Spilman Thomas & Battle, PLLC
  April 6, 2011 - North Carolina

The $900 Million Claim
  by By Timothy R. Moore

As expected, the FDIC moved against the former key officers of Washington Mutual Bank, namely its former President/CEO, COO and Home Loans President in March. The FDIC believes that these three people are responsible for WaMu’s higher risk lending program, which accounted for the bank’s huge losses. It is reported that the damages being sought against the defendants may be in excess of $900 million, which should grab anyone’s attention. In addition to the eye-popping damages figure, the case is also important in helping officers and directors understand the importance of their duties and their potential liability if they fail to uphold them.

    The claims essentially remain the same as those discussed in my earlier articles about FDIC actions. The usual claims of gross negligence, ordinary negligence and breach of fiduciary duty are all present. As such, a more noteworthy aspect is the factual allegations made that form the basis for their claims. It is from reviewing these allegations (and these are only allegations at this point) that we discern the specific behavior that the FDIC would find objectionable – many allegations boil down to the FDIC expecting sound management principles. 

1)    The Defendants knowingly pushed expansion of the higher risk lending strategy at the top of the bubble when there were pronounced weaknesses in the sub-prime market. Always be aware of the economy and flexible with your business plans...As Mr. Comm advised “stay on the balls of your feet.”

2)    The Defendants embarked on aggressive growth pattern in sub-prime loans knowing that the Bank’s infrastructure was “antiquated” and not capable of supporting this growth in sub-prime lending. Banks need to spend sufficient capitals on its internal infrastructure to support its business lines . . . keep up with technology.

3)    The Defendants ignored repeated and significant warnings from the credit and risk officers about the danger to WaMu through its sub-prime and geographic concentrations. Allegedly, the Defendants finally not only ignored the Risk Officers and credit officer but marginalized them by placing them in profit oriented business lines. Also, it hired an inexperienced Chief Risk Officer for the Home Loans Division. Hire top quality and experienced people. It is not only necessary to have good (and independent) credit and risk department but the department must be recognized by leadership as fundamental to the long term success and viability of the bank.

4)    WaMu had weak fraud prevention controls, which were placed in the business lines. Its aggressive strategy to make loans made WaMu more prone to fraud, which resulted in millions of dollars of losses. The Complaint states that WaMu should have had a Board approved fraud risk management policy that established the framework and delegated responsibility to an independent group.

5)    The Bank incentivized loan officers and underwriters to make loans by compensating them based on the volumes of loans originated. Apparently, WaMu also partly compensated one of its Chief Risk Officers based on loan volume, giving her a conflict of interest in performing her job properly. Ensure that compensation packages match the long term interests of the Bank and do not engender conflicts in one’s performance of duties.

6)    Even WaMu’s slogan “The Power of Yes” exemplifies its reckless lending policies. Anything can be used against you, even your slogans, so be careful.