FDIC Suing WaMu Execs For Meltdown

[Conan71]

Lest we think the banksters are going to get away unscathed, the FDIC is suing three top execs from Washington Mutual for negligence.  WaMu was the largest bank to meltdown in U.S. history.


The FDIC also named Killinger's and Rotella's wives in the suit filed in federal court in Seattle.

The FDIC said the three executives pushed for expansion of WaMu's risky lending even though they knew or should have known that its loan standards and controls were inadequate. The bank collapsed in September 2008 and was sold for $1.9 billion to JPMorgan Chase & Co. in a deal brokered by the FDIC.

Killinger, Rotella and Schneider, "through their gross negligence, breached their duties of care," the FDIC alleged in the suit. The agency said they acted with "reckless disregard."

Among other things, they adopted imprudent lending policies and caused the bank to make home loans "with little or no regard for borrowers' ability to repay them," the FDIC said.

The agency also alleged that Killinger and Rotella transferred assets to their wives in order to keep them out of the reach of their current and future creditors. The FDIC asked the court to freeze those assets, which it said were fraudulently transferred.

http://www.tulsaworld.com/business/article.aspx?subjectid=51&articleid=20110318_51_E3_WSIGOA334900

I believe Senator Chris Dodd (D- WaMu) should be added as a fourth defendant though.  Kerry Killinger, listed as CEO of WaMu donated to Chris Dodd in 2004 (I'm assuming for a Senatorial campaign) and in 2007 (likely for his Presidential bid).  I don't see how anyone can say there is no hint of corruption when bank executives are giving money to legislators who are supposed to regulate the industry they serve. 

http://fundrace.huffingtonpost.com/neighbors.php?type=name&oldest=1&lname=killinger&fname=kerry&search=Search

Stephen Rotella, COO of WaMu also donated to Dodd in '04 and '07

http://fundrace.huffingtonpost.com/neighbors.php?type=name&oldest=1&lname=Rotella&fname=Stephen&search=Search

David Schneider donated $1250 to Dodd and money to the WaMu PAC.  WTH does a bank need a PAC for?  I seriously doubt these guys were donating to Dodd to get tighter restrictions in banking regs.

http://www.campaignmoney.com/political/contributions/david-schneider.asp?cycle=08

[we vs us]

So what's Dodd's pro quo for the WAMU guy's quid?  There's gotta be payback if it's truly fishy. 

If I remember correctly, Dodd's banking reform bill from last year went relatively far in trying to reign banks like WAMU in.

[Conan71]

So what's Dodd's pro quo for the WAMU guy's quid?  There's gotta be payback if it's truly fishy.  

If I remember correctly, Dodd's banking reform bill from last year went relatively far in trying to reign banks like WAMU in.

WaMu went tits up in 2008 or early '09.  Dudd was asleep at the switch along with others on the banking committee.  Or another way to put it is he was being paid to look the other way.  I hear the mortgage rate for sitting Senators at Countrywide was a smoking deal too.  Something none of us mere mortals could ever expect.

Another irony is though, that I believe FDIC had more direct oversight.  Where were they back before the collapse?  They regularly audit banks to make sure they aren't about to go t/u.

[nathanm]

This stinks to high heaven. They're suing the execs of the bank they illegally seized for going belly up? Seems like they ought to be suing the banks that were heavy into the derivatives mess that caused the whole problem. (*cough*BoA*cough*JPMChase*cough*)

Oh, wait, I forgot, those two are the chosen ones, who are being allowed to get away with all sorts of fraud even as we speak. 

[Teatownclown]

Let me help you with some long term memory: http://en.wikipedia.org/wiki/Phil_Gramm

[Teatownclown]

Banks Should Pay for Foreclosures

http://www.commondreams.org/view/2011/05/01-0

"The largest banks - the Bank of America, JP Morgan Chase, Wells Fargo, and Citigroup - are among the top lenders foreclosing on California families. Not surprisingly, these are among the banks that have been flooding Sacramento with political cash in order to thwart legislation designed to make them - the real culprits of the foreclosure massacre - pay for the suffering they've caused."

What a great idea (that will never happen).

[Conan71]

From TTC's link. 

So what's the alternative for mortgage companies? Allow people to squat in their properties while the value spirals even lower?  The banks had their place in this mess and made stupid loans.  Let's not pretend though, as the author of this op-ed is doing, that every foreclosure is the fault of a big mean bank.  People had the discretion to say: "I can't afford this".  They also had the discretion to take a look at the cyclical nature of the California real estate market and it's booms and busts over the years to determine they might be taking on a huge risk.  How about financing something you could still afford to live in if your income were halved tomorrow?



"A bill sponsored by Assemblyman Bob Blumenfield (Democrat, Los Angeles) -- the Foreclosure Mitigation Fee (AB 935), which is currently going through legislative hearings - would require banks to pay their share of foreclosure costs. Backed by a broad coalition of consumer, community and labor groups, (read: liberal SIG's) the bill would impose a $20,000 fine on banks for each foreclosure.

The $12 billion revenue over next two years would go entirely to local communities in order offset the multiple costs borne by our neighborhoods because of foreclosures and shared between public safety, public education, local governments, redevelopment activities and small businesses.

Los Angeles County alone will face an estimated 381,461 foreclosures through 2012, costing local governments $918 million in lost property taxes and $2.8 billion to pay for the problems. Riverside and San Bernardino counties have been particularly hard hit by the foreclosure earthquake. But no county, city, or small town in California has been spared the devastation.

Indeed, the foreclosure tsunami and the housing market crash are the primary causes of the severe budget crisis facing California's municipalities and counties, forcing local officials to slash services and lay off tens of thousands of employees.

But many Californians are asking, why should taxpayers and communities have to pick up the tab, and face such hard times, for a crisis they didn't cause? They - and the families caught in the maelstrom - are the victims of this human-made disaster.

And let's be frank. Wall Street's reckless and predatory lending practices were responsible for the mess we're now in. Bankers pushed homeowners into high-cost loans they couldn't afford. They engaged in deceptive and often illegal activities, like not informing consumers that they qualified for conventional loans, tricking them into more costly and risky subprime mortgages.

Wall Street banks bundled these risky loans into "mortgage backed securities" that were given the seal-of-approval of ratings agencies (Moody's and Standard & Poor), and then sold them to foreign governments, pension funds and other unwitting investors.

When the scam imploded and Wall Street's bets went sour, the bankers were bailed out by the taxpayers. Goldman Sachs got $53 billion in bailout funds; Bank of America received $230 billion; Wells Fargo pocketed $43 billion. Meanwhile, the top executives got outrageous compensation packages. Last year, for example, Wells Fargo CEO John Stumpf received $17.1 million in salary and bonuses.

But California residents lost billions in savings in their homes, neighborhoods were devastated, businesses crashed and laid off employees, and local governments spiraled downward into fiscal hell."

[nathanm]

From TTC's link. 

So what's the alternative for mortgage companies? Allow people to squat in their properties while the value spirals even lower?  The banks had their place in this mess and made stupid loans.  Let's not pretend though, as the author of this op-ed is doing, that every foreclosure is the fault of a big mean bank.  People had the discretion to say: "I can't afford this".  They also had the discretion to take a look at the cyclical nature of the California real estate market and it's booms and busts over the years to determine they might be taking on a huge risk.  How about financing something you could still afford to live in if your income were halved tomorrow?

Some people were irresponsible. Most banks were irresponsible. Almost every mortgage broker was irresponsible.

I have read/heard stores of people who attempted to get a 30 year fixed loan and had the paperwork switched out at closing for an interest only reverse amortization mortgage because it made the broker a lot more money. The folks I talked to, being the sort to actually read the whole contract realized what was happening and put a stop to it. Less informed consumers were probably taken in by such fraud, though.

[Conan71]

Some people were irresponsible. Most banks were irresponsible. Almost every mortgage broker was irresponsible.

I have read/heard stores of people who attempted to get a 30 year fixed loan and had the paperwork switched out at closing for an interest only reverse amortization mortgage because it made the broker a lot more money. The folks I talked to, being the sort to actually read the whole contract realized what was happening and put a stop to it. Less informed consumers were probably taken in by such fraud, though.

I don't know how you quantify "some", "most", and "almost every".

Even the biggest dolt can add up their monthly income and subtract how much they are paying out and realize they are going deep in hock.

Sure, some unsophisticated borrowers didn't fully appreciate balloon notes or how the adjustment worked on their ARM.  Hell most bankers can't even tell you accurately which indexes could affect the rate on an ARM, it's not as simple as being tied to a prime-plus figure.

The article sure sounds like the liberal meme of: "Big corporations are greedy.  People are stupid.  People need more government between them and greedy corporations."

I guess I believe too much in personal responsibility.

[Red Arrow]

I guess I believe too much in personal responsibility.

It's going to give you a headache.

[Teatownclown]

Conan, it's good to believe strongly in personal responsibility. And that is the priority here.

But when individuals are diseased and there are uncontrolled enablers making their disease worse then it's up to government established rules to keep the system from corporate gaming a sick society.

[nathanm]

I don't know how you quantify "some", "most", and "almost every".

Even the biggest dolt can add up their monthly income and subtract how much they are paying out and realize they are going deep in hock.

Sure, but have you seen how terribly inaccurate GFEs often are? They have to supply the GFE for a good reason; they're in a better position than the borrower to know what all fees they are going to charge and how the loan will be structured. If the GFEs were actually accurate most of the time, I'd be right with you on decrying stupid borrowers.

However, there are two sides to the coin. You have to fully disclose your income (often including prior year income tax forms), assets, and debt to the bank. They know just as well as the borrower whether the borrower can afford the loan, at least initially. If they choose to use the initial payment on an interest only/reverse amortization loan to qualify the borrower, that's also as much on them as the borrower.

Of course, during the bubble they wanted to qualify people that way because they knew that if the borrower couldn't make the payment or refi, the house could be sold for far more than the loan's value.

My point isn't that borrowers deserve none of the blame, it's that the banks have at least as much culpability as the borrowers. It's not like they (usually) take you at your word when they're lending you a couple hundred grand.

[we vs us]

Sure, some unsophisticated borrowers didn't fully appreciate balloon notes or how the adjustment worked on their ARM.  Hell most bankers can't even tell you accurately which indexes could affect the rate on an ARM, it's not as simple as being tied to a prime-plus figure.

In many markets, it was actually a good real estate play to take out a jumbo loan, buy a bigger place than you could afford on paper and then flip it within a year or so when the appraisal had made you $10k (or however much).  In Chicago, I had several friends who managed that progression quite well in the years before the bust, and were able to build a good amount of wealth before the merry go round stopped.  

Here, in a stable and slowly appreciating market, taking out more than you can afford seems ridiculously counterintuitive -- and the market will actually guarantee that that's a stupid investment.  In the regions that appreciate quickly, it's the thing the market is encouraging you to do.  Until the bubble pops (which is inherently unpredictable) you're losing money if you're not part of it.  

As I've argued before, everyone holds a measure of blame for buying into a bubble mindset, but focusing on individual responsibility, while virtuous, doesn't reflect the enormity of the system's structural push to have this happen.  As is pretty well documented now, the banks were able to make unbelievable sums of money off of not simply a bad loan made to you but a raft of bad loans made to you, your family, your neighbors, and your friends.  The more the better.  That's not malfeasance on an individual level; that's market-level manipulation.  

[Conan71]

In many markets, it was actually a good real estate play to take out a jumbo loan, buy a bigger place than you could afford on paper and then flip it within a year or so when the appraisal had made you $10k (or however much).  In Chicago, I had several friends who managed that progression quite well in the years before the bust, and were able to build a good amount of wealth before the merry go round stopped.  

Here, in a stable and slowly appreciating market, taking out more than you can afford seems ridiculously counterintuitive -- and the market will actually guarantee that that's a stupid investment.  In the regions that appreciate quickly, it's the thing the market is encouraging you to do.  Until the bubble pops (which is inherently unpredictable) you're losing money if you're not part of it.  

As I've argued before, everyone holds a measure of blame for buying into a bubble mindset, but focusing on individual responsibility, while virtuous, doesn't reflect the enormity of the system's structural push to have this happen.  As is pretty well documented now, the banks were able to make unbelievable sums of money off of not simply a bad loan made to you but a raft of bad loans made to you, your family, your neighbors, and your friends.  The more the better.  That's not malfeasance on an individual level; that's market-level manipulation.  

I appreciate your post.  I don't begrudge anyone who made money flipping as the market went up.  However, I don't feel sorry for anyone speculating who got caught in the free-fall either, whether it had to do with their property value suddenly plummeting or they lost their last house because they became un- or under-employed as a result of the '08 collapse.

These people were making money with money.  They were producing nothing of value for a gain (technically not adding value to the "product" assuming they made no improvements to enhance the value).  That's essentially gambling.  That's all fine and good.  I'm not much of a gambler myself and I don't tend to feel sorry for people who suffer major gambling losses.  I don't think you can really protect people like that from that mindset.

I've also agreed all along the bankers were playing the same game (the enablers TTC refers to).  They gambled and lost too.  The bad part is, taxpayers never realized they were expected to be the ultimate insurance policy if the banks lost out on their huge gamble.  Hell, they were double-insured.  As I understand it, the derivative market was their insurance policy.  I have no idea if they figured from the git-go that the government would be the ultimate insurer if that scheme failed.  We know now that's exactly what wound up happening.

This is speaking to Nathan's post too- I went to work in consumer lending in 1987.  That was pretty much as the smoke was starting to clear here in Oklahoma from the whole Penn Square mess, the oil bust, the nation-wide S&L scandal and about 4000 to 5000 homes on the HUD inventory in Tulsa County.  Those were rough times.  It was hard to get much of anything financed and people were having to learn to be prudent with credit again.  I got out of the finance realm in '91.  It wasn't too long after that the ads for home equity loans for up to 120% of your equity started appearing.  That never made sense to me as when I was in the business, banks were being ultra-conservative.

Now since the financial markets nearly went completely t/u, we all realize what was going on.  The banks and mortgage generators (pimps) were getting all the highly profitable up-front fees as well as the stacked interest on the first year or two of the note then selling bundles of performing notes.  Meanwhile this whole shadow market of derivatives betting on the notes (talk about degenerate gamblers) comes about and they are so baffling and clever, not even the regulators fully appreciate what is going on with the risk pools.

As far as "accurate" GFE's go, my experience is the realtor generates the original one. It's an "estimate" not a "quote". There's another at closing.  If you have a fixed rate, it's going to be dead-nuts accurate.  If you have an ARM, there's simply no way to predict what your total of payments will be since the indices used are variable by nature.  If closers had to provide a GFE for every single possible permutation over the life of a 30 year note, I'd guess that would be at least a 3" stack of paper with every scenario for an increase or decrease on the rate in a given year. Now a better caution to consumers should be that most, if not all ARMs will wind up with an increased cost of borrowing, not a decreased or stable rate.  

I did buy my second house on an ARM.  I'll see if I can dig out the closing file and review how they did an estimate on the GFE.  If memory serves me correctly, they were only required to provide the first period based on the initial rate in the estimate, which I think was a year.  (IOW- my total cost of borrowing reflected what I'd repay if the rate remained stable for 30 years).  I knew full well from working in lending what I was getting into and there was a better chance than not the rate would go up.  I think we may have had a cap on the max.  Sheesh that's been almost 20 years ago and I am a Marshall's man    At any rate, yes, from having a lending background, I had a far better realization of what I was getting into, but I will give props to the closer as she made double sure we knew.  At least some people in home lending had a conscience at one point.

I never would have dreamed of using an ARM in the first place but my second child came a little sooner than planned and we had to have a bigger house right away.  It was the only way we could qualify to get the house we wanted as banks were real sticklers at the time about total monthly indebtedness being less than 35% of income.    We also paid off the remainder of a car loan and credit card to get under that threshold.  The mortgage adjusted up the following year and two years after that, my employment situation had changed to the point we refinanced to a 15 year fixed, so it worked out as intended.  Later, lenders kind of ignored that wisdom and started abusing the ARMs, balloons, and interest-only notes, as did speculators who eventually got caught with their pants down.

I do fully appreciate there were unsophisticated borrowers who got caught up in a web of deceit and greed on the part of banks, builders, and realtors who only cared about their own well-being.  Yet, at the same time there were people shopping for homes in markets they simply could not afford out of a materialistic drive which really wasn't he fault of the banks either.  Actually TTC did a good job summarizing that in his last post though it sometimes takes me five paragraphs to describe a 5 minute drive to Quik Trip and he can do it in a few somewhat legible sentences.  

[nathanm]

I do fully appreciate there were unsophisticated borrowers who got caught up in a web of deceit and greed on the part of banks, builders, and realtors who only cared about their own well-being.  Yet, at the same time there were people shopping for homes in markets they simply could not afford out of a materialistic drive which really wasn't he fault of the banks either.  Actually TTC did a good job summarizing that in his last post though it sometimes takes me five paragraphs to describe a 5 minute drive to Quik Trip and he can do it in a few somewhat legible sentences.  

GFEs are done by the bank/broker. At least 3 days prior to closing, they have to provide a HUD disclosure form setting the fees/etc in stone. What I was more complaining about was how it's difficult for even a savvy consumer to make a well informed decision when shopping for a loan because many banks put basically whatever they think you want to hear as far as attorney's fees and the like, while others purposefully lowball the fees and others attempt to accurately estimate.

There certainly were some people who knew exactly what they were getting themselves into, but the banks knew exactly what they were getting themselves into somewhere near 100% of the time. Most borrowers just go to the broker or loan officer and say "tell me what I qualify for." Sure, we know now how stupid that was on their part, but there was not that long ago a time when banks were reasonably conservative with their lending, making that a reasonable strategy for the borrower.

And the banks weren't just screwing unwitting homeowners, they were screwing unwitting investors. Of course, so were Fannie and Freddie with their above-everything-else tranches in the CDOs. Most of their losses had been paper losses requiring collateral deposits, last I saw. Lots of defaults, but not so many that that is what's blowing up their balance sheets. This is in stark opposition to the dog food funds and individual investors were getting. A lot of times the Freddie and Fannie tranches weren't even mentioned in the prospectus.

Then there's the seemingly willful failure to convey the notes correctly and it's a complete clustermug, most of which is directly at the feet of the large financial institutions. The really stupid part is how the banking half of the bank didn't talk to the trading half of the bank and so the banks ended up holding onto a bunch of toxic assets even though the originating side knew the stuff was nearly worthless.

Of course, their servicing arms are making out like bandits, fleecing the investors for even more by dragging their feet on loan mods so they can foreclose and thus collect more fees from the CDO owners, so that may be a wash.