Hubris in Seattle
All financial institutions – not just those deemed too big to fail – need strong regulatory oversight. That is one lesson of Kirsten Grind’s new book about the demise of Washington Mutual, “The Lost Bank.” Grind, who covered the bank for Seattle’s Puget Sound Business Journal before moving to the Wall Street Journal, offers decent coverage of the bank’s demise in September 2008. But her incredibly well-researched account of how the bank got there is more captivating.
The story begins in 1981 when lawyer Lou Popper, one of the firm’s directors, reluctantly agreed to run the Savings and Loan after it almost imploded. Over the next nine years he rebuilt WaMu’s reputation and restored employees’ pride – largely by being a principled, hands-on chief who mucked in with the workers and stuck to the basics of banking.
His hand-picked successor, Kerry Killinger, seemed just the man to keep WaMu on the straight and narrow. He lacked his patron’s people skills, but was studied and cautious, avoiding ostentatious clothes, cars and houses. He balked at any unnecessary expenses. from lavish lunches on the company dime to corporate jets. A favorite saying was “check your ego at the door.”
But Killinger quickly decided to impose his own stamp on the company by going on an acquisition spree. There was good strategic logic. In the fragmented U.S. banking sector, well-managed mergers could cut costs, improve margins and offer more services to clients. But getting bigger can make executives cocky. Craig Tall, who ran the M&A effort, started seeing all deals, big or small, as essentially the same aside from the number of zeroes on the check. At one point he even started to decide how much to offer by pulling a number out of a hat.
By the end of the millennium, Killinger had taken WaMu’s assets up to $150 billion – a 21-fold increase in nine years – and was hungry for more. He moved the headquarters into a plush new skyscraper, started using a corporate jet – though would rarely allow other executives to – and started wearing snappier clothes. He became best buddies with Lehman Brothers’ Dick Fuld and began hanging out at high-profile events like Davos.
Management suffered. Killinger loathed conflict and hated making difficult decisions, but spent less and less time in the office and refused to appoint a president or chief operating officer. Despite a well-deserved reputation for integrating acquired retail banks, WaMu continually put off consolidating as many as 12 mortgage platforms. By 2008, the bank often couldn’t even measure, for example, borrowers’ loan-to-value, or how many home loans customers might have. The attitude toward risk control is best expressed by a risk manager’s instruction to her staff: stop acting like a “regulatory burden” and instead become a “customer service” to support the bank’s growth.
Killinger’s ambition was to make WaMu the nation’s largest mortgage lender. That led him to stick with a five-year plan to increase higher-risk lending well into 2007, despite a 2003 internal probe which showed that only a quarter of WaMu’s subprime loans were any good, and despite multiple statements from 2004 onwards, including his own, that mortgage markets could be in a bubble.
The board of directors didn’t restrain Killinger’s ego. He had them eating out of his hand and for most of his tenure only one of them had any banking experience. The board only managed to fire him a few weeks before the FDIC moved in. At times during his 18 years running the firm, said a colleague, he looked “like a sweet old lady who owns a giant Rottweiler.” Little wonder that in the end he couldn’t keep the dog under control.
Grind’s narrative could be a tad clearer on the timeline and she tends to overdo some of the anecdotes. But it’s a compelling read that should serve as a cautionary tale for bankers, shareholders and regulators alike of how ego, mismanagement, groupthink and greed can undermine even the healthiest franchise.