Wall Street Journal contributor Kirstin Grind has written a
book on the downfall of WaMu, the second largest bank failure in the US (so
far) and the name that has come to symbolize risky mortgage lending in the USA.
I expect to enjoy reading it when it comes out, and learn more
about the inside story. Here is some of what we know already.
WaMu started as a mutual bank, meaning that it was owned by
its depositors. Mutual Banks come in different forms, but traditionally they
are focused on savings deposits and mortgage loans rather than loans to
businesses. They usually have low interest rates on loans and instead select
their borrowers carefully to have low losses. Mutual banks are a traditional, one might even say old-fashioned, form of bank that is often heavily committed
to the local communities and avoids having many branches. Hayagreeva Rao and I
are doing research on such community organizations, and we have found that they
can have a big and positive impact on the development of their communities.
For WaMu, however, the period as a mutual ended in 1983. Mutuals
can de-mutualize, and this is done both in banking and in insurance (many
insurers are also mutuals). De-mutualization means that they turn into regular
joint-stock firms, but often they keep their name. There is nothing preventing
a non-mutual from calling itself a mutual. They can keep their business
practices too, but most often do not. Mutuals are very efficient organizations as long as
they don’t grow, but de-mutualization means that they can grow quickly, adding
branches and getting new lenders. Shortly before failing, de-mutualized WaMu
had tens of thousands of employees and hundreds of branches, and a strong
electronic-banking presence. More worryingly, due to permissive loan practices
and incentives for loan generation, it has a loan portfolio that was bloated
and risky when compared to its capital. Losses on loans started to mount,
triggering a depositor bank run that was fast and furious thanks to the ability
to transfer money electronically: it is estimated that 16.7 billion dollar in
deposits left WaMu in nine days.
What happened? WaMu had become a commercial bank with
commercial bank ambitions but a shortage of commercial bank experience. It also
had some bad luck: 2008 was not a good year for having a large mortgage loan
exposure, because the subprime loan crisis was in full swing. Its failure shows
some of the problems of changing from one form of organization to another.
Strategies can change quickly, but the capabilities to back those strategies
take longer to develop.
In the book she reports another side to the story too, however, and one
that shows in a better way how WaMu did not totally outgrow its roots as a
mutual organization. When WaMu started experiencing problems collecting loans,
they sent out a team to investigate how they might improve payments from their borrowers.
This team made interviews on video tape documenting how people had been
blindsided by the fall of the housing market and found themselves unable to
pay. When they showed this footage to the president of WaMu's Home Loans Group,
David Schneider, he ordered a revision of loan collections to take a softer
approach. In the end, it is hard for a firm with mutual in its name and history
to escape the idea that mutuals are a way for people to help each other.
Greve, H. R. & Rao, H. 2012. Echoes of the
past: Organizational foundings as sources of an institutional legacy of
mutualism. American Journal of
Sociology, 118(November).
Grind, Kirsten. 2012. A Bank on the Run: How
WaMu's Demise Hit Home. Wall Street Journal, June 12 2012.
Grind, Kirsten. 2012. The Lost Bank. The Story of Washington Mutual, the Biggest Bank Failure in American History. Simon & Schuster.
Grind, Kirsten. 2012. The Lost Bank. The Story of Washington Mutual, the Biggest Bank Failure in American History. Simon & Schuster.