“All Things Considered, October 3, 2008 · Today marked the first day of bankruptcy proceedings for Washington Mutual, the largest commercial savings and loan to fail in U.S. history. Washington Mutual collapsed last week, 119 years to the day after its founding.
For casual observers, bank collapses like this one may seem to have appeared out of the blue. But for executives like William Longbrake, who worked at Washington Mutual for 26 years before September’s tumult, the collapse looked more like a slow unraveling.
Longbrake served as the savings and loan’s chief financial officer from 1982 until 2002 and as a senior executive until a few weeks ago. He says he’s free to talk now about the trouble he saw coming, because no one is left at the thrift to sue him for breaking nondisclosure agreements.
“There was something that disturbed me deeply, and it actually was a long time ago. It was probably about 2003,” he says. “And that’s when home prices began to rise at a rate that was much faster than people’s incomes were rising. Housing prices felt good when they were going up. Everyone was giddy with all the wealth they were accumulating, and a lot of them spent it. The problem was that, all the time, as housing prices were getting higher and higher and higher, the affordability was declining. Eventually, the ability of a lot of people to buy homes just disappeared, and we had too many houses.”
It’s now a matter of public record that Washington Mutual, which most people call WaMu, was a central player in the housing bubble Longbrake describes. It lent money to a lot of people to buy homes they just couldn’t afford. It might seem self-serving of Longbrake to say he recognized the bubble for what it was so far back.
But in off-the-record coversations, former WaMu board members agreed with Longbrake’s account. They say he did warn them that the housing market was becoming too risky and that WaMu shouldn’t be so heavily involved.
Management just didn’t listen. It was making too much money.
“When you’re in good times and things are going up, everyone tends to be optimistic and straight-line that out to forever,” Longbrake says. People raising red flags don’t get attention, he adds.
Signs Of A Bubble
Longbrake says that by 2006, it was clear inside the thrift that too many of its mortgage customers were not paying back their loans. Like other banks, WaMu began moving toward making more sensible loans and away from offering loans to customers who weren’t such solid bets. The change in course proved too little, too late. By reducing credit, the banks reduced demand for new houses — just as builders were flooding the market.
Suddenly, banks around the nation were squeezed by bad loans, to customers and to developers. Longbrake says he knew WaMu was in trouble, but he didn’t expect the current global banking crisis. That’s because bank insiders know how strong or weak their portfolios of mortgages and mortgage-backed securities really are. But outsiders have no way to know exactly how risky a bank is.
Longbrake note that banks make public a great deal of information. It’s just not necessarily the most revealing data. “What we’re talking about is loans,” he says. “You don’t have exact delineation of the type of loans. You can make your own guesses. One bank could have very conservatively listed loans, and another has garbage.”
As a result, banks have pulled back from doing business with other banks: They can’t tell the good ones from the ones that are built on garbage. That lack of trust fueled the credit crisis that has threatened to cripple the national economy.
More Pain To Come
Longbrake is not done giving dire warnings. He supports the $700 billion bailout approved by Congress this week, but he says it won’t solve the central problem. He points out that this crisis was set off when inflated home prices started to fall. They’re not done falling yet, he predicts.
“Many expect those prices to drop by 15, 20 percent,” he says. “You’ll still going to have losses that the system has to absorb, and until that’s completed there will be negative pressure on financial institutions and probably negative consequences for the economy as a whole. I hope that doesn’t sound too dark.”
What remains now, he says, is the need for government intervention to calm the markets so that irrational panic doesn’t make the correction more painful.
Longbrake retired shortly before the collapse. On Thursday, JPMorgan Chase, which bought what remains of WaMu, fired almost all of the remaining senior executives.
This story was produced in collaboration with Chicago Public Radio’s This American Life, which is airing a special one-hour edition on the economic crisis Oct. 4.”
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