The FDIC Files A Scathing Lawsuit Against Three Former WaMu Chiefs And Two Of Their Wives

kerry killinger wamu

Photo: AP

The FDIC just sued former WaMu top brass for gross negligence and breach of fiduciary duty which the agency says cost the bank billions. And the lawsuit didn’t end with the executives; the FDIC sued their wives too.In their complaint, via the WSJ, the agency accused ex-CEO Kerry Killinger, ex-COO and President Stephen Rotella and ex-chief of home loans, David Schneider of being unduly “focused on short term gains to increase their own compensation, with reckless disregard for WaMu’s longer term safety and soundness.”

The agency believes that alleged negligence was a major contributor to the “biggest bank failure in U.S. history.”

According to the FDIC complaint,

Killinger, Rotella, and Schneider led WaMu on this lending spree knowing that the real estate market was in a “bubble” that could not support such a risky strategy over the long term, that WaMu did not have the technology to adequately manage and evaluate the higher risks associated with the portfolio, and in the face of continuing warnings from WaMu’s internal risk managers.

This relentless push for growth was exemplified by WaMu’s advertising slogan, “The Power of  Yes,” which promised that few borrowers would be turned away.

Killinger’s wife Linda, and Rotella’s wife Esther, have been accused of illegally shifting cash and property into trusts in an effort to protect the assets from future legal claims. Linda is accused of transferring two different homes into trusts to protect them from creditors; Esther is accused of doing the same with a New York property.

Though a figure for damages wasn’t specified in the complaint, a source told the WSJ that the FDIC is looking to recoup $900 million.

The complaint (which is a no-holds-barred assault on the three men) includes as evidence a 2005 memo that the firm’s chief credit officer (CRO) sent Rotella, in which the officer foreshadows a nasty situation in the bank’s future: “The aggressiveness of the sales team and in many cases inappropriate, rude and/or insulting behaviour towards the underwriting staff is infectious and dangerous,” he warned.

The FDIC also lambastes the new defendants for missing what WaMu’s CRO had coined the “risk chromosome.”

According to the lawsuit,

In approximately August 2005, Defendants hired a Chief Risk Officer for Home Loans Division, with little background in risk management and none at a Bank. Schneider had worked with her at a different bank and recruited her to join WaMu.

Notwithstanding her role as a risk manager, her compensation was dependent, in part, on the volume and growth of the home loans generated.

After ERM became an “advisory” group, its members attempted to impose restraints on WaMu’s SFR lending, with little success. Meetings were held but no actions taken. Proposals were made and ignored. They were not given a meaningful voice and in many cases treated with disdain. Both Killinger and Rotella were heard to deride risk managers as “checkers checking checkers.”

But Killinger says the lawsuit is “baseless and unworthy of the government. The factual allegations are fiction. The legal conclusions are political theatre,” in a statement posted at the WSJ.

And Rotella said that he’d offered to meet with the FDIC to discuss the WaMu implosion after the event, but was rebuffed.

He now says it’s “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.”

 Here’s the two furious response statements from Killinger and Rotella >

Here’s the lawsuit >

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.