More Blame for Mortgage Meltdown: Unchecked Greed

The New York Times continues its weighty series "The Reckoning" explaining the mortgage meltdown with an in-depth article on Washington Mutual, one of the big lenders who reaped the whirlwind of subprime loans this year.

Now remember: the point of studying the causes of the mortgage meltdown is not just to assign blame (again, there's plenty to go around), but primarily to understand what happened so we can keep it from happening again.

Read Goodman and Morgenson carefully, all four pages. You will not find a word about the Community Reinvestment Act or President Bush's push for easier credit for immigrant homebuyers. The cause of disaster at Washington Mutual? Unchecked greed:

The ultimate supervisor at WaMu was [Kerry] Killinger, who joined the company in 1983 and became chief executive in 1990. He inherited a bank that had been founded in 1889 and had survived the Depression and the savings and loan scandal of the 1980s.

An investment analyst by training, he was attuned to Wall Street's hunger for growth. Between late 1996 and early 2002, he transformed WaMu into the sixth-largest U.S. bank through a series of acquisitions [emphasis mine; Peter S. Goodman and Gretchen Morgenson, "At Washington Mutual, a Relentless Urge to Approve Any Loan," New York Times, 2008.12.27].

Cancer also has a hunger for growth. Growth is not inherently good.

According to these accounts [from former employees], pressure to keep lending emanated from the top, where executives profited from the swift expansion - not least, Kerry Killinger, who was WaMu's chief executive from 1990 until he was forced out in September.

Between 2001 and 2007, Killinger received compensation of $88 million, according to the Corporate Library, a research firm. He declined to respond to a list of questions, and his spokesman said he was unavailable for an interview.

Boy, those limits on executive pay are looking better every minute. Salary caps aren't not just class warfare; it's a sensible check on reckless business practices.

During Killinger's tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers' incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank's executives. WaMu pressed appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.

I'm still waiting for the line that says, "Executives felt pressured to put satisfy social engineering objectives from Washington to put more low-income workers and minorities in homes."

For WaMu, variable-rate loans - option adjustable-rate mortgages, in particular - were especially attractive because they carried higher fees than other loans and allowed WaMu to book profits on interest payments that borrowers deferred. Because WaMu was selling many of its loans to investors, it did not worry about defaults: by the time loans went bad, they were often in other hands.

What did I say about keeping loans local and lenders tied to risk?

Goodman and Morgenson cite many instances of rank-and-file employees questioning sketchy loan applications. Good people at Washington Mutual tried to stop the madness, but managers and money shut them up. Don't tell me deregulation will solve that problem. Banks need rules, big scary rules. Heavy regulation will indeed curb prospects for outlandish growth and enormous executive salaries. It will also support workers who try to do the right thing and provide a more secure basis for slow, steady economic growth.