As suggested way back, lender fraud was a large part of the problem (rather than actual lending standards and/or Fed monetary policy)
Largely driven by counterproductive incentives.
It was also an inexcusable failure of regulation that allowed these types of incentives in the first place:
Memos Show Risky Lending at WaMu
By Sewell Chan
April 25 (NYT) — New documents released by a Senate panel show how entrenched Washington Mutual was in fraudulent and risky lending, and highlighted how its top executives received rewards as their institution was hurtling toward disaster.
The problems at WaMu, whose collapse was the largest in American banking history, were well known to company executives, excerpts of e-mail messages and other internal documents show.
The documents were released on Monday by the Senate Permanent Subcommittee on Investigations, which began an inquiry into the financial crisis in November 2008. The panel has summoned seven former WaMu executives to testify at a hearing on Tuesday, including the former chief executive Kerry K. Killinger.
The panel called WaMu illustrative of problems in the origination, sale and securitization of high-risk mortgages by any number of financial institutions from 2004 to 2008.
“Using a toxic mix of high-risk lending, lax controls and compensation policies which rewarded quantity over quality, Washington Mutual flooded the market with shoddy loans that went bad,” the panel’s chairman, Senator Carl Levin, Democrat of Michigan, said.
Mr. Killinger was paid $103.2 million from 2003 to 2008. In WaMu’s final year of existence, he received $25.1 million, including a $15.3 million severance payment.
His pay was not the only compensation under scrutiny.
Loan officers received more money for originating higher-risk loans, and loan processors were rewarded for speed and volume, rather than quality, the Senate panel found. Loan officers and sales associates were paid even more if they overcharged borrowers through points or higher interest rates, or included stiff prepayment penalties in the loans they issued.
The pay structure created “temptation to advise the borrower on means and methods to game the system,” a WaMu internal memo from April 2008 found.
So, I’m curious. If WAMU did not have FDIC insurance, could they have perpetrated a fraud of this size?
Intuition says know, but the experience of Madoff says yes.
But even if they had in an environment of no FDIC, at least the taxpayer would not be on the hook, the lender/investor that failed to do his homework would have.
oops, should have said:
Intuition says no…
without FDIC the banking system wouldn’t work.
because the funds are mainly govt/fdic funds, there is an imperative to regulate.
this was a board room failure to manage intelligently. boards will no longer approve the types of incentive packages that caused these institutions to fail, and regulators should prohibit them as well and do a better job regulating and supervising comp packages.
as i’ve said before, regulation is a work in progress
Warren sez:
“without FDIC the banking system wouldn’t work”
Why not?
The payment system doesn’t need FDIC. Treasury MMA accounts don’t need FDIC. The three check a month rule could be done away with. What Public purpose is served by a FDIC guaranteed by the Treasury?
see my proposals for fed, fdic, etc in left margin above?