By Beverly M. Burden
I don’t know what attracted me to The Lost Bank: The Story of Washington Mutual – The Biggest Bank Failure in American History, by Kirsten Grind (Simon & Schuster 2012), but I found it a compelling read that often felt more like the suspense novels I prefer.
Lost Bank starts at the end, with a prologue describing how the executives at WaMu learned on September 25, 2008 (the bank’s 119th anniversary), that the bank would be shut down that evening. Although the run on WaMu’s deposits had slowed; Congress was hammering out the details of the bailout of the financial system that would surely help WaMu; the newly appointed CEO was aggressively searching for an infusion of capital or a buyer for WaMu; and the bank’s financial condition was dire but appeared salvageable; time had run out as far as the FDIC was concerned. Just a few days previously, JPMorgan Chase had stopped negotiating with WaMu to purchase its stock. Instead, the FDIC closed WaMu and contemporaneously sold its assets to JPMorgan Chase for a fire-sale price.
Lost Bank then takes us back to the 1980’s and describes how WaMu (then known only as Washington Mutual) survived the S&L crisis through effective leadership and a culture of moderation and frugality. We follow the bank’s expansion over the next two decades from respectable community bank to dominant player in the subprime lending market. The book does a good job of describing the creative mortgage packages that were developed throughout the mortgage industry; the shift from prudent lending standards to the process of rewarding mortgage brokers for volume sales; the housing boom and subsequent crash.
We’ve seen this information before, but what we don’t usually see in a macro-economic analysis of the financial markets are the people: the officers and directors who chose to acquire other lenders and expand into the subprime market in an effort to gain market share; the employees who warned against the high degree of risk; the personality clashes and power struggles; and the failure of leadership that contributed to the bank’s downfall. We meet mom-and-pop investors who believed in Washington Mutual; and we meet a few home buyers enticed by the seemingly low monthly payments on what turned out to be adjustable rate mortgages or interest-only payments. But mostly we see the real people (good and bad) who worked at WaMu, and that’s one reason I liked this book so much – it gave life to an otherwise faceless entity.
Since Lost Bank is about the financial crisis in general and the failure of WaMu in particular, the book is peppered with statistics and numbers, but the author provides enough comparative perspective to make the numbers relevant, and the storyline isn’t bogged down by the data.
Lost Bank also gives us tremendous insight into the government’s role in supervising banks. Most interesting was the conflict between WaMu’s primary regulator, the Office of Thrift Supervision (OTS, which itself was a casualty of the financial crisis), and the FDIC. For a period of time, OTS backed WaMu, and its leaders resented the intrusion by the FDIC into OTS’s regulatory field. The FDIC, on the other hand, had as its goal the protection of its insurance fund. We learn that a significant factor in the closure of WaMu was not just the portfolio of bad loans; there was a two-week run on the bank’s deposits which caused a massive loss of liquidity immediately following a much smaller but highly publicized run on IndyMac that resulted in its failure. This run on the deposits of WaMu had the FDIC concerned. We see the FDIC working behind the scenes, so while WaMu is trying to find a buyer, the FDIC is asking the potential bidders JPMorgan Chase, Santander, Citigroup, and others, whether they would be interested in buying the assets of WaMu if WaMu failed. One can’t help but wonder whether WaMu might have had a chance of survival had it been given a little more time. Nevertheless, the FDIC deemed the shutdown and fire-sale of WaMu as a success because no insurance funds were spent in the process.
By the end of the book, we learn that only six days after government regulators shut down WaMu, Congress passed TARP. Soon thereafter, the FDIC raised the insurance limits from $100,000 to $250,000, something WaMu had previously begged the FDIC to do as a way of easing the panic that was causing runs on banks. But by then, WaMu was gone. Its creditors and equity holders were effectively wiped out when WaMu’s holding company filed bankruptcy (the case was still active at the time the author finished the book). Other banks survived with the help of the federal government. A mere two years after the acquisition of WaMu’s supposedly toxic assets, JPMorgan Chase posted record earnings.
The author, Kirsten Grind, covered much of the WaMu failure while a reporter with the Puget Sound Business Journal. The book is well-researched and documented; in fact, about 60% of my e-book was the narrative of the book itself; the remaining 40% contains worth-reading acknowledgements, research notes, source information, and indices. My e-book was nicely hyperlinked, making it easy to switch from narrative to endnote and back.
I would have preferred to see the book written in a more linear, chronological method. The book gives us a cast of characters, which is nice. I could have used a timeline as well. But overall, it is a well-written narrative that provides a cohesive look at the financial crisis and a dissection of the factors that led to the failure of WaMu, as seen through the eyes of real people who were there.
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Beverly M. Burden, Lexington, Kentucky, has served as the Chapter 13 Trustee for the Eastern District of Kentucky since 1999. From 1987 to 1999, she served as Law Clerk to Bankruptcy Judge Joe Lee. Prior to her tenure with the Bankruptcy Court, she was an Assistant Attorney General for the Commonwealth of Kentucky, where she concentrated on consumer fraud litigation. She earned her J.D. degree from the University of Kentucky College of Law in 1983 and holds a B.B.A. degree in Accounting. Ms. Burden has served on the faculty of the annual meeting of the National Conference of Bankruptcy Judges, the annual convention of the National Association of Chapter Thirteen Trustees, the Midwest Regional Bankruptcy Seminar, the Judge Joe Lee Biennial Bankruptcy Institute, and numerous other regional and local CLE programs. She was the 1997 recipient of the Kentucky Bar Association’s Justice Thomas B. Spain Award For Outstanding Service in Continuing Legal Education.
