The seizure of Washington Mutual and its delivery into the hands of JPMorgan Chase has always struck us an example of reckless regulatory overreach. So it was interesting to read today the testimony of WaMu's chief executive officer for 18 years, Kerry Killinger, on the bank's demise. The early press accounts of Mr. Killinger's testimony before the Financial Crisis Inquiry Commission are mostly full of derision. For an antitode, try reading his actual testimony. The key portions are here:
I believe Washington Mutual should not have been seized and sold for a bargain price. There is no question that the Company suffered from rising loan losses, but the Company was working its way through the crisis by reducing operating costs, raising over $10 billion of additional capital, and setting aside substantial loan loss reserves. The Company's Tier I capital ratio was a strong 8.44%at the end of the second quarter of 2008. The Company also had an outstanding retail banking franchise that not only provided substantial core profitability but also would have been of enormous value to a number of potential acquirers.
When I left the Bank in early September of 2008, its capital greatly exceeded regulatory requirements for a well-capitalized bank. Deposits were stable, sources of liquidity appeared adequate, and our primary regulator, the Office of Thrift Supervision ("OTS"), had not directed us to seek additional outside capital or find a merger partner.
It was with shock and great sadness that I read of the seizure and bargain sale of Washington Mutual on September 25, 2008. I recognize that policy makers and Regulators had no blueprint for dealing with the worldwide financial crisis that developed in the aftermath of the collapse of Lehman Brothers. But I believe that Washington Mutual's seizure was unnecessary, and the Company should have been given a chance to work its way through the crisis. I also believe it was unfair that Washington Mutual was not given the benefits extended to and actions taken on behalf of other financial services companies within days of the Company's seizure, such as the following:
· The FDIC's insurance limit increase to $250,000;
· The FDIC guarantee of bank debt;
· The Federal Reserve injection of liquidity and purchase of assets;
· The Treasury Department announcement of favorable treatment of tax losses;
and
· Injection of capital into all major banks through the Troubled Asset Relief
Program.
The unfair treatment of WashingtonMutual did not begin with its unnecessary seizure. In July 2008, Washington Mutual was excluded from the "do not short" list, which protected large Wall Street banks from abusive short selling. The Company was similarly excluded from hundreds of meetings and telephone calls between Wall Street executives and policy leaders that ultimately determined the winners and losers in this financial crisis. For those that were part of the inner circle and were "too clubby to fail," the benefits were obvious. For those outside of the club, the penalty was severe.
In my view, the actions taken by policymakers reflect a vision of a banking industry dominated by large Wall Street banks. Consumer-based banks like Washington Mutual were not included in this vision, and consequently were not extended the same protections. I believe this was a mistake. I fear that consumers will ultimately pay the price of this vision through less competition, higher fees, and lower interest rates on their deposits.
Because the majority of top executive compensation at Washington Mutual was tied to long-term performance, most executives, including myself, retained the majority of their stock and stock options. Because I fully believed in the Company and that it would work its way through the crisis, I maintained nearly all of my stock holdings and deferred diversifying my holdings. When Washington Mutual was seized and sold for a bargain price, the value of these holdings became worthless. I know how little consolation it must be, but I am deeply pained whenever I think about how many of our hard-working employees and other investors similarly lost the value of their Washington Mutual investments.
There hasn't been much press coverage that I have seen of what kind of return JPMorgan Chase got on its purchase of WaMu. It'd be interesting to find out.
