FDIC suit against WaMu executives may be a step toward justice
The financial collapse that caused the Great Recession was not an act of God. Nor was it the result of poor deadbeats buying houses. It was caused by the dodgy financial "innovations" and outright swindles cooked up on Wall Street and in the banking sector — with Washington Mutual as the horrid poster child.
Special to The Seattle Times
Most Americans have been asking for more than two years the question that Rolling Stone's incendiary journalist Matt Taibbi put simply: "Why isn't Wall Street in jail?"
After all, the financial collapse that caused the Great Recession was not an act of God. Nor was it the result of poor deadbeats buying houses. It was caused by the dodgy financial "innovations" and outright swindles cooked up on Wall Street and in the banking sector — with Washington Mutual as the horrid poster child.
If a poor 17-year-old had robbed $10 from a liquor store, he would soon be in the clutches of Sheriff Sue, on his way to a state pen, which is very good at rehabilitating soft criminals into hard ones. But the well-heeled authors of the worst economic collapse since the Great Depression have just been enjoying their millions.
Can we finally expect some justice?
We will get a sense from the lawsuit filed by the Federal Deposit Insurance Corp. against former WaMu CEO Kerry Killinger, as well as Stephen Rotella, former chief operating officer; David Schneider, former president of WaMu's Home Loans division; Killinger's wife, Linda; and Rotella's wife, Esther.
It seeks to recover $900 million, alleging among other things that the executives "led WaMu on this lending spree knowing that the real-estate market was in a "bubble that could not support such a risky strategy over the long term."
This is the team that destroyed a venerable Seattle institution, turning it into the nation's largest banking failure. That caused the loss of an irreplaceable major headquarters, thousands of jobs and Seattle's place as a major banking center. It wiped out shareholders and cost taxpayers hundreds of millions of dollars.
Yet Killinger can't be divorced from the larger arena in which he chose to gamble with Washington Mutual. The repeal of the Glass-Steagall Act and wider banking deregulation coincided with Killinger's ascendancy to the corner office.
Once this had been a dull business, taking deposits and lending the money out for mortgages. After deregulation, and helped by the easy credit of Alan Greenspan's Federal Reserve, Wall Street was free to set us up for the big fall.
Among the risky games was bundling mortgages into highly complex securities, slicing and dicing them and selling them to investors.
"Housing prices will never fall," the smartest people in the room said. And through much of the decade that was true, as America went on a historic debt spree.
It was highly profitable for the big banks on Wall Street, which showed a voracious appetite for mortgages. For Washington Mutual and other institutions, generating high volumes of loans was a gold mine, however they did it.
Behind all this, regulators were captured by the industry and looked the other way as risk mounted. Most leading economists told reassuring stories that the good times would never end, that the old business cycle was over. In fact, it was a classic bubble. When the roof fell in, the damage had global dimensions far beyond subprime mortgages.
Many are to blame, from lawmakers and regulators to average homeowners who used liar loans to buy houses they could not afford. But at the top of the food chain are the executives and board members of places such as Washington Mutual.
To be sure, WaMu in the end was caught in a liquidity trap, facing fire-sale losses from a falling market and edgy depositors wanting their money immediately, while their genuine assets were valuable only in the long term, just as it has always been in banking.
We may yet learn that some shady short-selling helped escalate what became a bank run. And the FDIC itself may have been too quick to sell WaMu instead of trying to preserve it as a free-standing institution.
But ultimately Killinger put WaMu in this perilous situation — and made quite a good living doing so. He is innocent until proven guilty, but there are really only two explanations for these executives: Guilty or stupid. Greedy is a given.
White-collar lawsuits, much less criminal cases, are very hard to win, a major shortcoming in our justice system. And more than two years after the Great Panic that brought WaMu down, the banking system is back to its old ways. Another collapse is inevitable. Bankers know Uncle Sam will save them from risky business.
And nobody has gone to jail, save the tangential fraudster Bernie Madoff.
You may reach Jon Talton at firstname.lastname@example.org
About Jon Talton
Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
Sam and Sara Lucchese create handmade pasta out of their kitchen-garage adjacent to their Ballard home. Here, they illustrate the final steps in making pappardelle pasta.