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A federal investigation into Wall Street and the economic crisis has honed in on Washington Mutual, making the bank that was absorbed by New York's ""JPMorgan Chase"":http://www.jpmorganchase.com in 2008 the poster child for what went wrong with the nation's financial system.
[IMAGE]After two days of hearings this week, the ""Senate Permanent Subcommittee on Investigations"":http://levin.senate.gov/senate/investigations/index.html has concluded that federal banking regulators failed to step in and curtail ""shoddy lending practices"" and ignored excessive risk-taking at what was once the sixth largest U.S. bank.
A $300 billion thrift, Washington Mutual became the largest bank failure in U.S. history, and according to the Senate panel, played a major role in proliferating the bad loans and shady financial practices that sent the economy into its tailspin.
""The bank originated and sold hundreds of billions of dollars in high risk loans to Wall Street in return for big fees, polluting the financial system with toxic, and sometimes fraudulent, mortgages,"" according to Sen. Carl Levin (D-Michigan), chairman of the subcommittee.
The findings released by Levin and his colleagues say that WaMu used shoddy lending practices riddled with credit, compliance, and operational deficiencies to make tens of thousands of high risk home loans, and as a business practice, knowingly steered borrowers into mortgages they could not afford, enticing them with low initial payments that in time ""shot up.""
[COLUMN_BREAK]The bank securitized over $77 billion in subprime mortgages and billions more in other high-risk home loans. At times, WaMu selected and securitized loans that it had identified as likely to go delinquent, without disclosing its analysis to investors, the panel said. The bank also securitized loans tainted by fraudulent information, without notifying purchasers of the fraud that was discovered, according to the panel's report.
The senators determined that WaMu's compensation system rewarded loan officers for originating large volumes of high risk loans, and paid bonuses to loan officers who overcharged borrowers or added stiff prepayment penalties.
In the midst of all this financial jeopardy, regulators looked the other way and obstructed each other from taking any real action.
The Senate subcommittee said, from 2003 to 2008, the Office of Thrift Supervision (OTS) repeatedly identified significant problems with Washington Mutual's lending practices, risk management, and asset quality, but failed to force adequate corrective action to stop the bank's origination and sale of loans with fraudulent borrower information, appraisal problems, errors, and ""notoriously high rates of delinquency and loss.""
The panel said OTS went so far as to impede the FDIC's oversight of Washington Mutual by blocking the agency's access to bank data and refusing to allow it to participate in bank examinations.
The FDIC, the backup regulator of Washington Mutual, was unable to conduct the analysis it wanted to evaluate the risk posed by the bank and did not succeed in its fight against the OTS to gain access, senators said.
""Federal bank regulators undermined efforts to end unsafe and unsound mortgage practices at U.S. banks,"" the panel said in its report. Both ""OTS and FDIC allowed Washington Mutual to reduce its own risk by selling hundreds of billions of dollars of high risk mortgage backed securities that polluted the financial system, undermined investor confidence in the secondary mortgage market, and contributed to massive credit rating downgrades, investor losses, disrupted markets, and the U.S. financial crisis.""
