The Inside Story of WaMu - The Biggest Bank Failure in American History

The Lost Bank by Kirsten Grind
Source: Amazon
The Lost Bank by Kirsten Grind

During the frenzied days of September 2008, as the U.S. financial system teetered on the brink of collapse, the government chose winners and losers.

Washington Mutual, the country’s largest savings and loan bank, fell into the latter camp.

Despite its size – the bank had $307 billion in assets – it wasn’t quite big enough to be considered “Too Big To Fail.” So on Sept. 25, 2008, federal regulators marched into its headquarters in Seattle and seized the bank, turning over its assets to JPMorgan Chase for $1.9 billion.

The collapse marked the largest bank failure in U.S. history, far bigger than that of Continental Illinois, which failed in the 1980s and had just $40 billion in assets. Despite this tantalizing selling point, WaMu’s failure hasn’t received nearly the public scrutiny that many of the other casualties of the financial crisis have received — Bear Stearns, Lehman Bros., AIG, etc.

The reason for its lack of headline play is the same reason it was allowed to fail in the first place: it was an afterthought.

In other words, the bank had virtually no political clout. That’s in large part because its long-time chief executive, Kerry Killinger, did not place an emphasis on building up relationships in Washington. He in fact tried to avoid doing so altogether. Whether companies should be forced to engage in that sort of charade at all is debatable, but one thing is certain: Killinger’s dearth of friends in high places, coupled with the bank’s far-away headquarters in Seattle, directly contributed to its downfall.

Killinger was no match for Jamie Dimon, the chief executive and chairman of JPMorgan Chase , who considers government relations a separate line of business. Dimon had long wanted to buy WaMu for its tantalizing retail branches scattered across the West Coast. As WaMu endured an epic bank run in the summer of 2008, Killinger tried to call in help from then-Treasury Secretary Hank Paulson. Paulson told him there would be none coming. “You should have sold to JPMorgan,” Paulson chastised. “Things could get a lot more difficult for you.” (JPMorgan had tried to buy WaMu in the spring of 2008 and was turned down by the bank in favor of private equity.)

During the frantic weeks before WaMu collapsed, the bank’s new chief executive Alan Fishman, put in place after WaMu’s board ousted Killinger, tried to quickly repair relationships in Washington in order to save the bank. But it was too late. “They were done with WaMu,” Fishman said.

Killinger would later, to much hilarity, describe the financial institutions that did get bailouts as, “too clubby to fail.”

There are a lot of lessons to be learned from the story of WaMu, only one of which is the premium companies must now place on Washington.

Kirsten Grind is the author of "THE LOST BANK: The Story of Washington Mutual-The Biggest Bank Failure in American History'" and has received more than a dozen national awards for her work, including being named a finalist for the Pulitzer Prize and the Gerald Loeb Award. A reporter for The Wall Street Journal, she lives in New York City.

Email me at bullishonbooks@cnbc.comAnd follow me on Twitter @BullishonBooks