Washington Mutual created 'mortgage time bomb,' Senate panel says

Washington Mutual created 'mortgage time bomb,' Senate panel says Reporting from Los Angeles and Washington

Before Washington Mutual collapsed in the largest bank failure in U.S. history, its executives knowingly created a "mortgage time bomb" by making subprime loans they knew were likely to go bad and then packaging them into risky securities, a congressional investigation has found.

In some cases, the bank took loans in which it had discovered fraudulent activity -- such as misstated income by borrowers -- and rolled them into mortgage securities sold to investors without disclosing the fraud, according to the report released Monday by the Senate's Permanent Subcommittee on Investigations.

The actions were driven in part by greed, according to the committee report, which pointed out that WaMu's pay practices rewarded loan officers and processors based on how many mortgages they could churn out.

The new disclosures could give a boost to efforts by President Obama and congressional Democrats to pass sweeping overhaul of financial regulations, which the Senate is set to consider this spring, said Sen. Carl Levin (D-Mich.), the subcommittee's chairman.

"Washington Mutual built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison into a river," Levin said. "Using a toxic mix of high-risk lending, lax controls and destructive compensation policies, Washington Mutual flooded the market with shoddy loans and securities that went bad. . . . It is critical to acknowledge that the financial crisis was not a natural disaster, it was a man-made economic assault."

WaMu's failure is also under investigation by the Justice Department. The Seattle-based thrift, which was seized by federal regulators in September 2008 and sold to JPMorgan Chase & Co. for $1.9 billion, had nearly a third of its 2,200 branches in California and was a major player, along with rival Countrywide Financial Corp., in helping fuel the state's housing boom. According to the Senate report, WaMu executives were aware in 2006 of problems at its Southern California subprime unit, Long Beach Mortgage Co. Excerpts of internal e-mails and reports offer a stark and unvarnished view of the warning signs that were dismissed as the bank tumbled toward failure.

The company's chief risk officers called Long Beach Mortgage, the subprime subsidiary the firm used to stage its rapid growth in home lending, "a real problem for WaMu." Stephen Rotella, WaMu's former chief operating officer, described the unit as "terrible."

"Short story is this is not good," David Schneider, WaMu's former president of home loans, wrote in a December 2006 e-mail. "We are all rapidly losing credibility as a management team."