Why WaMu failed

You can make these things complicated, or you can make them simple. I'll make this one simple. Washington Mutual failed not because of a credit squeeze or a crisis of confidence or because it participated in esoteric investment vehicles.

It failed because it made thousands -- tens of thousands, maybe hundreds of thousands -- of really stupid decisions. The weight of those boneheaded moves sunk the bank.

Let me highlight one, courtesy of Bubble Info, a San Diego real estate blog I like. The blog shows a small, poorly maintained house marked with graffiti inside and out. A couch sits on the front patio. From Bubble Info:

WaMu refinanced this 1,500sf house in City Heights just over a year ago -- when it was obvious that the market was in trouble, and the smarter banks should have been reeling in their lending practices.

The owner paid $83,000 when he bought it from Home Savings in 1995.

WaMu loaned him $449,000 in June 2007.

It's now being offered as a short sale -- for $140,000!

Two cents: The loan was made in June 2007, after the subprime collapse. Sorry folks, but this is a form of corporate suicide.

--Peter Viles

Hat tip: Calculated Risk originally highlighted this story.

Your thoughts? Comments? E-mail story tips to Peter Viles or follow L.A. Land on Twitter.

Photo credits: Los Angeles Times (above), Bubble Info (below).

Comments

[356man]

Criminal suicide, not just corporate. And they want us to bail people like this out? Ummm.... no.

[Rational Renter]

Hear, hear. The more that the reckless practices of these institutions come to light, the less generous we all feel toward bailing them out.

[Todd in WeHo]

As my write-in candidate for president, Forest Gump, says, "stupid is as stupid does."

[TakeFive]

Trivia question: What do you remember from WaMu TV ads?

Answer: Free checking and other services.

WaMu courted the small account customers. Most banks have some nominal minimum balance for this perk. Not WaMu.

Why does this matter? Fixed transaction costs and account maintenance probably made many of these accounts money losers.

But Social Justice lending policies (and greed, let's not forget the greed) are mostly to blame WaMu's undoing.

Further irony - here's WaMu's final press release:

"WaMu Recognized as Top Diverse Employer—Again"

"Company ranks in top ten of Hispanic Business’ Diversity Elite and earns perfect score on the Human Rights Campaign’s Corporate Equality Index"

http://newsroom.wamu.com/phoenix.zhtml?c=189529&p=irol-newsArticle&ID=1201788&highlight=

[RM]

STUPID BANK...CROOKED BORROWERS...VULTURES ON WALL STREET!

Without a doubt there are a lot of people with legitimate reasons for not being able to fulfill their obligations with a loan, but there are also a lot of people who gamed the system. Personally I have difficult time making out the difference between robbing the bank with a gun or some kind of con. There are however a lot of vultures on wall street looking to make a killing. Not every bank had bad loans. Thornburg Mortgage actually had a very good loan portfolio, yet its lenders backed them against the wall and practically took them out.

[OverIt]

Multiply "100's of 1000's" of bad decisions over time (say the better part of a decade) and you have a problem even 700 billion can't fix.

[MyLessThanPrimeBeef]

Wamu failed because it failed to imagine, like the rest of us.

We failed to imagine that subprime loans would lead to Paulson down on one knee begging Pelosi.

And we are failing to imagine that the $700 billion+ bailout might lead to the US Treasury losing its' AAA rating. If that were to happen, we are not only going to lose the financial industry, but our currency as well.

So the choice might be

1) lose your job

or

2) lose your job plus your country.

What would you do? It's like playing chess, we need to think 3 moves ahead.

[Mucker]

RM

Let me see if I can spell it out for you. Robbing with a gun carries with it the threat of loss of life. Life cannot be replaced or recaptured. Robbery with a con is based on loss of property. Property can be recovered or rebuilt. It's a huge difference. You'll recognize it immediately when someone comes up and points a gun in your face.

[E]

Bubble Markets Inventory Tracker profiled a 666 sf 1BR house in some one horse border town where WAMU lent close to 500K in December 07.

Am I the only one who thinks this was all a setup to screw EVERYBODY?

[Mary C.]

Has anyone done a story on AVM appraisals and their role in creating the real estate bubble? Because my gut feeling tells me that the practice of using AVM's has a heck of a lot to do with the run-up of appraisals and prices on marginal properties in marginal neighborhoods. I think some lenders were not even sending out live appraisers to many of these properties. And the AVM's are heavily flawed, as seen in many cases. Real estate valuation functioned more smoothly when values were set by live appraisers and real estate agents who knew their communities, neighborhood by neighborhood, block by block, instead of pulling database comps from the "other side of the tracks" (I see that even now on AVM sites). I think it has to be a part of the puzzle. I have a feeling WAMU loaned heavily on the basis of AVM's, or loans like this one would not have gone through, or at least not at that price.

[Laker]

Guys,
Assuming this shack will sell for $140,000. Who do you think will refill the cash coffers of WAMU ohhh, sorry JP Morgan Chase, with the missing $310,000....on this one stinking house?

Correct, your $700,000 billion dollars. This money is needed to replenish the missing money. Once we make the banks whole again, they will resume their bonuses payments such that CEO could afford a little more. I think it is a sham that CEO of a $300 billion dollar asset bank is/was making $140 an hour....
o
oh wait, he was making $140,000 an hour...Now i feel better.
So where do I sign (the $700 Billion) check? Do we need to bend over? One knee is enough - Paulson?

[Dave]

"made... really stupid decisions."

I'd say horribly, disgustingly GREEDY decisions. Those clowns, like my 24 year old neighbor (mortgage broker in Santa Monica) driving around in a PAID FOR IN CASH Mercedes....

They close on the toxic loans, take a cut, and then re-package and sell this slime to some other sucker. And they're all laughing as they light their cigars with $100 bills.

Don't bail these criminals out. If you bought a home in the last 5 years in SoCal, and you see some kid tooling around in a BMW M3 or a Mercedes, just ask yourself, did that kid make money off of me?

[igor]

Banks CEOs and the Top Management are not there for a long haul. They were just trying to make a buck while they could, writing zillions of loans (charging points, origination fees, etc) and getting great bonuses for good, albeit temporary, performance. They did not have to think about passing-on a healthy business to their heirs. All they had to think about was their quarterly and yearly bonuses. Therefore $449,000 loan for a $200,000 property, and after that who cares. Ther are no consequences for future or even current poor performance of their bank or financial institution. Quite contrary, they even get bonuses on departure due to poor performance.
This, I believe, is the root cause of current financial problems and generally the root cause of failing performance of many corporations. They are owned by faceles, nameless shareholders and that is almost socialism or communism (communal ownership).
There should be a way to recover the wealth acumulated by CEOs and top managers in cituations like the current one. Than there won't be incentives to commit a fraud.

[TWillie]

In many ways WaMu is the worst offender in this thing

[sfvrealestate]

iGor and Dave are right. Retail banks and lenders were able to do loans like this because they didn't necessarily keep the loans -- they just turned around and sold them on the secondary market.

My Less Than Prime Beef, there was no failure of imagination. Everybody I know in the real estate business predicted/worried that many people would not be able to afford their mortgage payments. But who were we to argue with the heads of the mightly lending industry? Or buyers that wanted these loans and believed there'd be a way to work it out?

And Peter, I agree, but here's a hair-splitting point: the crunch really hit the retail end of the business in August of 2007, not June.

[Wes Boudville]

Laker,

Suppose, as you suggested, that someone buys the house for $140 000. The missing $310 000, that WaMu paid to the owner last year, is already reflected inside the $31 billion writeoff that JPMorgan immediately took on Friday, when they bought WaMu. The hit was taken, and no taxpayer's money was spent on it.

If the Treasury gets go ahead on that $700 billion package, no fraction of that would be spent on this property.

[Blue]

Let's not be so quick to blame WaMu. Yes, WaMu made lots of stupid business decisions, but it didn't singlehandedly bundle all those bad decisions into mortgage backed securities. WaMu failed because of issues with the MBS security market, not the underlying mortgage market.

I'm especially bothered by the not so subtle racism in attempts to tie WaMu's business with low income (often minority) borrowers to its failures.

The money WaMu lost on this house is nothing compared to the money it lost paying a CEO for 17 days' worth of work.

[Laker]

Wes Boudville ,
You are assuming that starting from Monday, all houses with mortgages are automatically worth at least the amount of the loan and nobody is upside down no more...
You do understand that this is a joke. Look at the graph from CR that Peter posted on today's blog page. Since we are about half way down, the 31 billion write off from JPM is nothing. The WAMU portfolio included about $50 Billion of Option ARMS and 20 billion of subprime. Somebody will need to replenish this.
What about all the 2nd mortgages and HELOCS? Most of them worth 0 on the dollar but on the books it shows as full value....

Blue,
You are correct. The amount that was lost on that house equal 2 hours of pay for Fishman.....

[David Johnston]

$80K versus $449K. Maybe the second price included the couch.

[turkey sub]

FYI brittany spears wrote the national anthem

[Lisette]

WAMU’s merchant account scam has been holding my two companies hostage and depriving me of the right to earn a living for almost a year now. My case against them is pending with the courts and because of this non-sense my landlord took me to court to because I owe him money that he no longer wants to wait for. This is the last straw so I am not worried about it because God is in control of the situation. What was meant to harm me will ultimately turn out to be a blessing. The Landlord hired a pit-bull lawyer to make the case and put me on the street....but little do they know that they put me on speed-dial to something bigger and much better. I am ready to move out of Death Valley by the Grace of God.