Inside WaMu's (criminally?) insane culture

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why do you insist that the "obama" administration is inevitable?
are you like red sox fans of old that used gallows humor as
a way to cope? why not wait until after the fat lady sings
to say such things? enough already

Some people almost certainly did what they were told because they had a nice, fancy desk that made them feel professional and they didn't think very hard or know any better. I don't think that group of people belong in jail, but whoever managed them does.

I'm also with Tad in believing that some of the elected officials (in my view, in the Bush adminstration) who were so caught up in 'de-regulation' that they enabled full-throttle theft and fraud need at least some jail time, and some long term community service obligations -- let 'em go help build public housing for a year or two and maybe they'll realize that a nation building McMansions (many of them on former agriculturally productive land near urban areas) is a formula for disaster.

If the woman you quote could figure it out, then a whole lot of others should have figured it out also. And we need far more FBI investigators (since this is cross-state commerce, and local law enforcement doesn't have the manpower or the authority) to track this down and bring some justice into this world.

Then, of course, we also need a Dept of Justice that isn't so politicized that it can't enforce whatever cases the FBI brings before it.

Meh. Unless the WaMu execs violated the law, they only did what the government asked: "Write these deals according to these parameters, and we'll insure them."

That's no more criminal than a welfare official granting benefits according to criteria. He's under no obligation to ensure the recipient isn't taking advantage of the system.

Didn't someone say, "If you subsidize something you will get more of it"? Fannie Mae and Freddie Mac subsidized bad loans.

WaMu's people would never have behaved like this with their own shareholders' money.

Zak, you raise the IMO most important point here: where should we draw the line between unethical business practices and criminal violations?

One thing we should be examining is how the cult of entitlement colors the transactions.

Setting qualifications for a loan makes business sense, but not because the person receiving the loan may be injured. It makes sense because those who do qualify may be injured, which in turn hurts the potential profitability of the lender. People will withdraw their deposits for the perception that their money has been put at risk, as well as the lender's possible inability to make good on the promise of interest paid on thise deposits.

People who objectively do not qualify for loans are made to feel entitled to them. Why else do they cast sanity to the wind and take the money?

This is a classic illustration of TANSTAAFL. The people receiving the free lunch are being "fed" by those who follow the rules. Someone is paying for the lunch. Ethics comes in when there is an explicit effort to protect the lunch eaters from being held responsible for paying for it. Ask any business owner if taking the full price paid by some customers and giving discounts to other customers is a sane practice. They all want the discount, and those who don't or can't get it will take their business elsewhere.

When it comes to the financial industry, "elsewhere" is nowhere. "To big to fail" is precisely blackmail and extortion. Requiring their loan officers to make bad loans is not itself a criminal offense -- though it is clearly unethical -- but making others pay for those free lunches is -- or damn well should be -- criminal.

The complaints against regulation have nothing to do with making profit. Regulated companies make profits. Their complaints are for the simple fact that regulation restricts them from making more profit at the expense of others. Businesses are made to feel entitled to all the profit they can get, regardless of means, because consumers are rewarded for that corporate greed in the short term, and have no sense of the long term until it bites them in the ass.

Which company would you rather invest in?

A makes a quality product, its employees are well satisfied with good wages and benefits, and puts out a solid and unexciting 2% dividend every year.

B floods the market with twice as many products as A, minimizes its overhead by using every loophole it can find (and perhaps some that don't exist) to pay employees as little as possible, offers as few benefits as it can get away with, and posts a 10% dividend.

If your answer is "the smart investor goes with B", you have just violated a long list of ethics in the name of profit. No one from B needs to go to jail to justify that view.

Zak
Oh wait, I don't feel the need to criminalize every ethical lapse inspired by the need to meet a company's demands.

No one's suggesting anyone criminalize anything.

Loans issued with the knowledge that the borrower cannot pay them back are already illegal. They've been illegal for decades.

It's not just some crazy ethical violation, it is actual criminal activity.

David, there was never any doubt that already illegal loans get made. I do not think those are the loans that Ms. Cooper was pressured to approve. There is no statutory violation for a high-risk loan going bad. "A greater chance of default" is not the same as "will never get paid."

Erin,

80 percent of the subprime foreclosures were not under the Community Reinvestment Act (CRA). Most of the loans were made by companies that were not authorized to make CRA loans. The Federal Reserve released a study that found the CRA loans were very successful and had a low rate of foreclosure.

There were large numbers of people that subject to fraudulant lending. People were talked into getting adjustable rate loans at a time when rates were low.

Obama has been talking about increasing oversight since at least 2006 when he sponsored the Stop Fraud Act that was never passed.

In January 2008, I heard Obama talk about increasing the number of bank regulators when talking about foreclosures.

Could we have a fixed link, please?

Franklin,
Many business owners do discount prices for potential repeat customers. I work for a survey research company. Every sale we make is custom-priced, because no two projects we work on are exactly the same. So when we price projects, we have to estimate what our costs would be. That means there is risnk involved in pricing too low (we don't cover our costs) and in pricing too high (we don't win the business). If we don't cover costs, then we hurt our shareholders because they don't get profit. If we don't win business, we hurt our shareholders and employees, because revenue isn't there and we'll have to lay people off. So we take on a certain amount of risk. We may price low in order to win a big client, risking low profits because it will support a lot more of our sunk costs. Is there anything unethical in these risk calculations?

Now imagine that you're determining an interest rate or principal requirement for a loan. What is the ethical evaluation of risk?

There may be people who ignored the concept of risk entirely, but for most, they just assumed there wasn't much risk, because default rates had been so low recently, and they knew they needed to make loans in order to stay in business, and their competitors were using such low rates. I think there was more foolishness than outright ethical violation.

Zak, you make good points. Respectfully, they don't cover the current context very well, at least as I see it.

Adjusting price to react to market pressures is only what one would expect from a company wanting to remain competitive. Your client base (keeping to your stated example) will recognize that. Some may regret not hiring you earlier rather than later, some may grumble about having paid more in the past than someone else is paying now, but if the company is making such decisions transparently, it is indeed acting ethically within the bounds of its business. Those who, on that basis, decide to take their business elsewhere belong in my TANSTAAFL category.

My example assumes (where I probably should have stated) that the product is not subject to such immediate pressures. I had in mind the manufacturing model, not the service model. A hypothetical and in all ways limited extension would be the widget from company A, being made to last for a couple or three years, is compared to the same widget from company B costing 2/3 as much but needing to be replaced twice as often. There's a good reason there why B will show a greater short-term profit than A.

With similar logic, Bank X (my analog to company A) will seek to sell mortgages at fixed rates, and part of the qualification process is a determination of the risk of default over the life of the mortgage. Bank Y (my analog to B) will push ARMs at lower initial rates in the expectation that they will bring in more income by sheer volume as well as when the rate adjusts upward. The reasonable expectation is that Y will "sell" more mortgages than X, showing a greater short-term profit.

The ethics comes in when Y sells to people who have no reasonable expectation of being able to afford the mortgage at a higher rate. The default risk was based on a future change in the terms of the loan, not on the risk that the person will default on the loan for the "usual" reasons. They sold to such people solely to boost that short-term performance. There are plenty of Bank Xs around who are as solid and reliable after the "crash" as before. Who made the right business decision, and who implied a stronger ethical stance?

I don't know the proportions. I don't know if anyone has tried to measure them. But I do know that nearly every, if not every, mortgage holder who could afford the lower rate payments would still be making those payments if their banks had made an attempt to keep those rates where they were. Instead, the vast majority of previously "solid" loans "magically" became defaults. That, good sir, is worthy of a close examination of the ethics involved.

Scary fact: I'm STILL getting unsolicited credit card applications from these clowns. Got one just last week.

I remember getting some insurance junk mail from AIG...the day they went belly-up...I laughed out loud....

Sorry for that gang, the link was broken. I fixed it.

Zak,

I have to think it was a little less innocent than that on WaMu's part. They were propping up demand artificially and approving the bad loans, too. Under normal conditions, the market would still have some demand (keeping housing prices high) if the financial firms only loaned to those with good or even acceptable credit.

But approving high-risk loans hand-over-fist would only end in any demand being rapidly sated. Construction firms and businesses with loans saw the hot market and overbuilt.

Then housing prices fell due to sated demand and interest rates rose when the dollar started swirling the drain. Then the defaults started piling up, and housing prices plunged further as everyone who wanted a house already had one, the newcomers weren't as numerous as the defaults, and building jobs planned while the market was hot and being finished, empty, and awaiting buyers and lessees, were creating a glut of supply while the demand was in negative numbers.

This was nothing more than a short-term get-rich-quick scheme by a select few, make no mistake.

Zak, yes, that was my thinking. Jude offers some plausible points, about which I know little to comment. MI offers another bit of sane perspective on the mindset that something will "always"... go up, be better, be positive. No business person I've ever met would consider that anything close to a sound attitude on which to base decisions, short- or long-term.

WAMU's merchant account scam has been holding my two companies hostage and depriving me of the right to earn a living for almost a year now. My case against them is pending with the courts and because of this non-sense my landlord took me to court to put me on the street because I owe him money that he no longer wants to wait for. This is the last straw so I am not worried about it because God Almighty is in control of the situation. What was meant to harm me will ultimately turn out the be a blessing in disguise. My landlord hired a pitbull lawyer to make the case and put me on the street....but little do they know that they put me on speed-dial to something bigger and much better. I am ready to move out of death valley by the grace of God.