When it comes to the Wall Street meltdown, just about every financial institution out there is a villain. Then there's Washington Mutual, who may have rewritten the definition of villain by their conduct in the subprime mortgage madness of the past decade.
The Senate Permanent Subcommittee on Investigations is beginning hearings today on Washington Mutual's lending practices to make a record on the behaviors that led to Wall Street's meltdown in 2008. Based on what I've read so far, it promises to be explosive.
Washington Mutual built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison into a river,” said Levin. “Using a toxic mix of high risk lending, lax controls, and destructive compensation policies, Washington Mutual flooded the market with shoddy loans and securities that went bad. Examining how Washington Mutual operated, and what its insiders were saying to each other, begins to open a window into the troubling mortgage lending and securitization practices that took our economy over a cliff.
Here are some of the revelations you can expect to hear:
- WaMu intentionally lured borrowers qualified for prime mortgages into subprime mortgages, then bundled those with the riskier loans to "spread the risk."
- Over half of the loans made were obtained with fraudulent information.
- The WaMu culture emphasized revenue and production over all else, including prudent lending practices, rewarding employees with trips to Hawaii and the Caribbean for high production.
- Loans were marketed and sold by mortgage brokers who were not employed by WaMu. After funding the loans, WaMu chose the ones most likely to default for packaging as securities to be sold on Wall Street.
- When Washington Mutual executives were made aware of the danger in 2006, their only concern was for how it would make them look, rather than the damage it could do to the financial structure of the country as a whole.
If Washington Mutual were unique, we could listen to these hearings, call for prosecution of those executives who should have been more prudent and banker-like in their dealings and move on. But it wasn't unique. Countrywide Mortgage engaged in similar practices, as did other large banks and lenders across the country, while the rug was pulled out from under the middle class.
I expect the subcommittee hearings to reveal a story of greed, power, privilege and unparalleled arrogance. Senator Levin is carefully making the case for sound financial reform with a consumer protection agency at the center of it.
Levin said the findings showed the need for a new consumer financial protection agency, which Obama has proposed as part of his regulatory overhaul, to stop lenders from preying on borrowers. "The bottom line is that WaMu had poor policies, poor controls, inadequate oversight of its loans [and] turned out toxic mortgages that sunk the bank, devastated homeowners and polluted the financial system like a poison," Levin said. "This was a Main Street bank that got taken in by these Wall Street profits."
Stay tuned. I know I will.
