Kerry Killinger and Steve Rotella, former executives of failed thrift Washington Mutual, struck back at charges contained in a civil lawsuit filed against them and their wives by the FDIC.
Bloomberg NewsFormer CEO Killinger and Rotella, the ex-operating chief, are accused of pushing WaMu to take on greater and greater risk, even as they ignored warnings that housing prices were due for a fall, and that WaMu couldn’t manage the company’s increasing reliance on subprime or other risky home loans.
Killinger, in a statement from his attorneys, said the allegations are “fiction” and the “legal conclusions are political theater.”
Killinger says WaMu’s management was “sound and prudent,” and its lending practices were overseen and reviewed by multiple layers of executives, board committees, auditors and government regulators. He also essentially turns the tables on the FDIC and other regulators, by saying they consistently confirmed the soundness of WaMu’s asset quality and liquidity. Killinger also says the 2008 government seizure and fire sale of WaMu to J.P. Morgan was “demonstrably premature and unjustified.”
In a note addressed to Rotella’s “Friends, Family and Colleagues,” the former COO says the lawsuit “runs counter to the facts about my relatively short time at the company,” and he described himself as an “effective, hard working bank manager who performed well under extraordinary conditions in an efforts to save an important financial institution.” (Rotella worked at WaMu from January 2005 until WaMu collapsed in September 2008, according to the FDIC lawsuit.)
Rotella also said the FDIC has refused to meet with him during a 2 1/2 year investigation of WaMu. He said he believed the lawsuit “may be a way for the FDIC to collect a payout from insurers who provided officers and directors liability coverage for the time they worked at WaMu.”
Here are the executives’ statements in full:
Kerry Killinger:
The civil lawsuit filed by the FDIC today against Kerry Killinger is baseless and unworthy of the government. The factual allegations are fiction. The legal conclusions are political theater. Trial in a courtroom that honors the rule of law—and not the will of Washington, D.C.—will confirm that Kerry Killinger’s management, diligence and commitment to Washington Mutual responsibly and consistently served the interests of its depositors, customers and shareholders.
Washington Mutual’s management structure was a model of corporate governance. The mortgage lending practices of the Bank were established by a professional corps of bankers and risk managers with extensive experience in home lending. Those practices were in turn carefully reviewed and monitored by independent credit risk management and board committees. An internal audit group similarly reported directly to an audit committee of the board to assure compliance with law and management objectives. The work of the management and board committees were, in turn, subject to continuous review and scrutiny by outside auditors and, perhaps most importantly, by federal bank regulators.
The presence and prominence of the federal bank regulators at Washington Mutual cannot be overstated. First, they had offices on premises “24/7”. Second, they had unfettered access to the books, records, accounts, committee minutes, and personnel of the Bank. They roamed freely and paid particular attention to the quality of the assets—i.e., the mortgages—and the liquidity of the Bank. Third, well into the summer of 2007, the Office of Thrift Supervision consistently reported to management and to the board that Washington Mutual’s asset quality and liquidity profile evidenced a strong and well managed bank. Those judgments were confirmed by the Bank’s external auditors who paid particular focus to the adequacy of loan loss reserves—again, a measure of quality and of the transparency of management regarding prospective risk.
Beginning in late 2007 and in the spring of 2008, after the financial climate had changed dramatically, management took effective, immediate and concrete action by raising $10 billion in additional capital to reinforce the safety and soundness of the Bank. Those initiatives—once applauded by the regulators as diligent and responsible management—have, through the alchemy of Washington, D.C. politics, been turned into allegations of gross negligence. Such a “two-faced” posture by the government will be exposed in a court of law.
For 18 years as CEO of Washington Mutual, Kerry Killinger grew and managed the Bank in a responsible, diligent, and transparent manner. The loan portfolio of the Bank reflected a proper and good faith business judgment balance between continued U.S. government initiatives to extend mortgage loans to the underserved, while at the same time preserving the safety and soundness of the Bank.
The September 25, 2008 seizure and sale of Washington Mutual was demonstrably premature and unjustified. Had the benefits extended to Wall Street institutions within weeks of the seizure—e.g., increases in insurance limits, guarantees of bank debt, TARP purchases and capital injections, and added liquidity by the Federal Reserve—been extended to Washington Mutual, it too would have weathered the global financial crisis.
The management of Washington Mutual was sound and prudent. The FDIC’s much belated complaint will be refuted in court. As the FDIC has publicly stated, not one dime was lost by the FDIC insurance fund on the seizure and sale of the Bank. All that needs restoration is the truth about the good faith, diligence, and independently confirmed business judgment of Washington Mutual’s management.
The civil lawsuit filed by the FDIC today against Kerry Killinger is baseless and unworthy of the government. The factual allegations are fiction. The legal conclusions are political theater. Trial in a courtroom that honors the rule of law—and not the will of Washington, D.C.—will confirm that Kerry Killinger’s management, diligence and commitment to Washington Mutual responsibly and consistently served the interests of its depositors, customers and shareholders.
Washington Mutual’s management structure was a model of corporate governance. The mortgage lending practices of the Bank were established by a professional corps of bankers and risk managers with extensive experience in home lending. Those practices were in turn carefully reviewed and monitored by independent credit risk management and board committees. An internal audit group similarly reported directly to an audit committee of the board to assure compliance with law and management objectives. The work of the management and board committees were, in turn, subject to continuous review and scrutiny by outside auditors and, perhaps most importantly, by federal bank regulators.
The presence and prominence of the federal bank regulators at Washington Mutual cannot be overstated. First, they had offices on premises “24/7”. Second, they had unfettered access to the books, records, accounts, committee minutes, and personnel of the Bank. They roamed freely and paid particular attention to the quality of the assets—i.e., the mortgages—and the liquidity of the Bank. Third, well into the summer of 2007, the Office of Thrift Supervision consistently reported to management and to the board that Washington Mutual’s asset quality and liquidity profile evidenced a strong and well managed bank. Those judgments were confirmed by the Bank’s external auditors who paid particular focus to the adequacy of loan loss reserves—again, a measure of quality and of the transparency of management regarding prospective risk.
Beginning in late 2007 and in the spring of 2008, after the financial climate had changed dramatically, management took effective, immediate and concrete action by raising $10 billion in additional capital to reinforce the safety and soundness of the Bank. Those initiatives—once applauded by the regulators as diligent and responsible management—have, through the alchemy of Washington, D.C. politics, been turned into allegations of gross negligence. Such a “two-faced” posture by the government will be exposed in a court of law.
For 18 years as CEO of Washington Mutual, Kerry Killinger grew and managed the Bank in a responsible, diligent, and transparent manner. The loan portfolio of the Bank reflected a proper and good faith business judgment balance between continued U.S. government initiatives to extend mortgage loans to the underserved, while at the same time preserving the safety and soundness of the Bank/
The September 25, 2008 seizure and sale of Washington Mutual was demonstrably premature and unjustified. Had the benefits extended to Wall Street institutions within weeks of the seizure—e.g., increases in insurance limits, guarantees of bank debt, TARP purchases and capital injections, and added liquidity by the Federal Reserve—been extended to Washington Mutual, it too would have weathered the global financial crisis.
The management of Washington Mutual was sound and prudent. The FDIC’s much belated complaint will be refuted in court. As the FDIC has publicly stated, not one dime was lost by the FDIC insurance fund on the seizure and sale of the Bank. All that needs restoration is the truth about the good faith, diligence, and independently confirmed business judgment of Washington Mutual’s management.
Steve Rotella
Recently I was informed that the Federal Deposit Insurance Corporation (FDIC) has filed a civil lawsuit against me and other former officers at WaMu. This action runs counter to the facts about my relatively short time at the company. It is also unfair and an abuse of power. I believe this may be a way for the FDIC to collect a payout from insurers who provided officers and directors liability coverage for the time they worked at WaMu.
I am writing to ensure that you hear first—and directly—from me about the facts of this matter.
As you might imagine, I am angered at this abuse of power by the FDIC. More than anything, I am angered that my wife and children may be subjected to the public attention this lawsuit may generate, even if it is for a short period of time. And, of course, I am angered that my good name, built over a career of three decades, is at risk as a result of this callous action.
While I have remained quiet about my time at WaMu since it was seized in 2008, I feel compelled to respond in the face of this unwarranted action.
Today I issued the following statement:
“It is almost beyond belief that the FDIC would take action against an effective, hard working bank manager who performed well under extraordinary conditions in an effort to save an important financial institution. The FDIC’s 2½ year investigation of WaMu lacks credibility and is unfair, since it has flatly refused Mr. Rotella’s offer to meet, answer their questions, and explain his role as Chief Operating Officer at the company. Furthermore, it is patently unfair for the FDIC to expect an individual to have perfect foresight into a crisis that the FDIC itself did not see coming. Despite clear evidence of significant improvements during Mr. Rotella’s three-plus years at WaMu, the FDIC now seems to claim that Mr. Rotella’s efforts were not enough, even though its own examiners actively participated in the oversight of WaMu, rating the bank Satisfactory or better until the middle of 2008, just months before it seized the bank.
“This continues a pattern of inequitable treatment of WaMu’s shareholders, creditors and employees. To this day, the seizure of WaMu in 2008, which was called a “mistake” by a senior Treasury official, destroyed billions in shareholder value and cost many thousands their jobs, remains controversial. It was doubly so since, within days, the federal government handed out billions of taxpayer dollars to save a select group of chosen financial institutions. This stands in stark contrast to the fact that no taxpayer dollars were used at WaMu. In fact, the FDIC will actually receive nearly two billion dollars of proceeds as a result of their decision.
“Over the course of its investigation the FDIC has had more than ample time to conduct a proper and complete investigation of both WaMu and its own actions under duress. Any fair minded person would agree that during its lengthy investigation the FDIC should have interviewed Mr. Rotella. Had the agency done so, it would better understand that Mr. Rotella expressly joined WaMu in 2005 to help fix serious and deep-rooted problems that predated his arrival. In the face of significant organizational challenges and the worst financial crisis in a generation, Mr. Rotella made significant progress in dealing with the issues he was hired to address. By the end of his three-plus years as Chief Operating Officer, the company had substantially reduced mortgage volumes and risk, begun to diversify the business mix, raised capital, and improved its efficiency.
“The agency’s actions today should be deeply troubling to all thoughtful Americans.”
My parents, God bless them both, now at or near 90 years old, brought me up in a humble, but honorable environment. My father, a blue collar worker and my mother a homemaker, taught me to work hard and play by the rules. I have always done my best to do just that and have said many times that what I have achieved in life was an example of what can only happen in America. They also instilled in me a fierce sense of fairness and right and wrong. This action by the FDIC betrays any sense of common decency or fairness.
Should there be any doubt that I and other responsible managers at WaMu were taking the appropriate steps to correct the course of the company, the charts attached to this note will demonstrate how substantially we had changed the direction of the company’s mortgage business, the area the FDIC focused on during its investigation. As John Adams once said, “Facts are stubborn things.”
To this day, I believe that if WaMu had been treated in the same way as other large financial institutions by the FDIC, it would have turned a corner—and be providing valuable financial products and services to consumers, employing thousands of people who lost their jobs, and delivering returns to creditors and shareholders alike, who needlessly lost their investments.
Please feel free to contact me if you would like to know more.
Steve
P.S. Below are several charts which show how WaMu’s riskier mortgage loan generation and share of the mortgage market declined during the time I was chief operating officer of WaMu
blogs.wsj.com/deals/2011/03/17/...rnment/?mod=google_news_blog
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