A couple of weeks ago, the government started signaling, at long last, that it was ready to get tough on the bankers who caused the 2008 financial crisis. On March 16 the Federal Deposit Insurance Corporation, or FDIC, sued three former top executives of Washington Mutual, or WaMu, for taking "extreme and historically unprecedented risks," thereby causing the bank to lose "billions of dollars." That same day, the New York Times reported that the Securities and Exchange Commission had sent so-called Wells notices—often a sign that civil charges are imminent—to a handful of former executives at mortgage-securitization giants Fannie Mae and Freddie Mac.
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The targets seem well-chosen. The collapse of WaMu, acquired by JPMorgan Chase at a fire-sale price in the fall of 2008 was, according to the FDIC, the biggest bank failure in U.S. history. The FDIC is seeking to recover $900 million from the three bankers. Fannie and Freddie were taken over by the government in the fall of 2008. So far, they have cost taxpayers about $130 billion.
Perhaps you're thinking: If only the government had known at the time what these scoundrels were up to, we could all have been spared a great deal of pain. The trouble with that line of reasoning is that, um, the government did know what was going on. The Office of Thrift Supervision, which regulated WaMu, and the Office of Housing Enterprise Oversight, which regulated Fannie and Freddie, were supervising the very behavior that their sister agencies are now suing over. The government's lawsuits call to mind a cynical boast by Burt Lancaster, playing tabloid power broker J.J. Hunsecker, in the 1957 noir classic Sweet Smell of Success: "My right hand hasn't seen my left hand in 30 years."
The FDIC's complaint against WaMu alleges that the three executives—former CEO Kerry Killinger, former Chief Operating Officer Stephen Rotella, and former President of Home Lending David Schneider—"focused on short term gains to increase their own compensation, with reckless disregard for WaMu's longer term safety and soundness." Or as Killinger put it in a June 2004 memo, ""Above average creation of shareholder value requires significant risk taking." The FDIC complaint basically says that as experienced bankers, the three should have known better. Yet they repeatedly ignored warnings from risk managers, including one who said that WaMu was "putting borrowers into homes that they simply cannot afford." According to the complaint, the three not only embraced risky loans, but "layered these already risky products with additional risk factors." Both Killinger and Rotella were "heard to deride risk managers as 'checkers, checkers, checkers.' " Both Killinger and Rotella have come out swinging in their own defense, insisting that they took what steps they could to save WaMu. (Schneider has been silent.)
