The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American Historyby Kirsten Grind
During the most dizzying days of the financial crisis, Washington Mutual, a bank with hundreds of billions of dollars in its coffers, suffered a crippling bank run. The story of its final, brutal collapse in the autumn of 2008, and its controversial sale to JPMorgan Chase, is an astonishing account of how one bank lost itself to greed and mismanagement, and how the
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During the most dizzying days of the financial crisis, Washington Mutual, a bank with hundreds of billions of dollars in its coffers, suffered a crippling bank run. The story of its final, brutal collapse in the autumn of 2008, and its controversial sale to JPMorgan Chase, is an astonishing account of how one bank lost itself to greed and mismanagement, and how the entire financial industry—and even the entire country— lost its way as well.
Kirsten Grind’s The Lost Bank is a magisterial and gripping account of these events, tracing the cultural shifts, the cockamamie financial engineering, and the hubris and avarice that made this incredible story possible. The men and women who become the central players in this tragedy— the regulators and the bankers, the home buyers and the lenders, the number crunchers and the shareholders—are heroes and villains, perpetrators and victims, often switching roles with one another as the drama unfolds.
As a reporter at the time for the Puget Sound Business Journal, Grind covered a story set far from the epicenters of finance and media. It happened largely in places such as the suburban homes of central California and the office buildings of Seattle, but Grind covered the story from the beginning, and the clarity and persistence of her reporting earned her many awards, including being named a finalist for the Pulitzer Prize and the Gerald Loeb Award. She takes readers into boardrooms and bedrooms, revealing the power struggles that pitted regulators at the Office of Thrift Supervision and the FDIC against one another and the predatory negotiations of investment bankers and lawyers who enriched themselves during the bank’s rise and then devoured the decimated bank in its final days.
Written as compellingly as the finest fiction, The Lost Bank makes it clear that the collapse of Washington Mutual was not just the largest bank failure in American history. It is a story of talismanic qualities, reflecting the incredible rise and the precipitous collapse of not only an institution but of trust, fortunes, and the marketplaces for risk across the world.
"An eye-opening book."—Booklist
"If indeed this book had been fiction, it would have been branded unrealistic, outlandish, and out of the realm of reality. It is, however, a factual account with endnotes, references, and detailed documentation of sources used. It is an incredible story... The book reads very much like a novel and holds the reader’s interest."—William J. Taylor, ABA Banking Journal
"A fantastic story... Every American should read about it..."—John Hockenberry, "The Takeaway"
"Almost a Barbarians-esque view..."—Andrew Ross Sorkin, "Squawk Box"
"Wall Street Journal reporter Kirsten Grind deftly restores the 'lost bank' to its rightful place in the annals of financial disasters... The clarity and humility of the writing is refreshing."—Tom Braithwaite, The Financial Times
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OUT OF TIME
Always an early riser, Steve Rotella arrived at WaMu just before 7:00 a.m. on September 25, 2008. The autumn morning was cool and dark. The president and chief operating officer of the country’s largest savings and loan bank was almost always among the first executives to show up each day.
Rotella lived with his wife, Esther, in a 7,200-square-foot house abutting a large cemetery in the upscale, trendy Seattle neighborhood of Capitol Hill. Each day Rotella climbed into his BMW and made the short trip downtown, easily navigating the now-familiar back roads to the office. He avoided Capitol Hill’s main street, where a Starbucks glowed among the closed facades of dozens of bars and boutiques, and young hipsters in skinny jeans lined up in front of a popular sidewalk coffee stand. Even at this time of the morning, there would likely be traffic in that direction, although not nearly the kind of traffic he was used to in New York. Instead, Rotella drove directly downhill, along a street crammed with parked cars, condominiums, and apartment buildings on either side. To the west, he could see the jagged peaks of the Olympic Mountains. As he paralleled the freeway, a large REI store loomed in front of him. When Rotella moved to the city three years earlier, he had promptly bought several thousand dollars’ worth of outdoor gear at REI. He had been hiking just once.1
He pulled his car into one of the executive parking spots underneath WaMu’s new skyscraper. The bank had built the multimillion-dollar office space two years earlier and shared part of it with the Seattle Art Museum. Rotella walked onto the executive floor and poured himself a cup of coffee. He usually avoided the giant Starbucks in the bank’s lobby, believing it was overpriced. Sometimes, however, his assistant offered to run out and fetch him a latte.
By this time, the team of WaMu employees tracking the bank’s deposits had already prepared the morning report. Because of the time difference, it reflected branch activity on the East Coast. Earlier in the week, the team had delivered a glimmer of good news. WaMu customers across the country had stopped pulling their money out of the bank at such a rapid pace. Daily deposit outflows now hovered around $500 million, down from a peak of $2.8 billion on one frantic day during the prior week. Rotella turned on his computer and scanned through the report for that day. He found more good news. People seemed to have calmed down and weren’t withdrawing their money on the basis of rumors and speculation. They had come to their senses and were bringing their money back. The East Coast branches had seen a net inflow of several hundred million dollars. The media helped the situation. Newspapers reported that Congress had spent the previous night hammering out details of an unprecedented $700 billion bailout of the financial system, which was likely to help all banks, including WaMu. President George W. Bush had delivered his first-ever address focused just on the economy, pleading with the nation to bless the decision. If the bailout wasn’t approved, Bush warned, Americans could be in for “a long and painful recession.” “Our entire economy is in danger,” he told the public.2
Even with the news that help could be coming, and even though customers’ money seemed to be returning to the bank, Rotella didn’t feel reassured. He felt uneasy. The halls of WaMu seemed far too quiet.
On the East Coast, the bank’s newly appointed chief executive, Alan Fishman, had been desperately trying to sell the company. Rotella could count on one hand the number of hours he had spent with the New York banker since the WaMu board had moved him in two and a half weeks ago, ousting Kerry Killinger, the bank’s longtime leader. Fishman was blunt, aggressive, and confident, the qualities that WaMu needed its chief executive to possess in the current situation. But what WaMu needed even more was Fishman’s turnaround skills and his industry ties. Fishman needed to find a buyer for WaMu—or at least more capital—immediately. One of WaMu’s government regulators, the Federal Deposit Insurance Corp., had just doled out an ultimatum that could potentially destroy the bank. If executives didn’t find more money, or a willing purchaser, WaMu would land on a list of troubled banks—a scarlet letter that, when word leaked out, would terrify already anxious customers. WaMu had quietly lost billions of dollars in deposits over the last two weeks because of fears about its financial health. The bank likely wouldn’t survive a “troubled” designation.
Fishman, along with several other executives and WaMu’s investment banking advisers from Goldman Sachs and Morgan Stanley, had spent most of that panicked time fielding late-night calls from potential buyers, meeting with the buyers, and not sleeping. The buyers, including JPMorgan Chase, Citigroup, and Banco Santander in Spain, had in turn deployed dozens of representatives to scour WaMu’s financial information in an online data room. Fishman, who regularly checked in with Rotella back in Seattle, reported heavy interest from the buyers. He soon expected to organize a deal.
But three days earlier, on Monday, the interested banks unexpectedly stopped calling, puzzling Rotella. On the East Coast, Fishman and his advisers couldn’t get any answers from their chief executives, either. Now, on Thursday, the silence continued. Fishman and two other WaMu executives planned to fly back to Seattle, arriving that night. There was no point in staying in New York. It seemed no one wanted to talk to them anymore.
The silence continued throughout the morning of September 25, long after Rotella had finished his coffee, and into the afternoon. The day had turned gray and cool. Occasionally, bits of sunlight poked through the clouds, briefly casting shadows across the city. In Seattle, local weathermen called this phenomenon a “sunbreak.”
Rotella, restless, sitting at his desk, called John Robinson, the bank’s head of regulatory relations. Robinson played the middleman between WaMu and the two government agencies that oversaw its operations, the Office of Thrift Supervision (OTS) and the FDIC. Robinson wasn’t in Seattle. By the luck of bad timing, he had flown to northern California the day before to attend meetings of the Federal Home Loan Bank of San Francisco, on whose board he sat. In the last week, the FHLB had been making a difficult situation even more difficult for WaMu. Scared about its own financial position, the FHLB was considering a much bigger haircut on the mortgages backing WaMu’s line of credit, although it hadn’t yet made a decision. WaMu relied on that credit to stay in business.
“John,” said Rotella when he reached Robinson on his cell phone, “we’re hearing rumors on the Street that JPMorgan is scheduling a press conference later today. Can you find out what’s going on?”
JPMorgan was one of the banks that had been sifting through WaMu’s data room, contemplating a possible purchase. But Fishman had reported that JPMorgan wasn’t going to make an offer.
Robinson, also puzzled by the silence from prospective buyers, agreed.
“I’ll try,” he said.
Robinson ducked out of a meeting and found an empty conference room inside the nondescript bank building, on the edge of San Francisco’s Chinatown. Once sequestered, he dialed the number of Darrel Dochow. Dochow, the regional director of the OTS’s West Region, had overseen WaMu for years. He lived in a sprawling suburb outside Seattle and kept an office at the bank’s headquarters. Always forthright, Dochow would surely tell Robinson if he knew something. Robinson called his office several times but couldn’t reach him. He wasn’t answering his cell phone, either.
Robinson proceeded up the chain of command, next calling Scott Polakoff, the deputy director of the OTS and Dochow’s boss, in Washington, D.C. It was approaching 7:00 p.m. on the East Coast. Polakoff also didn’t answer. Robinson left a message imploring the regulator to call him back. He returned to his meeting.
Not long after, Robinson felt his cell phone ring in his pocket. He picked it up and saw that the caller was Polakoff. He ducked back into the conference room.
“Scott?” he answered, after he had closed the door. “What’s going on? I’ve been trying to reach Darrel, and Darrel hasn’t gotten back to me. We’re hearing rumors about a press conference this afternoon.”
Then he said, his voice strained, “I have some bad news for you.”
“We are coming in to close you this afternoon.”
Numbness gripped Robinson, but he continued to speak calmly.
“How much time do we have?”
“They’ll come at six.”
• • •
The Bloomberg machine on the credenza behind Rotella’s desk hummed as Rotella waited for Robinson’s call. WaMu’s stock had closed that day at the dismally low price of $1.69 a share. But new reports from the afternoon showed relative improvement, and it looked as though WaMu would lose $600 million in deposits that day from the bank run. That was still a lot of money, but far less than on some of the days of the previous two weeks, and less than 1 percent of the bank’s total retail deposits of $126 billion. The hemorrhaging of deposits appeared to have slowed. WaMu was still in a precarious financial position, but it no longer seemed so dire. The bank could survive.
Rotella’s phone rang. He picked it up. It was Robinson.
“Steve,” Robinson told him. “It’s over. They’re coming in to close us this afternoon.”
The news stunned Rotella. “Is there anything we can do to put it off?” he asked.
“No,” Robinson replied. “There’s not any time left.”
• • •
Just before 5:00 p.m. Pacific Time, Ada Osorio turned on the television in the family room of her house in Thousand Oaks, California, to catch the evening news. She was only half listening from the adjoining kitchen, focusing instead on making chicken casserole for dinner. Ada favored simple meals that didn’t take too long to put together.
The casserole had only just begun to bake, the smell filling the three-bedroom property, when Ada heard a newscaster say something about “WaMu.” Now the TV had Ada’s full attention. WaMu had become so popular in the midsize city of Thousand Oaks—five branches had opened in as many years—that the Osorios had decided to invest. In the spring of 2007, when WaMu was trading at around $40 a share, they bought $100,000 of the bank’s stock. Over the next several months, as the price of WaMu’s shares dropped, the Osorios added another $100,000 to their investment. The money represented nearly all of the couple’s savings since they had emigrated decades earlier, Ada from Costa Rica, Luis from Peru. They planned their budget, including expensive medication to treat Luis’s heart condition, around their WaMu investment and its dividends. At their recommendation, the couple’s two children also invested, although they didn’t buy as much stock as their parents.
Over the preceding weeks, Ada and Luis, himself a former banker, had followed the news about WaMu. Much of the time it was hard to piece together what was going on. It seemed like a lot of bad news—the stock price kept falling, and now the company was up for sale?—but the Osorios continued to have faith. WaMu had survived both the Savings and Loan Crisis and the Great Depression, after all. Less than six months earlier, the bank had landed $7.2 billion in private equity from TPG, a group of seasoned investors. WaMu would pull through.
Ada stood in front of the TV, pictures of her family hanging on the walls. On CNBC, anchor David Faber, speaking with urgency, updated an earlier story: “JPMorgan is going to be buying more than just the deposit base of Washington Mutual. In fact, it is also going to be taking the assets on the bank’s balance sheet as well, according to people close to the government side of this arrangement. Essentially, the OTS, the Office of Thrift Supervision, will be seizing Washington Mutual, delivering it to the FDIC, which is immediately going to deliver the deposits and assets and branches of the bank to JPMorgan Chase. JPMorgan is going to pay, I’m told, what may be more than $1 billion for the entire institution.”3
As the report flashed to a yellow screen with the ominous question, “Wall Street Crisis: Is Your Money Safe?” Ada felt somewhat relieved. She wasn’t quite clear about the government’s role, but it seemed that the new CEO had found a buyer for WaMu. The purchase price, if she had heard correctly, must be wrong. She didn’t believe it was possible for someone to pay just $1 billion for a bank with $307 billion in assets.
The anchor continued, speaking over a graph showing JPMorgan’s share price of $43.75, up 8 percent. “But they’re not buying any of the stock. The equity holders are wiped out. The subordinated debt holders, the debt holders—wiped out.”
In that moment, Ada knew, although she hoped she would later be proven wrong, that this was the worst news about her investment that she could have received.
What People are saying about this
"An eye-opening book."—Booklist
Meet the Author
Kirsten Grind has received more than a dozen national awards for her work, including a Pulitzer Prize finalist citation. A reporter for The Wall Street Journal, she lives in New York City.
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We received a brand new copy of the book the same week we placed the order without using expedited shipping. The book was cheaper than any new or used copy I could fine on-line. I definitely plan to use B&N again.
As a shareholder, I never had a secure feeling concerning Washington Mutual. Too many friends owned the stock too and few understood how their earnings could be so huge, given most of their business was creating mortgages. Then came the option ARM and I elected to sell my interest. This is a thoroughly interesting saga of a good business turned bad. Kirsten Grind presents a first rate accounting of WaMu's demise. I finished it, totally entertained, but shaking my head. Great book!
An interesting, well-written book, but it reads like an extended collection of the authors WSJ coverage on the same topic... a lot of who what where and when, very little why or what does it all mean. In short, there was a little S&L called Washington Mutual, they grew to monster size writing a lot of bad mortgages to people who really couldn't afford them, their greediness finally caught up with them and the bank collasped. The end. There's not much more to it than that.