The Downfall of Washington Mutual Case Solution

1. Introduction 

Washington Mutual was previously established as a saving and loan bank. Popularly known as Washing Mutual, or WaMu, by the year end of 2007, the bank, had over 40,000 employees with over 2000 branches in 15 different states. The bank had deposits of over $185 billion in deposits at this time. WaMu’s business largely came from individuals and small businesses – who were attracted to the bank by its innovative and appealing schemes and offers. The bank had 60% of the business from the retail banking section, and 21% of the business was generated through credit cards. Only 14% of the bank’s business was attributed to home loans (Dash & Sorkin, 2008). However, this was enough to topple the bank over. In 2008, WaMu had become the largest failed bank in the history of US finances having declared bankruptcy (Chinmayee & Namratha, 2009).

However, even before the housing markets’ distress, the bank was subject to continued deterioration that had prompted the regulators to seize it earlier one Thursday, instead of on a Friday as per normal practice.  Even before the declaration of the bankruptcy, there was increased nervousness regarding WaMu’s matters with the Federal Reserve and the Treasury Department. The institutions pressured the bank to sell itself as it was amongst one of the worst hit amidst the looming financial and housing crisis, however, WaMu adamantly insisted on remaining independent. As the financial markets were overtaken by fear with the collapse of the Lehman Brothers, WaMu saw its customers hurriedly withdrawing deposits (Chinmayee & Namratha, 2009). Following this, the government stepped up and worked privately with four potential bidders towards a deal for selling WaMu. Regulators had informed James Dimon, chairman and chief executive of JPMorgan Chase on Thursday of being the likely winner for the bids, and for having acquired WaMu (Amadeo, 2021). 

WaMu did not only have a unique size, but also faced higher risk exposure in mortgages around troubled housing markets. This has been sighted as the most popular reason for the bank’s destruction. In addition, analysts have pointed to a number of issues that had infested the bank’s internal systems and culture, and led to a failure of adherence to principles of corporate governance. This case analysis and assessment highlights the inherent issues and failures of corporate governance that led to the downfall of the WaMu. In doing so, the case discusses the problems in detail as well as makes recommendations for avoiding such situations in the future. The assessment concludes with a brief summary of the findings. 

2. Crosshairs in the lost bank 

WaMu had started off as a local thrift that ran well. However, with bold acquisitions, WaMu had soon turned into a national banking powerhouse with high ambition. This ambition was not aligned with the competence of the bank’s management, nor was it aligned with the bank’s balance sheet (Chinmayee & Namratha, 2009).

Though the bank had enjoyed high profitable growth that was admired by others, as well as by the wall street, many failed to acknowledge that the growth was fueled ‘sleazy boiler-room lending operations’ i.e. lending operations and loans given out by the bank regardless of failure to meet the required standards. These deals and operations were carried out by salespeople and executives whose compensation largely depended on commission. Consequently, the bank was already gripped with incompetency by the time the housing bubble burst (Sidel, et al., 2008). 

The long run marketing campaign, ‘the power of Yes’ runs deep not only in consumers;’ minds leading to WaMu becoming the bank that never said no, but also established a culture of incompetency and complacency within the bank. As a result, the bank indulged in risky lending practices that were over seen by poor mid-management and incompetent risk management controls. The information systems within the bank were also not aligned to meet its fast-fuelled growth and ambition (Chinmayee & Namratha, 2009).

Most worryingly, the leadership of the bank appeared to be incompetent and continued to ignore the warning signs and the red flags that were raised. Killinger had failed to take an interest or notice of the problems, and instead, insisted that the problems could be fixed. This was evident from the company’s continued stance of covering up its shortcoming by putting out an image of being perfectly sound and functional (Dash & Sorkin, 2008). 

These issues that cropped up at WaMu, and ultimately led to its downfall hint towards deeper, and more significant issues related to the failure of the bank to incorporate sound corporate governance practices. WaMu’s fall, and failure in fact reflects upon a number of corporate governance issues that have been identified in the following section.

3. Problem statement

WaMu’s fall amidst the financial crisis reflected on failures of corporate governance that were rooted in the broader financial system, and even more deeply embedded in WaMu’s internal systems and culture. WaMu had decided to pursue a high-risk lending strategy, which was one of the root causes of the bank’s downfall. Having experienced high and unregulated credit growth along with higher liquidity levels and financial innovation before the crisis, WaMu had contracted housing loans more than it could operationally afford in terms of its size. The bank had liberally supplied credits without securitization, and adhering to the standards - while following its ‘power of yes’ culture. When the housing bubble burst, this backfired on the bank, and the situation escalated to out of control (Pearlstein, 2012). Headed by insufficiently qualified and selfish board members and directors, the bank also faced increased instances of regulation difficulties which weakened internal corporate controls and processes, highlighted incompetence, led to a conflict of interest, and reflected managerial self-interest amidst WaMu’s ambition of empire building (Berger, et al., 2016).