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A federal investigation into Wall Street and the economic crisis has honed
in on Washington Mutual, making the bank that was absorbed by New York's
JPMorgan Chase in 2008 the poster child for
what went wrong with the nation's financial system.

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After two days of hearings this week, the Senate
Permanent
Subcommittee on Investigations has concluded that federal banking regulators
failed to step in and curtail "shoddy lending practices" and ignored
excessive risk-taking at what was once the sixth largest U.S. bank.

A $300 billion thrift, Washington Mutual became the largest bank failure in
U.S. history, and according to the Senate panel, played a major role in
proliferating the bad loans and shady financial practices that sent the
economy into its tailspin.

"The bank originated and sold hundreds of billions of dollars in high risk
loans to Wall Street in return for big fees, polluting the financial system
with toxic, and sometimes fraudulent, mortgages," according to Sen. Carl
Levin (D-Michigan), chairman of the subcommittee.

The findings released by Levin and his colleagues say that WaMu used shoddy
lending practices riddled with credit, compliance, and operational
deficiencies to make tens of thousands of high risk home loans, and as a
business practice, knowingly steered borrowers into mortgages they could not
afford, enticing them with low initial payments that in time "shot up."

The bank securitized over $77 billion in subprime mortgages and billions
more in other high-risk home loans. At times, WaMu selected and securitized
loans that it had identified as likely to go delinquent, without disclosing
its analysis to investors, the panel said. The bank also securitized loans
tainted by fraudulent information, without notifying purchasers of the fraud
that was discovered, according to the panel's report.

The senators determined that WaMu's compensation system rewarded loan
officers for originating large volumes of high risk loans, and paid bonuses
to loan officers who overcharged borrowers or added stiff prepayment
penalties.

In the midst of all this financial jeopardy, regulators looked the other way
and obstructed each other from taking any real action.

The Senate subcommittee said, from 2003 to 2008, the Office of Thrift
Supervision (OTS) repeatedly identified significant problems with Washington
Mutual's lending practices, risk management, and asset quality, but failed
to force adequate corrective action to stop the bank's origination and sale
of loans with fraudulent borrower information, appraisal problems, errors,
and "notoriously high rates of delinquency and loss."

The panel said OTS went so far as to impede the FDIC's oversight of
Washington Mutual by blocking the agency's access to bank data and refusing
to allow it to participate in bank examinations.

The FDIC, the backup regulator of Washington Mutual, was unable to conduct
the analysis it wanted to evaluate the risk posed by the bank and did not
succeed in its fight against the OTS to gain access, senators said.

"Federal bank regulators undermined efforts to end unsafe and unsound
mortgage practices at U.S. banks," the panel said in its report. Both "OTS
and FDIC allowed Washington Mutual to reduce its own risk by selling
hundreds of billions of dollars of high risk mortgage backed securities that
polluted the financial system, undermined investor confidence in the
secondary mortgage market, and contributed to massive credit rating
downgrades, investor losses, disrupted markets, and the U.S. financial
crisis."

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