that ultimately WaMu’s liabilities (or at least its deposits) were being backstopped by the US government; and they knew that if they wanted to get their total compensation up into the $100 million range they were just going to have to take enormous risks and gamble with the money they had essentially unlimited access to at the Fed’s discount window.

The bottom line is simple: WaMu failed its investors and bondholders by failing to operate according to the prudent standards expected of the banking industry. For that, their executives, the ones who made the decisions, need to accept some of the losses they caused, at the very least. And this lawsuit should reveal clear findings of fact that could be applied to other executives who engaged in most of the same practices throughout this period.

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David Dayen

David Dayen