WaMu's Failure Was Fueled By Fraud and Greed: Panel

Once the nation's largest thrift, Washington Mutual became a Main Street bank in search of Wall Street profits.

AP Washington Mutual's headquarters in Seattle.

It's a quest that led employees to engage fraud, and ultimately led to WaMu's failure in September of 2008, a Senate subcommittee alleges.

Along the way, the thrift infected the secondary mortgage market with billions of dollars in bad loans.

Those are the findings of year and a half long investigation by the Senate Permanent Subcommittee on Investigations.

The panel is holding the first of four hearings Tuesday on the role high risk mortgages played in the financial crisis.

"Using a toxic mix of high risk lending, lax controls and destructive compensation practices, Washington Mutual flooded the market with shoddy loans and securities that went bad," the subcomittee's Chairman Carl Levin (D-Mich), said in a statement.

Levin said his subcommittee looked at the Seattle-based thrift as a case study.

He described it as the story of a 100 year old traditional lender that turned away from safer lending practices to pursue the higher profits reaped from selling high risk mortgages to Wall Street firms.

As it did, the thrift failed repeatedly to bring the hammer down on fraudulent practices rampant in some of its most profitable mortgage centers.

Starting in 2003 WaMu began increasing the production of subprime loans.

At the time, Wall Street firms were buying these mortgages, bundling them together, slicing them into pieces and selling them to yield-hungry investors in a process known as securitization.

Despite the underlying nature of the loans, the securitized products often received triple A ratings from credit rating agencies.

• View the Senate Subcommittee Exhibits List (Pt. 1)
• View the Senate Subcommittee Exhibits List (Pt. 2)

All that changed in January 2008 when the same agencies started downgrading the securities as home prices declined and defaults increased. Banks saddled with the securities lost billions of dollars, bringing the U.S. economy to the brink of collapse.

"There was a huge appetite that Wall street had for these mortgages," Levin said. "It changed this character of this Main Street bank into a production factory for Wall Street and Wall Street securities."

• Read the Senate Subcommittee Press Release

Levin said his subcommittee will leave questions of criminality to the Justice Department, and will turn the investigations findings, including over 500 pages of documents and emails over to the Financial Crisis Inquiry Commission. The FCIC is investigating the causes of the financial crisis.

Levin said he hopes the subcommittee's findings will give a boost to strong regulatory reforms through a robust consumer protection agency.

As for Washington Mutual's primary and secondary regulators, the Office of Thrift Supervision and the FDIC, they will answer questions about their role in a hearing on Friday.

While WaMu began expanding its subprime lending practices in 2003, it didn't receive formal board approval until January 2005, doing so at the behest of regulators.

The architect of this new strategy was former CEO Kerry Killinger. He ran the thrift for almost 18 years until he was fired in September of 2008.

• Slideshow: Top Buyers of Failed US Banks