WaMu conspiracy theories abound, but there's no smoking gun

Since the moment Washington Mutual became the nation's largest bank failure, blindsided executives and devastated investors have spun conspiracy theories about what did it in.

The obvious answer is the implosion of a runaway mortgage market in which WaMu had been a dominant player. Bad loans caused its profits and stock price to crater, and regulators say an accelerating outflow of deposits led them to close the bank Sept. 25.

Yet Oliver Stone-style sleuths are digging for something darker, like regulatory missteps or the federal government sacrificing WaMu to pressure Congress to approve a multibillion-dollar bailout for the financial industry.

Entire Web sites and e-mail campaigns are devoted to uncovering the perceived injustices. Most allege collusion between the government and JPMorgan Chase, and many are linked at www.wamu-shareholders-resources.com.

"A decent, well-funded (and the country's largest) U.S. savings bank that had served the American people for over 100 years was suddenly killed by the [regulators'] premeditated conspiracy," declares one well-circulated letter.

Even less-paranoid shareholders wonder how much inside information JPMorgan had about WaMu's condition. The New York bank wanted to buy WaMu for years and offered roughly $8 billion for it last spring. Yet, it did not make a viable offer when the Seattle thrift sought a buyer in the weeks before its failure. Instead, JPMorgan waited and paid $1.9 billion to regulators when they took over WaMu.

Some former WaMu executives wonder why regulators closed the thrift when deposits dropped to $129 billion in September after not taking action in July, when a run on the bank sank deposits almost to the same level.

Here are some of the theories inciting speculation about WaMu's demise, and a verdict on each:

Allegation: The federal government wanted WaMu to fail.

Motive: It needed a big-bank casualty to persuade Congress to pass a $700 billion bailout package, or it wanted to give JPMorgan Chase a thank-you gift for rescuing investment bank Bear Stearns.

Evidence for: WaMu failed after depositors withdrew $16.7 billion in 10 days. Still, its deposits were at $129 billion after that run on the bank — only $6 billion lower than they had been in late July after depositors withdrew $53 billion in one month, according to the Office of Thrift Supervision (OTS).

Federal attempts to rescue troubled banks did not come in time for WaMu. Those efforts included an Internal Revenue Service rule change a few days after it failed, which would have made WaMu a more attractive acquisition target. And two weeks after WaMu failed, the Federal Deposit Insurance Corp. raised the ceiling for deposit insurance from $100,000 to $250,000. Many of the deposits WaMu lost in mid-September came from accounts exceeding the earlier $100,000 limit.

Evidence against: A bank failure is an embarrassment to regulators, whose job is to keep banks afloat. "It's like losing any kind of battle on your watch," said Bert Ely, a bank consultant in Alexandria, Va.

OTS officials say WaMu was in worse condition in September than July. The pace of the deposit run was accelerating, they said, and general economic conditions were deteriorating.

The FDIC could not raise the deposit-insurance limit without an act of Congress, which only came with the $700 billion bailout package early last month. Regarding the timing of the IRS rule change, Treasury Department spokesman Andrew DeSouza said, "We'd been working on it for many weeks, and that [Sept. 30] was the first day we could get it out."

Blaming the seizure of the bank on a drop in deposits is "a canard," said Lawrence J. White, professor of economics at New York University's Stern School of Business and a former savings and loan regulator. Nonetheless, because of WaMu's bad loans, it had to fail: "The place really was insolvent. It really had no capital."

Verdict: Very doubtful.

Allegation: The FDIC let potential buyers know WaMu might be seized, torpedoing the thrift's efforts to sell at a decent price.

Motive: Either the FDIC panicked, or it was working for JPMorgan Chase's benefit.

Evidence for: The FDIC did talk to possible buyers, including JPMorgan; that's how it had a buyer lined up Sept. 25, the day regulators closed the Seattle thrift. Some D.C. insiders say the FDIC sought potential buyers earlier than it usually does for a bank failure.

Evidence against: Once a bank is "scheduled to fail" by regulators, said spokesman David Barr, the FDIC begins looking for buyers.

Its policy is not to tell management because it wants them to continue running the bank effectively and does not want them to panic depositors. Very often, banks scheduled to fail do not actually fail, Barr said.

It made sense for the FDIC to scope out potential buyers early, given the difficult economic climate, said Gary Gorton, a professor of finance specializing in banking at the Yale School of Management.

"This is a period when many firms are hoarding cash, and where the deal the government might have to do to have an orderly exit might be rather involved," Gorton said.

Verdict: The FDIC probably hurt WaMu's efforts to sell itself, but the regulator seems to have had solid reasons for talking to potential buyers.

Allegation: The FDIC bullied WaMu's primary regulator, the OTS, into closing WaMu.

Motive: Either the FDIC panicked, or it wanted WaMu to fail (see above).

Evidence for: The OTS wanted to give WaMu until its next quarterly earnings report late last month to right itself or find a buyer, according to people familiar with the situation.

By the time it failed, WaMu's deposits had fallen sharply, but they were not much lower than they had been in July when depositors panicked after the failure of another thrift, IndyMac Bank, in California.

As often happens in bank failures, the FDIC was more anxious than the primary regulator about the bank's situation and moved ahead with trying to find a buyer.

Evidence against: The OTS says it made the final decision because it was WaMu's primary regulator.

Competition between regulators can be healthy, Gorton said. He also disagreed that the FDIC panicked. "They were arranging for an orderly transfer of ownership of assets. After the fact, we might second-guess their decisions."

Verdict: Unclear.

Allegation: JPMorgan undermined WaMu after trying to buy the thrift last spring, by talking about its wounded condition.

Motive: JPMorgan felt spurned and wanted to buy WaMu cheap.

Evidence for: A widespread rumor in Seattle and Washington, D.C., is that JPMorgan executives talked to regulators, rating agencies and others about WaMu's deteriorating condition. But there is no smoking gun.

Evidence against: Regulators already had access to WaMu's books. Rating agencies also have a lot of data, and their downgrades appear to have been based largely on WaMu's declining stock price.

"If they're doing something which is legal — a firm is on the ropes and they're just trying to get a better price — so what?" Gorton said. "Is the complaint that 'we were weak and somebody took advantage of us'? Welcome to capitalism."

Verdict: Trash talk didn't kill WaMu.

Allegation: The government did not protect WaMu from naked short selling last summer.

Motive: To push the thrift toward failure (see above).

Evidence for: Short selling seriously damaged WaMu's stock. That contributed to rating agencies downgrading WaMu's debt, which in turn prompted some depositors to flee.

When WaMu CEO Kerry Killinger asked Treasury Secretary Henry Paulson to use his influence to put WaMu on a list of protected stocks in July, Paulson told him, "You should have sold to JPMorgan Chase in the spring, and you should do so now. Things could get a lot more difficult for you," according to one of several current and former high-ranking WaMu executives who confirmed details of the call.

Evidence against: The Securities and Exchange Commission initially protected only Fannie Mae and Freddie Mac, which were government-sponsored enterprises, plus 17 banks and securities brokers that trade Treasury securities directly with the Federal Reserve.

One of those was Lehman Brothers, which subsequently failed — suggesting the protection was hardly bulletproof. WaMu didn't trade directly with the Fed.

Several days before it failed, WaMu was included on a larger SEC list banning the short selling of 799 financial-institution stocks.

Verdict: The SEC protection appears haphazard, but didn't specifically target WaMu.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com