Washington Mutual Settlement Lets Former Executives Pay $64 Million Of $900 Million Suit
In what essentially amounts to pocket change when compared to the billions that Washington Mutual made in risky loans, three former top executives of the bank have agreed to settle for $64 million with the Federal Insurance Deposit Corporation for their role in driving the subprime lending disaster.
In a call with reporters on Tuesday, a senior spokesman for the FDIC characterized the overall settlement as "good." Consumer advocates were less pleased: "It's not a lot -- not even a tenth of damage of what they have done," said Diane E. Thompson, an attorney with the National Consumer Law Center. "I doubt that this will make them feel much in the way of pain."
Filed by the FDIC in March, the civil suit sought $900 million in damages and was one of the first cases to hold banking officials personally accountable for the financial practices that derailed the United States housing market.
The case charged that former WaMu chief executive Kerry Killinger, former chief operating officer Stephen Rotella and former home loan executive David Schneider "focused on short-term gains to increase their own compensation, with reckless disregard for WaMu's longer term safety and soundness."
On Monday, the three executives agreed to pay $64 million to settle the case, which is expected to be finalized in the next day. That amount is far less than the $95 million they were collectively compensated between 2005 and 2008, according to the FDIC's case.
Killinger himself received $88 million in compensation between 2001 and 2007, including $24 million in 2006 at the height of the housing boom. The settlement also absolves the wives of Rotella and Schneider, who had been named in the FDIC case and charged with shielding cash and property.
Moreover, very little of the $64 million will come from their personal assets. The bulk of the settlement will be paid out by the executives' insurance companies; money will also be taken from Killinger's retirement package, from Schneider's and Rotella's so-called golden parachutes, and from Schneider's bonus.
A senior spokesman at the FDIC would not break down further what portion of the settlement would be paid from the executives' personal holdings.
"This was one of the few attempts to hold the individuals responsible for our financial crisis personally responsible, and the settlement is a small measure of the harm they caused," said Thompson of the National Consumer Law Center. "The WaMu loans were toxic. WaMu's collapse early in the crisis is a clear indicator that WaMu's loans were particularly risky."
The $64 million will be combined with a separate $125 million payout from Washington Mutual Inc., which settled with the FDIC last year to release claims on 12 other executives who worked for the banking institution, for a total of $189 million to be given to creditors.
Seattle-based Washington Mutual was one of the most aggressive subprime lenders during the housing boom, issuing thousands of mortgages to people, regardless of their financial circumstances. The banks slogan, "The Power of Yes!" was taken literally, as documented in a 2008 investigation by the New York Times.
Steven M. Knobel, a founder of appraisal company Mitchell, Maxwell & Jackson, which did business with WaMu until 2007, told the New York Times, "If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan." The Times article notes that the bank would recklessly approve loans for babysitters "claiming salaries worthy of college presidents." In one particularly egregious example, a mariachi player claimed a six-figure salary. Documentation was flimsy. Defaults were high, as was compensation for the agents closing these deals.
Washington Mutual's reckless lending practices contributed to its own financial collapse, making it the largest bank failure in U.S. history. The Federal Deposit Insurance Corp. took control of the bank in 2008 and sold its assets to JPMorgan for $1.9 billion.