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Former WaMu CEO: Feds are taking us toward another housing bubble

Many may remember Washington Mutual Savings Bank, at one point operating as the nation’s largest thrift institution. It was built up by former CEO Kerry Killinger, and then in 2008 during the now-infamous housing crash, it was seized by the feds on grounds that it was insolvent.

Except when looking at Killinger’s new book Nothing Is Too Big to Fail, he argues the bank was stolen.

“We think the feds are once again taking us down a position of severe risks in the economy for a potential another bursting of bubbles like the stock market and housing and the like. And we figured that the only way they’re going to learn so they don’t repeat some of those same mistakes is to get a lot of those true facts out there,” he told Seattle’s Morning News with Ross.

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Dave asked Killinger his position on the failure of Washington Mutual, and whether they tried to hide any assets or conceal any wrongdoing.

“Absolutely not. First of all, we strongly believe the bank was unfairly seized and it was not a failure and should not have happened,” Killinger responded.

“Let me just give a couple of very quick factoids similar to today where we see risk of a housing bubble,” he continued. “We started warning the feds, the Federal Reserve, the major regulators, our shareholders, and everybody else about four years before the financial crisis, that housing prices were getting too high and that we were in for some form of correction,” he said.

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He says Washington Mutual reduced residential lending ahead of time — and cut higher risk lending — leading to a lower rate of loan delinquencies than the rest of the industry.

“We actually reduced the amount of residential lending we did before leading up to the financial crisis for those four years by some 74% — we almost got out of the business. We cut out all the higher risks lending like subprime, which was always a small part of what we did. But wereduced that to nothing, and we showed that our loan delinquencies were about half what the industry was,” he said.

“The problem was we got caught in the crosshairs. One was there was a rapacious appetite on the part of JPMorgan Chase to acquire the company, so they were very aggressive and trying to work and some would say manipulate the regulators into helping them out. And then we got caught in the second part where Treasury Secretary Paulson said policy-wise he wanted to eliminate community banks and thrifts to the benefit of Wall Street. And then third, when the crisis finally hit and everybody panicked, there was no game plan.”

Did we at least learn a lesson from it such that it won’t happen again?

“I think the lessons learned from this is that whenever we get in these periods of encouraging asset bubbles like the Fed did leading up to the last financial crisis, they kept interest rates below the rate of inflation for an extended period of time. And guess what? Housing prices rose at an unrealistic level,” he said.

“I’m hoping we have learned from that because that’s exactly what we’re seeing again today. The Fed has kept interest rates way below the rate of inflation. Naturally, that led to easy affordability for housing, and people are just bidding up prices all over the country. So we all have to think about what’s going to happen to the prices of those houses when interest rates returned to a more normal level.”

Listen to Seattle’s Morning News weekday mornings from 5 – 9 a.m. on KIRO Radio, 97.3 FM. Subscribe to the podcast here.

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