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Transcript of The Dave Ross Show, Seattle Washington : "Why did they close WaMu?" The 29 Billion Dollar Question

|Includes:JPM, WMIH Corp. (WMIH)

Transcript of The Dave Ross Show, Seattle Washington
Date: December 09, 2009

Topic: An Investigative Report from the Puget Sound Business Journal
Headline: “Why did they close WaMu?”
Members: Dave Ross of the Dave Ross show and Kirsten Grind along with Al Scott for the Puget Sound Business Journal

Dave Ross:  “Was there any reason to close Washington Mutual?  Was the bank really insolvent?  Were the ATM’s about to stop working?  Apparently the answer is no.  And if the answer is no, then why was it closed, why were those people thrown out of work, why did the investors lose all their money.   That’s what Kirsten Grind and Al Scott wanted to find out and that’s why they’re both here with us today.  Kirsten and Al welcome.  You were tipped off to this because of an internal report by the bank which showed it was solvent at the time it was closed down?”

Kirsten Grind: “Well we had actually been looking into Washington Mutual’s failure all year and asking a lot of questions that investors and employees had and this is just the latest in stories that we’ve run about the banks closure.”

Dave Ross: “But if they had money, so how much money did they have at the time they closed down?

Kirsten Grind: “At the time that they closed they had 29 Billion in net liquidity.”

Dave Ross: “So, which means cash that you could spend right away.”

Kirsten Grind: “Exactly.”

Dave Ross:  “Not stock they would have to cash in or assets they would have to sale.  This was, these were liquid instruments that could be turned into cash right away?”

Kirsten Grind: “Right.”

Dave Ross: “29 Billion dollars?”

Kirsten Grind: “Yes.”

Dave Ross: “Well, that would seem to keep the ATM’s working, right?”

Kirsten Grind: “Yes and it’s also above what regulators typically look at when they’re closing a bank, actually much more, much higher than that.”

Dave Ross: “It also looks to me, based on what you wrote in this article, enough to even protect themselves from another run on the bank.  They had two runs, one was for 9.4 billion, one was for 16.7, so they had more than even those two runs on the bank.”

Kirsten Grind: “In another interesting aspect is the run that was going on that everyone’s heard about was actually tapering off but that wasn’t released by their regulators because those numbers were never publicized either.”

Dave Ross: “Alright, so, I’ll bite, why were they closed down?”

Al Scott: “Well, ah, (its) that what we’re still trying to find out, the regulators took the decision and have said very little about it since and they’ve declined requests from us to be interviewed about it and they have, even though they released some of the documentation, some of the email traffic, all of that’s been basically, completely blacked out.”

Dave Ross: “Right, but you were telling me that even though its been censored, you see the subject headings and you can fill in some of those blanks.  Did you get the impression that they were, let’s say, in a rush to do something?”

Kirsten Grind: “What we know actually is that there was a disagreement between the two main regulators that, that were in charge of WaMu.  It was the Federal Deposit Insurance Corp and also the Office of Thrift Supervision – it seemed that the FDIC was more interested in resolving WaMu, it’s worried about its deposit insurance fund.  So, it appeared that there was internal strife, uhm, over what to do with WaMu, but long before September.

Dave Ross:  “So, there, so it was the FDIC that was hot to close it down, huh?”

Kirsten Grind: “That’s what it appears.”

Al Scott: “That’s the impression, yeah.”

Dave Ross: “Now, what gives them the power to do that? Essentially whenever they want, regardless of the banks numbers because that’s what you imply in this story – that even though there were numbers indicating that they had plenty of money, the FDIC had the power, just to come in and say – ‘we don’t care what you think, we don’t care if your ATM’s are fine, we’re gonna close you down and destroy the shareholders value.’  What gives them that power?

Al Scott:  “Well, that’s part of the regulatory structure, the FDIC doesn’t actually have that power, the OTS does.  So the disagreement they had during the summer before the closure was pretty significant because FDIC was, from what we understand, from what we can gather, was very concerned about protecting the deposit fund that it supervises.  But the OTS actually is the agency with the authority to shut down the bank, so basically, FDIC had to convince OTS to, to make that move.”

Dave Ross: “And you can’t tell from the emails what argument they used to convince them?”

Kirsten Grind: “It’s completely blacked out.”

Dave Ross: “Huh.  So you suspect it’s something like ‘it’s almost five o’clock we gotta knock off and go home, let’s close this bank’?”

Kirsten Grind and Al Scott: (laughter)

Kirsten Grind: “Yes, it could be something like that, I mean we’ll just never know unless...”

Dave Ross:  “I don’t know if you’ve read, there’s an article in the Washington Post about Neel Kashkari who was the guy who helped Paulson, Henry Paulson then Treasury Secretary Henry Paulson, run the TARP fund, the way he writes it, they spent like about two sleepless weeks just scrambling, trying to keep the – they were sincerely worried at one point that they would be looking at closing down eight thousand banks at once.  Which meant everybody’s ATM’s would’ve stopped working, so and there were like, something like a couple dozen people whose job it was to keep them all open.  It sounded like it was an absolute nightmare, I mean he finally left the government and is living in some cabin in Montana, some place, just to decompress.  So I wouldn’t be surprised if they were in a panic.”

Kirsten Grind:  “It definitely appears, I mean you can see from the hundreds of emails that were released, that they were emailing at all hours of the night, you know Shelia Bair, the Chairman of the FDIC, emailing with headings like ‘liquidity’ and ‘WaMu Status Report’.  So you can see that they were very concerned about this for at least two months before the closure.”

Dave Ross:  “There’s all this concern about runs on the bank.  I thought the FDIC was supposed to stop runs on the bank and yet, WaMu suffered two runs in the same year, the one in July and the one that was tailing off in September – explain to me why they still happen, even though we have FDIC insurance and though nobody in a covered account has lost any money, ever?”

Al Scott:  “People still get panicky, and there were withdrawals from people that were covered by insurance, I think the first run was predominantly people that were above insurance limits, so they were taking…”

Dave Ross:  “People with more than, was it two fifty at that point?”

Al Scott:  “It was a hundred, hundred thousand dollars at that time.”

Dave Ross:  “I thought those guys though figured out ways to open, you know, a million different types of accounts so they could be completely covered.”

Kirsten Grind:   “But you know the average consumer isn’t that savvy.  I mean they saw in July when WaMu had its first bank run, they were seeing all those pictures of IndyMac, you know lines around the block of that California Mortgage Lender, people trying to take out their money.  So they were just worried ‘oh no, my money’s at WaMu, I’ve heard that WaMu might be in trouble, I’m just going to take it out of there’.  But you know a lot of other banks were also facing some of these issues, maybe not quite the same level of a bank run as WaMu did but it’s just you saw it so much in WaMu’s case.”

Dave Ross:  “So we have a system then where whether the financial system lives or dies is based, is based on which rumors catch fire.”

Kirsten Grind:    “I mean, in WaMu’s case, rumors about what was happening at the bank really were its nail, the nail in its coffin.”

Dave Ross:   “And is there any reason why these rumors ended up hitting WaMu harder than other banks, was it, did somebody say something, naming WaMu, or did it just, did this rumor just spontaneously create itself?”

Kirsten Grind:   “You know, I don’t really have the answer to that, I think that WaMu’s loan troubles were pretty heavily publicized.  They had a very contentious shareholder meeting in the spring, where their former CEO Kerry Killinger had to get up and defend himself in front of hundreds of shareholders.  So, I think that the issue just sort of steam rolled.”

Dave Ross:  “I remember the story being that, that the reason for this was in fact that WaMu had bought into the whole subprime market and had lost money there.”

Al Scott:  “That was a big part of it, I mean, there was a lot of reporting throughout the spring of two thousand eight about the problem loans, the mounting losses that were coming, you know, the deep entrenchment WaMu had in the subprime market which was going south in a hurry.  And by the time you get to September, when you know, really, panic had seized wall street, the whole thing had been ratcheted up a bit and WaMu’s also an interesting, just because of its size, is an interesting case, you know, there are a lot of community banks like you said, smaller banks, maybe eight thousand banks that might’ve been on the verge of failure, quote unquote or might have been concerns but few were really the size of WaMu outside of that sort of New York bank nexus, the money center banks.  You might be propping up those, you know, the government might be looking to keep those ones open cause they’re so systemic, so far reaching in there intertwining with other financial institutions, but something like WaMu, where it’s mortgage loans, ehh..”

Dave Ross:  “But yet, despite all that, you’re saying that even with the bad loans, they still had the 29 Billion dollars.”

Al Scott:  “Oh and more, they had another eight billion on top of that they could get from the Fed to help them through, there was, yeah...”

Dave Ross:  “Plus they had an investor, right, they had a private investor?  That was keeping them afloat?”

Al Scott:  “Yeah and they were looking for other ways to get more capital, bond to equity transaction that would have perhaps...”

Dave Ross:  “Plus, if they had waited six days they would’ve been eligible for TARP funds.”

Al Scott:  “Right.”

Dave Ross:  “So, so, then none of this makes sense.”

Kirsten Grind:  “Well it, WaMu’s case is a little bit hard to wrap your head around because this was a bank that had expanded heavily into risky mortgage loans; its strategy was way off base.  We’re certainly not saying that it didn’t have a ton of problems.  And it also had suffered these two bank runs, so just knowing this, you would think ‘oh well they, they should’ve been closed’, but the fact of the matter is they should have been able, it appears, to organize their own, you know, market resolution.”

Dave Ross:  “You know the question is you got this from the banks internal reports, right?   Now, do you have any reason to believe they were making that up?”

Kirsten Grind:  ‘I mean, there’s always a chance I guess but we actually have the reports that they circulated and also this is from talking to many people, not just WaMu executives.”

Dave Ross:  “Well I have to assume that the fact you published it in the business journal tells me that you thought it’s a credible number.  So, if the 29 Billion dollars, which you say is actually a conservative estimate – that there was actually more than that available to them, if that is an honest figure, why didn’t they just disclose that and say ‘look, you folks for all you’ve been hearing – we’ve got 29 Billion dollars and access to 8 Billion more, so keep your money here’.”

Kirsten Grind:  “Well, I mean, there’s a couple of reasons for that; one there actually is a lawsuit right now going on that has to do with whether or not the bank was solvent, um, so there’s that but a lot of the executives involved in this, that have these numbers, are currently being sued by shareholders for these risky mortgage strategies and they just can’t talk publically – absolutely not, so, and really there hasn’t been an outlet for them to do so because so many people have had such a negative perception of …”

Dave Ross:  “Well I know now, I understand now, I’m talking about back then, before the law suits, before the bank was closed.  Why couldn’t somebody, if this figure was true, stand up and say, ‘we’ve got 29 Billion dollars’?”

Kirsten Grind:  “Oh, well in September they were definitely doing that...”

Dave Ross:  “Oh, they were?”

Kirsten Grind:  “They were getting out, they were releasing liquidity numbers.  This number hadn’t been publicized because it’s the last number that was available and then the regulator shut them down.”

Dave Ross:  “Okay, so they were saying..’we have plenty of money’...”

Kirsten Grind:  “They were trying to, oh yeah.”

Dave Ross:  “Why didn’t that work, nobody believed them?”

Al Scott:  “That’s the question, FDIC and OTS were watching the liquidity number daily, um, that WaMu was sending to them and they knew the position.  So it was a big surprise to the WaMu folks when the regulators walked in and took over the bank.”

Dave Ross:  ‘In terms of, in terms of the effect on the public though –I’m saying if investors, if depositors - why didn’t they paint a giant 29 on the side of the WaMu building or whatever, just to make it clear – ‘Hey, there’s plenty of money here’.  Wouldn’t that have stopped the run on the bank and reassure the regulators?”

Al Scott:  “You know it’s a funny thing about banks because they’re really all about confidence and banks get into this tricky position where in the public perception if there’s a concern about their financial strength and viability then even things they say to reinforce their perception of strength and invincibility, tend to work against.”

Dave Ross:  “It backfires.”

Al Scott:  “It backfires; your question is good about why the regulators went ahead even when they knew that this number is there.”

Dave Ross:  “I want to ask you what this has told you about the way the government works and where we should go from here, and also, you talk to so many employees; I’d like to know how their lives have changed in the past year.  We’ll do that when we get back with Kirsten Grind and Al Scott of the Puget Sound Business journal, ‘Why did they close WaMu?’  Stand by.”

[Commercial Break at 14:03 – 14:08 of MP3 file]

Dave Ross:  “Did the government have to close down WaMu last year?  According to the Puget Sound Business Journal report – no they didn’t.  Thos figures to be believed, they had 29 Billion dollars basically in cash, so the ATM’s would’ve continued working fine.  Report is written by Kirsten Grind and Al Scott of the Puget Sound Business Journal, both of whom are here.  You talked to a lot of ex-WaMu employees, what’s life been like for them over the last year?

Kirsten Grind:  “Umm, not great, actually there’s been quite a lot of suffering on the employee end.  In this story we wrote about one particular executive who unfortunately took his own life.”

Dave Ross:  “That’s where your article begins, there was a memorial to somebody who committed suicide because of this, name not disclosed, but I mean, this did have a huge impact on the lives of people, didn’t it?”

Kirsten Grind:  ‘It did and one of the reasons why this case in particular was so interesting is that it’s more than a year later and there is still so many people that are affected and continue to be affected by it and it’s not just employees, it’s shareholders all over the country.  I mean, I called dozens of shareholders for this story and everyone I called, you know, they lost their retirement, they lost travel funds, they lost everything they were still thinking about the bank.  A lot of them have kept money in the penny stock hoping that the governments going to come to its senses and restore some of that money they lost.”

Dave Ross:  “Yeah, what is the stock going for now?”

Kirsten Grind:  (Laughter)

Al Scott:  “Like something around 16 or 20 cents a share.”

Dave Ross:  “Wow, did you get any indications from reading through those emails that the regulators took the human cost into consideration or was that just considered to be collateral damage in that environment?”

Al Scott:  “There was no evidence that they considered that impact.”

Dave Ross:  “None?”

Al Scott:  “None.”

Kirsten Grind:  “And in fact, the FDIC at least typically doesn’t consider that impact.  Their only concern is for the deposit insurance fund which covers bank customers in case of a bank failure.  So they only care about bank customers.  Which, that’s, that’s great, I mean, they should be worried about that, but there’s just no concern for shareholders.”

Dave Ross:  “What does a bank do then to protect themselves from this in the future?  Because as Alan Greenspan has said, ‘that no matter what we do, this will happen again some day’.  You were mentioning to me during the break that the WaMu executives were very close to having their own private deal to resucue the bank, they just needed a few more days.  It occurs to me if you always have a rescue deal like that in your back pocket – that you don’t need a few more days.  The moment that the regulators come in you can say, ‘ah, before you do anything guys, can I show you what we have, what we have had in the works here for years just for this event’.  Wouldn’t that make sense?”

Kirsten Grind:  “Well, I think so but it’s my impression actually that, that was happening at WaMu.”

Dave Ross:  “Really?”

Kirsten Grind:  “Yes, that they um, in a previous story that we wrote where we talked more about their search for a deal in September and how the FDIC actually undercut them by shopping the bank around to other bidders in a distress sale.  They were actually trying to sell the bank and looking for other ways to raise capital and telling the regulators about this, so that’s why they were all so shocked when the bank was actually shut down.  I mean, there’s not one WaMu employee or executive I’ve spoken to that saw this coming.”

 Dave Ross:  “The executives though, I mean, they took the hit though, didn’t they?  I mean, Kerry Killenger’s name was certainly dragged through the mud, did he deserve that?”

Al Scott:  “Well, he was, he was the architect of the strategy of the deep dive into subprime mortgages, so yeah, he deserves that but he was…”

Dave Ross:  “But now you’re saying that’s not what killed the bank.”

Al Scott:  “Well, it was part of it because that was, that was what was inflating the concerns and provoking the runs on the bank.  All that angst about what’s going to happen to WaMu.  But ultimately it was the regulators who decided to take it down and um, as we say in this article, you know, despite the fact that the bank had enough liquidity and capital to be above all the regulatory minimums and in fact, there are banks that are operating in the state today and across the county today that are below the minimums and they’re still being allowed to operate.”

Dave Ross:  “So, there are banks right now, in a worse position than WaMu was on the day it was closed?”

Al Scott:  “Right.”

Dave Ross:  “But are still operating.”

Al Scott:  “Far worse.”

Dave Ross:  “See if I were a bank executive I’d be, I’d be pissed off.”

Kirsten Grind:   “Well and someone, I mean, we have people in these stories sort of pointing that out.  I mean whats the rhyme and reason for closing banks and that’s why it’s so frustrating that the government will just not speak with us about the details about why they closed WaMu.”

Dave Ross:  “And you’ve gotten a complete stonewall from them?”

Kirsten Grind:   “Completely.”

Dave Ross:  “In other words, they will not say what factors went into their decision to close this bank down when other were worse off.”

Kirsten Grind:   “Exactly.”

Dave Ross:  “Well, thank you Kirsten and Al I appreciate it.”

Kirsten Grind and Al Scott:   “Thanks.”

Dave Ross:  “The Article is in the Puget Sound Business Journal, ‘Why did close WaMu’ by Kirsten Grind and Al Scott, this is the Dave Ross Show.”

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