Bank Crisis

Do we need another book about bank failures? In the case of Seattle-based, Washington Mutual, I think so. After all, it represents the largest bank failure in U.S. history.

A new book has just been published about WaMu: The Lost Bank, by Kirsten Grind. Ms. Grind is a reporter for The Wall Street Journal and a former writer for the Washington State’s Puget Sound Business Journal. Having reported about WaMu for years, she brings a trove of knowledge and context to a story that goes well beyond the proceedings from Capitol Hill hearings.

In fact, one of the major reasons to read this book is the peek behind the curtain it provides … so that we can begin to understand “why” things happened, not just “what” happened.

Washington Mutual represents an ugly off-note in the oh-so-harmonious corporate world of Seattle — home to vaunted progressive organizations such as Starbucks, Boeing and Microsoft. And for decades, the financial institution was just another regional banking entity, making safe loans and turning in a decent financial performance at the end of each year.

What happened?

The trajectory of WaMu’s brief, dramatic ascent into the stratosphere – and subsequent disastrous plunge – was set when the institution, no longer the closely held institution it had once been, gambled on growth by acquiring Long Beach Mortgage in 1999. Unlike WaMu, LBM was a leading participant in the sub-prime mortgage lending market, with a national presence.

Ms. Grind notes that some of the impetus for acquiring Long Beach Mortgage came from a desire to be in accord with Congressional aims to expand home mortgage lending to people who had traditionally not been able to participate in the housing market due to low incomes, poor credit, or a lack of credit history.

Herein begins yet another example of the old adage: “The road to hell is paved with good intentions.”

And in fact, it wasn’t long before WaMu started expanding its loan offerings to include adjustable rate mortgages and other “innovations” designed to increase loans and commensurate deposits.

It was all too easy. Then the greed set in. As long as home values continued to climb, WaMu found it could continue to originate mortgage loans, collect fees, sell the loans, and continue to grow its lending business, deposits and earnings.

The bank set aggressive goals to become one of the nation’s top two or three mortgage lenders, even as it came to possess a 2,000+ branch network.

But by 2007, barely eight years after the run-up began, the bank’s own officers began to realize major problems with the sub-prime division, leading to its collapse barely a years later and the fire-sale takeover of its assets by J.P. Morgan.

The legacy of WaMu’s bad lending practices has been bedeviling J.P. Morgan ever since. After initially marking down WaMu’s portfolio of mortgage loans by some $31 billion, J.P. Morgan has had to set aside an additional ~$6 billion because of further deterioration of the portfolio. The fallout from WaMu’s collapse will continue to reverberate in the coming years.

The Lost Bank is a good read even for people who aren’t well-versed in the financial side of business. Unlike other books I’ve encountered on banking topics that seem to be “long on tedium,” this one definitely keeps your interest from first page to last.

I find this book on par with two others that brought their corporate subjects to light in a similarly real way – and also well-worth reading: