WEBVTT 00:00:00.000 --> 00:00:03.419 I want you to close your eyes for a second. Picture 00:00:03.419 --> 00:00:07.099 a birthday party, but not just a casual get together. 00:00:07.179 --> 00:00:09.460 This is a centennial plus celebration. All right. 00:00:09.619 --> 00:00:12.480 There is a massive cake sitting on a mahogany 00:00:12.480 --> 00:00:16.120 table. The frosting is pristine. And there are 00:00:16.120 --> 00:00:21.039 119 candles flickering away, generating that 00:00:21.039 --> 00:00:23.239 kind of heat you can feel on your face. That 00:00:23.239 --> 00:00:26.320 is a lot of candles. You'd need a fire permit 00:00:26.320 --> 00:00:29.250 for a cake that big. Exactly. The room is filled 00:00:29.250 --> 00:00:32.350 with history, generations of success. Everyone 00:00:32.350 --> 00:00:34.030 is gathering around, they're taking a breath, 00:00:34.149 --> 00:00:36.109 getting ready to sing happy birthday. I'm with 00:00:36.109 --> 00:00:38.729 you. The guest of honor leans in, chest expanding, 00:00:38.969 --> 00:00:40.810 ready to blow on the candles and make a wish 00:00:40.810 --> 00:00:43.109 for another century of prosperity. And right 00:00:43.109 --> 00:00:46.570 at that split second, boom, the front door gets 00:00:46.570 --> 00:00:49.270 kicked off its hinges. Wow. Okay, that's a violent 00:00:49.270 --> 00:00:52.130 image, but go on. The feds walk in. They don't 00:00:52.130 --> 00:00:54.590 just crash the party. They seize the house. They 00:00:54.590 --> 00:00:56.509 take the keys. They start putting price tags 00:00:56.509 --> 00:00:58.549 on the furniture to sell to the neighbors for 00:00:58.549 --> 00:01:00.450 pennies on the dollar. And they tell the birthday 00:01:00.450 --> 00:01:02.869 boy to grab his coat and get out. And he's just 00:01:02.869 --> 00:01:05.469 out. He's on the street before the smoke for 00:01:05.469 --> 00:01:07.489 the candles is even cleared. It sounds like a 00:01:07.489 --> 00:01:10.109 scene from a mob movie or, I don't know, maybe 00:01:10.109 --> 00:01:12.530 a Greek tragedy, but you are describing literal 00:01:12.530 --> 00:01:15.769 history here. This isn't a metaphor. I am. We 00:01:15.769 --> 00:01:19.189 were talking about September 25, 2008. It was 00:01:19.189 --> 00:01:21.849 the 119th anniversary of the founding of Washington 00:01:21.849 --> 00:01:24.930 Mutual, the bank known to millions of Americans 00:01:24.930 --> 00:01:29.319 simply as WAMU. And on that specific day, their 00:01:29.319 --> 00:01:32.400 birthday, instead of a celebration, we got the 00:01:32.400 --> 00:01:34.540 largest bank failure in the history of the United 00:01:34.540 --> 00:01:37.060 States. It is a staggering story. And I think 00:01:37.060 --> 00:01:38.920 because it happened right in the middle of all 00:01:38.920 --> 00:01:41.280 the 2008 financial chaos, I mean, right when 00:01:41.280 --> 00:01:43.500 Lehman Brothers was collapsing and AIG was melting 00:01:43.500 --> 00:01:46.219 down, people sometimes forget the sheer scale 00:01:46.219 --> 00:01:48.560 of the WAMU failure. It gets lost in the noise. 00:01:48.760 --> 00:01:50.680 It does. We aren't just talking about a local 00:01:50.680 --> 00:01:52.459 branch closing its doors. We're talking about 00:01:52.459 --> 00:01:54.819 a Leviathan. So let's put some numbers on this 00:01:54.819 --> 00:01:57.340 beast. How big are we talking, really? At the 00:01:57.340 --> 00:01:59.260 moment it was seized, Washington Mutual held 00:01:59.260 --> 00:02:04.319 roughly $307 billion in assets. They had $188 00:02:04.319 --> 00:02:07.379 billion in deposits. Staggering numbers. To put 00:02:07.379 --> 00:02:10.460 that in perspective for you, before WAMU, the 00:02:10.460 --> 00:02:13.219 benchmark for a banking disaster in the U .S. 00:02:13.219 --> 00:02:15.360 was the failure of Continental Illinois. That 00:02:15.360 --> 00:02:18.759 was back in 1984. Right. I remember reading about 00:02:18.759 --> 00:02:21.360 that. That was considered the Titanic of banking 00:02:21.360 --> 00:02:24.039 failures at the time. Real unthinkable event. 00:02:24.360 --> 00:02:26.759 Exactly. Continental Illinois was huge. It sent 00:02:26.759 --> 00:02:29.259 shockwaves through the system. But the Wamuu 00:02:29.259 --> 00:02:32.460 collapse dwarfed it. It was exponentially larger. 00:02:32.659 --> 00:02:35.819 Wamuu wasn't just a bank. It was an entire ecosystem. 00:02:36.539 --> 00:02:39.479 It held the savings of families, small businesses, 00:02:39.759 --> 00:02:41.900 massive corporate accounts across the entire 00:02:41.900 --> 00:02:44.659 country. And what makes this deep dive so fascinating 00:02:44.659 --> 00:02:47.620 to me is the trajectory. Because for the longest 00:02:47.620 --> 00:02:50.939 time, Wamuu wasn't this scary, toxic Wall Street 00:02:50.939 --> 00:02:53.120 monster. He was the friend of the family. He 00:02:53.120 --> 00:02:55.060 was the bank that wore khakis and polo shirts 00:02:55.060 --> 00:02:56.879 while the other guys wore three -piece suits. 00:02:57.000 --> 00:02:59.060 That was their whole brand. Approachable, local, 00:02:59.340 --> 00:03:02.020 safe. So the mission for this deep jive is clear. 00:03:02.159 --> 00:03:04.400 We have a stack of articles, court documents, 00:03:04.539 --> 00:03:07.400 and old financial reports here. We need to trace 00:03:07.400 --> 00:03:12.219 the arc of Wamuu. How did a local, friendly institution, 00:03:12.460 --> 00:03:15.219 which was born quite literally out of the ashes 00:03:15.219 --> 00:03:18.460 of a fire, grow into a subprime giant that ended 00:03:18.460 --> 00:03:20.639 up burning down the financial house? It's the 00:03:20.639 --> 00:03:23.099 ultimate question. And to answer it, we can't 00:03:23.099 --> 00:03:25.479 just look at the panic of 2008. That's just the 00:03:25.479 --> 00:03:27.479 final scene of the movie. Right. That's the explosion. 00:03:27.680 --> 00:03:30.060 We need to find the fuse. Exactly. We have to 00:03:30.060 --> 00:03:32.120 look at a fundamental shift in corporate philosophy 00:03:32.120 --> 00:03:34.759 that happened decades earlier. We need to look 00:03:34.759 --> 00:03:37.199 at aggressive expansion, at hubris, and at the 00:03:37.199 --> 00:03:39.360 specific mechanics of the financial instruments, 00:03:39.460 --> 00:03:42.340 the toxic sludge that Wamuu didn't just participate 00:03:42.340 --> 00:03:46.240 in, but actively courted. So let's rewind the 00:03:46.240 --> 00:03:48.900 tape all the way back. I mentioned born from 00:03:48.900 --> 00:03:50.580 ashes, and I wasn't just trying to be poetic. 00:03:50.800 --> 00:03:53.080 No, you were being historical. The origin story 00:03:53.080 --> 00:03:55.780 takes us to the Pacific Northwest, Seattle. The 00:03:55.780 --> 00:03:58.919 date is September 25, 1889. Okay, set the scene 00:03:58.919 --> 00:04:01.740 for us. This isn't the Seattle of Amazon's fears 00:04:01.740 --> 00:04:04.520 and grunge music we know today. Oh, far from 00:04:04.520 --> 00:04:07.699 it. This is a frontier town that had just been 00:04:07.699 --> 00:04:10.659 absolutely devastated. The Great Seattle Fire 00:04:10.659 --> 00:04:13.340 had swept through just a few months prior. The 00:04:13.340 --> 00:04:15.590 whole city. Pretty much the whole business district. 00:04:15.849 --> 00:04:18.910 It destroyed about 120 acres of the central core. 00:04:19.110 --> 00:04:22.430 The wharves, the mills, the banks, everything 00:04:22.430 --> 00:04:24.769 was made of wood and everything was just gone. 00:04:25.069 --> 00:04:27.649 So the city is black, charred, and smells like 00:04:27.649 --> 00:04:30.269 smoke. Precisely. But there was this immense 00:04:30.269 --> 00:04:33.149 energy to rebuild. You have to imagine the sound 00:04:33.149 --> 00:04:35.589 of hammers and saws everywhere, this pioneer 00:04:35.589 --> 00:04:39.410 spirit. But rebuilding requires capital. It requires 00:04:39.410 --> 00:04:42.629 money. And in a burnt -down city, money is tight. 00:04:42.879 --> 00:04:45.040 So a group of citizens gets together to solve 00:04:45.040 --> 00:04:47.720 this problem. A classic American story. Right. 00:04:47.800 --> 00:04:50.120 They incorporated the Washington National Building 00:04:50.120 --> 00:04:53.240 Loan and Investment Association. That is a mouthful. 00:04:53.279 --> 00:04:55.319 I can see why they eventually shortened it. Huh. 00:04:55.480 --> 00:04:58.300 Yeah. Marketing wasn't the priority in 1889. 00:04:58.480 --> 00:05:01.579 Survival was. But they wasted no time. Just a 00:05:01.579 --> 00:05:04.000 few months later, on February 10, 1890, they 00:05:04.000 --> 00:05:05.899 made their first home mortgage loan on the West 00:05:05.899 --> 00:05:09.370 Coast. Wow. That's a serious claim to fame. The 00:05:09.370 --> 00:05:11.470 very first home mortgage on the West Coast. That 00:05:11.470 --> 00:05:14.629 establishes them not just as a bank, but as a 00:05:14.629 --> 00:05:17.050 pioneer, a pillar of the expansion of the American 00:05:17.050 --> 00:05:20.310 West. It does. And for a long, long time, they 00:05:20.310 --> 00:05:23.009 kept things incredibly simple. They were a boring, 00:05:23.170 --> 00:05:27.089 reliable engine for homeownership. In 1917, they 00:05:27.089 --> 00:05:30.069 changed the name to Washington Mutual Savings 00:05:30.069 --> 00:05:33.149 Bank. And I want to. Pause on that word mutual. 00:05:33.449 --> 00:05:36.189 Yes. Let's unpack this. We hear mutual fund or 00:05:36.189 --> 00:05:39.389 mutual insurance. But in the context of a bank 00:05:39.389 --> 00:05:41.889 in the early 20th century, what does being a 00:05:41.889 --> 00:05:44.410 mutual actually mean? How is it different from, 00:05:44.449 --> 00:05:47.069 say, a Bank of America or a J .P. Morgan today? 00:05:47.310 --> 00:05:49.819 It's a completely different animal. A mutual 00:05:49.819 --> 00:05:52.939 bank is owned by its depositors. By the customers. 00:05:53.139 --> 00:05:55.220 By the customers. There are no outside stockholders. 00:05:55.379 --> 00:05:57.300 There is no ticker symbol on the New York Stock 00:05:57.300 --> 00:05:59.540 Exchange. If you have a savings account there, 00:05:59.600 --> 00:06:02.000 you are, in a very real sense, a partial owner. 00:06:02.220 --> 00:06:04.500 So the guy depositing his paycheck from the lumber 00:06:04.500 --> 00:06:07.240 mill is the boss. In a structural sense, yes. 00:06:07.459 --> 00:06:09.819 And this dictates the bank's entire behavior. 00:06:10.040 --> 00:06:12.240 The primary goal, really the only goal of a mutual 00:06:12.240 --> 00:06:14.459 bank, is to keep the money safe and serve the 00:06:14.459 --> 00:06:16.379 members. You aren't trying to hit a quarterly 00:06:16.379 --> 00:06:18.579 earnings target to impress Wall Street analysts. 00:06:18.839 --> 00:06:20.639 You're not trying to jack up the stock price. 00:06:20.819 --> 00:06:22.540 You're not. You are trying to make sure that 00:06:22.540 --> 00:06:24.500 when Mrs. Johnson comes to get her money in 10 00:06:24.500 --> 00:06:27.970 years, it's there. Period. It sounds... Inherently 00:06:27.970 --> 00:06:30.689 conservative. Risk averse. Extremely. You don't 00:06:30.689 --> 00:06:32.329 gamble with the depositor's money because the 00:06:32.329 --> 00:06:34.370 depositors are your neighbors. It aligns perfectly 00:06:34.370 --> 00:06:36.889 with the slogan they used for decades. The friend 00:06:36.889 --> 00:06:39.589 of the family. You don't bet the family's grocery 00:06:39.589 --> 00:06:42.949 money on a high stakes poker game. You just don't. 00:06:42.949 --> 00:06:45.750 It's not in the DNA. It sounds idyllic, honestly. 00:06:45.990 --> 00:06:48.649 A bank that actually cares about safety over 00:06:48.649 --> 00:06:51.689 profit. But we know this story doesn't end with 00:06:51.689 --> 00:06:54.860 a friend of the family badge. Wamuu didn't stay 00:06:54.860 --> 00:06:58.560 a mutual bank. No. And this is arguably the first 00:06:58.560 --> 00:07:00.920 most important domino in the long chain leading 00:07:00.920 --> 00:07:03.980 to the 2008 disaster. The critical turning point 00:07:03.980 --> 00:07:08.199 was 1983. Wamuu demutualized. Demutualized. It 00:07:08.199 --> 00:07:09.879 sounds like a painful medical procedure. I'm 00:07:09.879 --> 00:07:11.759 sorry, sir. We have to demutualize you. It's 00:07:11.759 --> 00:07:13.480 a corporate transformation that changes the soul 00:07:13.480 --> 00:07:16.079 of the institution. They converted from a mutual 00:07:16.079 --> 00:07:19.100 savings bank into a capital stock savings bank. 00:07:19.339 --> 00:07:22.300 In plain English. They became a public company. 00:07:22.480 --> 00:07:26.360 They issued stock. So the DNA changes. Completely. 00:07:26.459 --> 00:07:29.319 You stop serving just the depositors and you 00:07:29.319 --> 00:07:31.220 start serving shareholders. And shareholders 00:07:31.220 --> 00:07:34.220 are a very different beast. Very different. Shareholders 00:07:34.220 --> 00:07:36.899 want growth. They want returns on equity. They 00:07:36.899 --> 00:07:39.540 want stock price appreciation. And they want 00:07:39.540 --> 00:07:42.500 it now, not in 10 years. They want it next quarter. 00:07:42.990 --> 00:07:45.589 Exactly. The incentives shift from safety first 00:07:45.589 --> 00:07:49.069 to growth first. Once you are public, you are 00:07:49.069 --> 00:07:51.189 on a treadmill. If you aren't running faster 00:07:51.189 --> 00:07:53.410 than you were last quarter, investors punish 00:07:53.410 --> 00:07:56.610 you. The stock goes down. So the sleepy local 00:07:56.610 --> 00:07:59.410 thrift vibe is officially dead. They might have 00:07:59.410 --> 00:08:00.709 kept the name, they might have kept the slogan 00:08:00.709 --> 00:08:02.430 for a while, but the engine was swapped out. 00:08:02.529 --> 00:08:04.930 It took a little while to wrap up, but yes, the 00:08:04.930 --> 00:08:08.350 philosophical shift was complete. In 1984, they 00:08:08.350 --> 00:08:11.129 reorganized again as a holding company. Washington 00:08:11.129 --> 00:08:14.709 Mutual Inc., or WMI. This is a technical detail, 00:08:14.810 --> 00:08:16.430 but it's important. Why is that so important? 00:08:16.730 --> 00:08:18.430 It allowed them to separate the banking units 00:08:18.430 --> 00:08:20.870 from non -banking units, giving them even more 00:08:20.870 --> 00:08:23.550 flexibility to expand, to buy other companies, 00:08:23.689 --> 00:08:26.410 and to diversify into riskier ventures. It's 00:08:26.410 --> 00:08:28.529 a structure that lets you build an empire. And 00:08:28.529 --> 00:08:31.589 expand they did. This brings us to the era of 00:08:31.589 --> 00:08:34.269 Kerry Killinger. He takes the helm, and the strategy 00:08:34.269 --> 00:08:37.289 shifts to what I call Pac -Man mode, just eating 00:08:37.289 --> 00:08:39.830 everything in sight. Killinger is a fascinating 00:08:39.830 --> 00:08:42.529 figure in this tragedy. He wasn't your typical 00:08:42.529 --> 00:08:44.669 Wall Street shark, at least not in appearance. 00:08:44.730 --> 00:08:47.490 He played the trumpet. He was affable. But he 00:08:47.490 --> 00:08:50.669 had a vision for aggressive, almost predatory 00:08:50.669 --> 00:08:54.730 expansion. The 1990s and early 2000s were defined 00:08:54.730 --> 00:08:58.110 by this growth by consumption strategy. But they 00:08:58.110 --> 00:08:59.789 didn't frame it as consumption. They had a much 00:08:59.789 --> 00:09:02.950 nicer name for it, the White Knight. Right. The 00:09:02.950 --> 00:09:05.250 white knight. This is when a company swoops in 00:09:05.250 --> 00:09:07.549 to save another company that's maybe failing 00:09:07.549 --> 00:09:10.309 or more often being attacked by a hostile takeover. 00:09:10.429 --> 00:09:12.350 It's brilliant PR. We aren't conquering you. 00:09:12.409 --> 00:09:14.830 We're rescuing you. Precisely. It allows the 00:09:14.830 --> 00:09:17.250 acquirer to look like the hero while swallowing 00:09:17.250 --> 00:09:19.830 up a massive competitor. And a prime example 00:09:19.830 --> 00:09:22.370 of this, perhaps the most dramatic soap opera 00:09:22.370 --> 00:09:25.029 of the era, was the saga involving Great Western 00:09:25.029 --> 00:09:28.159 Financial in 1997. Oh, I looked into this. This 00:09:28.159 --> 00:09:30.620 is better than daytime TV. So you have Great 00:09:30.620 --> 00:09:34.039 Western, which was a huge thrift based in California. 00:09:34.960 --> 00:09:37.620 And they were being targeted by a rival, H .F. 00:09:37.639 --> 00:09:40.159 Amundsen & Co. Right. H .F. Amundsen was the 00:09:40.159 --> 00:09:43.220 parent company of Home Savings of America. They 00:09:43.220 --> 00:09:45.600 were the big dog in the yard, the largest SNL 00:09:45.600 --> 00:09:48.480 in the country. And they launched a hostile takeover 00:09:48.480 --> 00:09:50.960 bid for Great Western. And it was hostile. Oh, 00:09:51.000 --> 00:09:53.279 it was nasty. Great Western's leadership did 00:09:53.279 --> 00:09:54.919 not want to be bought by Amundsen. There was 00:09:54.919 --> 00:09:57.960 bad blood, culture clashes, you name it. They 00:09:57.960 --> 00:10:00.659 were desperate for an escape route. Enter WAMU. 00:10:01.190 --> 00:10:03.950 riding in on a white horse, or maybe a corporate 00:10:03.950 --> 00:10:06.389 jet from Seattle. Wamuu stepped in with a friendly 00:10:06.389 --> 00:10:09.779 offer, a $6 .6 billion deal. Great Western's 00:10:09.779 --> 00:10:11.820 board leaped at the chance. They effectively 00:10:11.820 --> 00:10:14.220 used Wamuu to shield themselves from the hostile 00:10:14.220 --> 00:10:16.980 clutches of Amundsen. And just like that, Wamuu 00:10:16.980 --> 00:10:19.179 creates the nation's largest savings and loan 00:10:19.179 --> 00:10:21.700 association. They effectively doubled their size 00:10:21.700 --> 00:10:24.360 overnight by rescuing this company. But here 00:10:24.360 --> 00:10:26.899 is the ironic twist that really shows Killinger's 00:10:26.899 --> 00:10:29.919 ambition. Wamuu buys Great Western to save them 00:10:29.919 --> 00:10:32.759 from H .F. Amundsen. Then just a year later in 00:10:32.759 --> 00:10:36.340 1998, what happens? I love this part. It's so 00:10:36.340 --> 00:10:39.970 cynical and brilliant. in a corporate raider 00:10:39.970 --> 00:10:43.570 kind of way. Wamuu turns around and buys H .F. 00:10:43.590 --> 00:10:47.399 Amundsen. It's incredible. It's like a fish eating 00:10:47.399 --> 00:10:49.600 a bigger fish and then turning around and eating 00:10:49.600 --> 00:10:51.320 the fisherman who was trying to catch the first 00:10:51.320 --> 00:10:53.899 fish. They called it Project Grand Slam. That 00:10:53.899 --> 00:10:55.840 was the internal code name. And it was a grand 00:10:55.840 --> 00:10:58.799 slam. It solidified Wamuu's dominance in California. 00:10:59.440 --> 00:11:01.879 They now own the two biggest competitors in the 00:11:01.879 --> 00:11:04.360 state. They were suddenly a West Coast superpower. 00:11:04.779 --> 00:11:06.700 But they weren't just looking West. They wanted 00:11:06.700 --> 00:11:09.440 the whole map. They did. Their ambition was national. 00:11:09.779 --> 00:11:12.379 They went into Texas by acquiring Bank United 00:11:12.379 --> 00:11:15.159 Corp in 2001 to get a foothold. in the lucrative 00:11:15.159 --> 00:11:17.440 Houston and Dallas markets. And then the big 00:11:17.440 --> 00:11:20.159 one, New York. Then they set their sights on 00:11:20.159 --> 00:11:22.679 the East Coast. They acquired Dime Bancorp in 00:11:22.679 --> 00:11:26.639 New York in 2002 for $5 .2 billion. That gave 00:11:26.639 --> 00:11:28.659 them a huge presence in the biggest financial 00:11:28.659 --> 00:11:30.799 market in the world. They were everywhere. I 00:11:30.799 --> 00:11:33.120 remember this era clearly. You'd see Wamuu branches 00:11:33.120 --> 00:11:35.419 popping up on corners that used to be gas stations 00:11:35.419 --> 00:11:38.320 or diners or other banks. It felt like an invasion, 00:11:38.360 --> 00:11:41.220 but a friendly one. It did. But, you know, when 00:11:41.220 --> 00:11:43.759 you eat that much that quickly. Purely from an 00:11:43.759 --> 00:11:45.840 organizational standpoint, you're bound to get 00:11:45.840 --> 00:11:48.779 a stomachache. That's a very fair analogy. Rapid 00:11:48.779 --> 00:11:51.460 growth almost always comes at the cost of stability 00:11:51.460 --> 00:11:54.460 and quality control. The integration of these 00:11:54.460 --> 00:11:57.960 banks was messy. What do you mean by messy? You 00:11:57.960 --> 00:12:00.860 have to remember, every bank has its own computer 00:12:00.860 --> 00:12:03.100 systems, its own record -keeping methods, its 00:12:03.100 --> 00:12:05.679 own culture. Smashing them all together in a 00:12:05.679 --> 00:12:08.679 few years is a logistical nightmare. So messy 00:12:08.679 --> 00:12:11.529 how? Are we talking about cultural clashes at 00:12:11.529 --> 00:12:14.610 the water cooler or actual operational failures 00:12:14.610 --> 00:12:17.129 that hurt customers? Actual painful failures 00:12:17.129 --> 00:12:19.690 for customers. Take the Dime Bancorp merger. 00:12:19.889 --> 00:12:22.490 There were widespread reports of account ownerships 00:12:22.490 --> 00:12:24.289 being split from beneficiaries. So, you know, 00:12:24.289 --> 00:12:26.009 your account suddenly isn't linked to your spouse 00:12:26.009 --> 00:12:27.889 anymore. That's a huge problem. A huge problem. 00:12:28.009 --> 00:12:30.809 Or the fleet mortgage merger. This one is notorious. 00:12:31.490 --> 00:12:34.470 Loans would simply disappear. Disappear. Like 00:12:34.470 --> 00:12:36.870 into the ether. How does a mortgage just disappear? 00:12:37.419 --> 00:12:39.220 The loans were being serviced, the customer was 00:12:39.220 --> 00:12:41.600 paying every month, but customer service reps 00:12:41.600 --> 00:12:44.460 couldn't find them in the system. Imagine calling 00:12:44.460 --> 00:12:46.659 your bank and saying, hey, I'm trying to refinance, 00:12:46.659 --> 00:12:48.820 and they say, we have no record of you, but thanks 00:12:48.820 --> 00:12:51.220 for the check last month. That is terrifying. 00:12:51.940 --> 00:12:54.960 It's Kafkaesque. It undermines the very foundation 00:12:54.960 --> 00:12:58.220 of banking, which is trust. Effectively, yes. 00:12:58.399 --> 00:13:00.740 When you double your size overnight repeatedly, 00:13:01.299 --> 00:13:04.039 your back -end systems, the plumbing of the bank, 00:13:04.120 --> 00:13:07.330 can't always keep up. But the leadership didn't 00:13:07.330 --> 00:13:09.649 want to slow down to fix the plumbing. No, they 00:13:09.649 --> 00:13:11.529 had a vision. They had a very specific vision 00:13:11.529 --> 00:13:13.909 of what kind of company they wanted to be. And 00:13:13.909 --> 00:13:16.110 they didn't want to be a stuffy old bank. And 00:13:16.110 --> 00:13:19.029 this brings us to the Walmart of banking. That 00:13:19.029 --> 00:13:22.210 was Kerry Killinger's explicit goal. He was quoted 00:13:22.210 --> 00:13:24.450 saying he wanted to do to banking what Walmart, 00:13:24.690 --> 00:13:26.970 Starbucks, and Costco did to their industries. 00:13:27.269 --> 00:13:30.230 Which means volume, ubiquity, and catering to 00:13:30.230 --> 00:13:33.610 the everyday consumer. Low prices on every corner. 00:13:34.179 --> 00:13:36.779 Exactly. He predicted five years from now, you're 00:13:36.779 --> 00:13:39.360 not going to call us a bank. They wanted to be 00:13:39.360 --> 00:13:42.240 a retailer. They wanted to cater to lower and 00:13:42.240 --> 00:13:44.840 middle class consumers who were often ignored 00:13:44.840 --> 00:13:47.519 or, frankly, looked down upon by the traditional 00:13:47.519 --> 00:13:50.759 ivory tower institutions. And they really committed 00:13:50.759 --> 00:13:53.639 to the retail vibe. I remember walking into the 00:13:53.639 --> 00:13:57.440 branches. They did not look like banks. They 00:13:57.440 --> 00:14:01.000 had a name for it. Acasio. Yes, the Acasio design. 00:14:01.080 --> 00:14:03.759 They actually patented it in 2004. The whole 00:14:03.759 --> 00:14:06.179 idea was to eliminate the physical and psychological 00:14:06.179 --> 00:14:08.960 barriers between the banker and the customer. 00:14:09.179 --> 00:14:11.440 So no teller windows with the bulletproof glass. 00:14:11.980 --> 00:14:14.059 No, those velvet ropes. What do you call it? 00:14:14.100 --> 00:14:16.100 The queuing stanchions. Right. None of those. 00:14:16.179 --> 00:14:18.320 Instead, you walked in and there was a concierge 00:14:18.320 --> 00:14:20.539 greeter, like at the Apple store or a nice hotel. 00:14:21.139 --> 00:14:23.779 Concierge. In a bank. I know. The teller stood 00:14:23.779 --> 00:14:25.960 at these circular podiums. It felt like you were 00:14:25.960 --> 00:14:28.080 buying a pair of jeans, not depositing a check. 00:14:28.490 --> 00:14:30.490 And that was the entire point. It was designed 00:14:30.490 --> 00:14:33.330 to be disarming, to make banking feel like shopping. 00:14:33.409 --> 00:14:34.809 If you make people comfortable, if you make them 00:14:34.809 --> 00:14:37.149 feel like friends, they are more likely to buy 00:14:37.149 --> 00:14:39.690 products. And their marketing reinforced this 00:14:39.690 --> 00:14:41.429 aggressively. Oh, the commercials. They were 00:14:41.429 --> 00:14:44.070 everywhere. The free checking campaign. I remember 00:14:44.070 --> 00:14:46.990 those. They had those older, stuffy, suit -wearing 00:14:46.990 --> 00:14:49.490 bankers laughing at the young, cool, wamoo rep. 00:14:49.690 --> 00:14:52.730 It set up a clear us -versus -them dynamic. The 00:14:52.730 --> 00:14:55.629 old guard versus the new, friendly face of finance. 00:14:55.850 --> 00:14:57.940 It was very effective. It made people... feel 00:14:57.940 --> 00:15:00.799 like wamu was on their side and then came the 00:15:00.799 --> 00:15:03.600 slogan that in retrospect really defines the 00:15:03.600 --> 00:15:06.480 entire era the power of yes the power of yes 00:15:06.480 --> 00:15:09.419 introduced at the 2003 academy awards it sounds 00:15:09.419 --> 00:15:12.360 so optimistic so empowering who doesn't want 00:15:12.360 --> 00:15:14.299 to hear yes it's a great marketing hook it's 00:15:14.299 --> 00:15:16.600 brilliant but if you stop and think about it 00:15:16.600 --> 00:15:18.919 from a risk management perspective which is what 00:15:18.919 --> 00:15:21.720 banking is supposed to be it's chilling why chilling 00:15:21.720 --> 00:15:24.240 because in banking the most important skill the 00:15:24.240 --> 00:15:26.299 thing that keeps you alive is often the ability 00:15:26.299 --> 00:15:28.789 to say no Right. Can I have a million dollars 00:15:28.789 --> 00:15:31.210 even though I have no income? The answer should 00:15:31.210 --> 00:15:35.070 be a very firm no. Exactly. But the power of 00:15:35.070 --> 00:15:38.440 yes was a corporate mandate. It was about approving 00:15:38.440 --> 00:15:41.299 loans. It was about volume. It was about getting 00:15:41.299 --> 00:15:43.720 people into homes, often people who had been 00:15:43.720 --> 00:15:46.460 turned away by other lenders. This marketing 00:15:46.460 --> 00:15:49.320 push wasn't just fluff. It reflected the rotting 00:15:49.320 --> 00:15:51.600 core of their business model. They were pivoting 00:15:51.600 --> 00:15:54.379 from being a safe depository to being a volume 00:15:54.379 --> 00:15:57.340 -driven sales machine. That's it. And then, as 00:15:57.340 --> 00:15:59.279 if that wasn't on the nose enough, we have the 00:15:59.279 --> 00:16:03.179 Woohoo campaign. Oh, man. Woohoo. That was February 00:16:03.179 --> 00:16:06.759 2008. February 2008. Oof. The timing on that. 00:16:07.230 --> 00:16:10.129 It's just perfect in its awfulness. Just as the 00:16:10.129 --> 00:16:12.529 fears of a financial crisis are rising, just 00:16:12.529 --> 00:16:14.269 as the housing market is starting to shudder, 00:16:14.409 --> 00:16:16.909 Wamuu launches a campaign trying to position 00:16:16.909 --> 00:16:19.929 itself as an iconic brand people love. The commercial 00:16:19.929 --> 00:16:22.169 featured people literally dreaming about banking 00:16:22.169 --> 00:16:24.649 and yelling, woohoo. Which is a sound I can confidently 00:16:24.649 --> 00:16:27.149 say no human has ever made when thinking about 00:16:27.149 --> 00:16:29.889 their bank. Never. And interestingly, the search 00:16:29.889 --> 00:16:33.450 traffic for Wamuu spiked 1000 % after that campaign 00:16:33.450 --> 00:16:36.190 launched. But not for good reasons. Not for the 00:16:36.190 --> 00:16:38.710 reasons they hoped. People were searching to 00:16:38.710 --> 00:16:41.330 see if the bank was solvent, not because they 00:16:41.330 --> 00:16:44.070 wanted to yell, woohoo. And a little trivia nugget 00:16:44.070 --> 00:16:46.509 here. I read they originally wanted the slogan 00:16:46.509 --> 00:16:50.789 to be woohoo, without the H, just W -O -O. But 00:16:50.789 --> 00:16:52.470 they were worried about getting sued by Homer 00:16:52.470 --> 00:16:54.750 Simpson. That's right, Fox and the Simpsons. 00:16:54.929 --> 00:16:57.590 Which, in hindsight, was the least of their legal 00:16:57.590 --> 00:17:00.429 worries. They were worrying about copyright infringement 00:17:00.429 --> 00:17:02.309 while their entire balance sheet was catching 00:17:02.309 --> 00:17:05.539 fire? Seriously. So on the surface, they are 00:17:05.539 --> 00:17:08.220 the cool, friendly woohoo bank. But underneath, 00:17:08.519 --> 00:17:10.759 the engine driving this thing had changed completely. 00:17:11.039 --> 00:17:12.779 They weren't just taking deposits and making 00:17:12.779 --> 00:17:15.319 safe loans anymore. They had moved into the danger 00:17:15.319 --> 00:17:18.099 zone. The subprime zone. This is where the story 00:17:18.099 --> 00:17:19.920 gets darker. This is where the friend of the 00:17:19.920 --> 00:17:23.690 family becomes the retailer of risk. So how did 00:17:23.690 --> 00:17:25.750 they get so deep into subprime? Was it just the 00:17:25.750 --> 00:17:28.609 general market trend or was it a specific deliberate 00:17:28.609 --> 00:17:31.329 choice? It was a very deliberate strategy fueled 00:17:31.329 --> 00:17:33.690 by acquisitions. They bought their way into trouble. 00:17:33.869 --> 00:17:36.829 In 1999, they bought Long Beach Financial. And 00:17:36.829 --> 00:17:39.839 Long Beach was. Long Beach was a subprime specialist. 00:17:40.240 --> 00:17:42.299 That's what they did. They dealt with borrowers 00:17:42.299 --> 00:17:44.720 who had spotty credit histories, people who couldn't 00:17:44.720 --> 00:17:47.099 qualify for a traditional Fannie Mae or Freddie 00:17:47.099 --> 00:17:50.119 Macalons. And then in 2005, they doubled down 00:17:50.119 --> 00:17:52.740 and bought Providium. A subprime credit card 00:17:52.740 --> 00:17:56.700 issuer. That was a $6 .5 billion deal. What's 00:17:56.700 --> 00:17:58.640 fascinating about the Providium deal is that 00:17:58.640 --> 00:18:00.640 the credit card company's management had actually 00:18:00.640 --> 00:18:03.259 been trying to move upmarket. Upmarket. Yeah, 00:18:03.299 --> 00:18:05.500 trying to get prime customers with better credit 00:18:05.500 --> 00:18:08.099 scores to stabilize their business. But Wamuu 00:18:08.099 --> 00:18:10.859 bought them specifically to fill a hole in the 00:18:10.859 --> 00:18:13.500 product line. They wanted those high yield, high 00:18:13.500 --> 00:18:16.440 risk assets. High yield means high risk. Always. 00:18:16.819 --> 00:18:19.599 In finance, there is no free lunch. If you are 00:18:19.599 --> 00:18:22.140 charging 20 % interest, it's because there is 00:18:22.140 --> 00:18:24.759 a very high chance you won't get paid back. But 00:18:24.759 --> 00:18:27.240 the most toxic product in their arsenal, the 00:18:27.240 --> 00:18:29.460 weapon of mass financial destruction, if you 00:18:29.460 --> 00:18:33.099 will, was the option ARM. OK, we need to deep 00:18:33.099 --> 00:18:35.599 dive on this because the option ARM is the technical 00:18:35.599 --> 00:18:38.920 heart of this entire collapse. It sounds complicated, 00:18:38.980 --> 00:18:41.440 but we need to break it down for everyone. What 00:18:41.440 --> 00:18:44.299 exactly is an option adjustable rate mortgage? 00:18:44.759 --> 00:18:47.960 Okay, so an option ARM is a mortgage that gives 00:18:47.960 --> 00:18:51.019 the borrower a choice, an option in how much 00:18:51.019 --> 00:18:54.099 they pay each month. Typically, you get four 00:18:54.099 --> 00:18:56.140 options on your monthly statement. Four choices. 00:18:56.279 --> 00:18:59.099 Okay. Option one, you can pay the full principal 00:18:59.099 --> 00:19:01.200 and interest to pay off the loan in 30 years, 00:19:01.339 --> 00:19:03.579 you know, like a normal mortgage. You can pay 00:19:03.579 --> 00:19:05.220 the principal and interest to pay it off in 15 00:19:05.220 --> 00:19:08.099 years, an accelerated payment. You can pay interest 00:19:08.099 --> 00:19:10.460 only so the loan balance stays the same, you're 00:19:10.460 --> 00:19:13.299 just treading water, renting the money, or... 00:19:13.690 --> 00:19:16.190 and this is the trap option four, you can pay 00:19:16.190 --> 00:19:18.789 a minimum payment. And that minimum payment is 00:19:18.789 --> 00:19:21.410 the seductive part. That's the hook. It is. The 00:19:21.410 --> 00:19:23.750 minimum payment is calculated at a ridiculously 00:19:23.750 --> 00:19:27.769 low teaser interest rate, maybe 1 % or 2%. But 00:19:27.769 --> 00:19:29.690 the actual interest rate on the loan might be 00:19:29.690 --> 00:19:32.890 6 % or 7 % or even higher. So let's do the math 00:19:32.890 --> 00:19:35.809 for the listener. Say I borrow $500 ,000. My 00:19:35.809 --> 00:19:37.930 actual interest bill for the month is, what, 00:19:37.970 --> 00:19:40.789 roughly $2 ,500? But the minimum payment option 00:19:40.789 --> 00:19:43.750 says I only have to pay half $1 ,000. So I pay 00:19:43.750 --> 00:19:46.349 the $1 ,000. What happens to the other $1 ,500 00:19:46.349 --> 00:19:49.029 I owe? It doesn't disappear. It gets added to 00:19:49.029 --> 00:19:51.130 the principal balance of your loan. It gets added 00:19:51.130 --> 00:19:53.809 back on top. Right back on top. It's called negative 00:19:53.809 --> 00:19:56.809 amortization. You make a payment, but you owe 00:19:56.809 --> 00:19:58.529 more money the next month than you did the month 00:19:58.529 --> 00:20:02.170 before. So after month one, your $500 ,000 loan 00:20:02.170 --> 00:20:06.769 is now a $515 ,000 loan. That sounds insane. 00:20:06.910 --> 00:20:09.349 Why would a bank possibly want that? If I'm the 00:20:09.349 --> 00:20:11.789 bank, I want my money back. I don't want a larger 00:20:11.789 --> 00:20:14.049 loan that the guy clearly can't pay. Here is 00:20:14.049 --> 00:20:15.950 the accounting trick, and this is where it gets 00:20:15.950 --> 00:20:19.049 really murky and, frankly, fraudulent in spirit. 00:20:19.470 --> 00:20:22.650 On their books, Wamuu could record that deferred 00:20:22.650 --> 00:20:26.099 interest, that $1 ,500 you didn't pay. as income. 00:20:26.319 --> 00:20:28.480 As profit. As profit. They were booking profit 00:20:28.480 --> 00:20:30.859 on money they hadn't actually received based 00:20:30.859 --> 00:20:33.119 on the assumption that the borrower would eventually 00:20:33.119 --> 00:20:35.859 pay it all back with interest. So their financial 00:20:35.859 --> 00:20:37.700 statements looked fantastic. Look at all this 00:20:37.700 --> 00:20:39.619 interest we're earning. But it was Fanta money. 00:20:39.799 --> 00:20:42.940 It wasn't real. Precisely. And why would a borrower 00:20:42.940 --> 00:20:45.279 take that deal? Because the initial monthly payments 00:20:45.279 --> 00:20:47.619 were incredibly low. It allowed a family making, 00:20:47.700 --> 00:20:50.920 say, $40 ,000 a year to buy a $500 ,000 house. 00:20:51.119 --> 00:20:53.119 It kicked the can down the road. What was the 00:20:53.119 --> 00:20:55.710 logic? The logic was, I'll pay the minimum now, 00:20:55.869 --> 00:20:57.930 and in a few years, the house will be worth way 00:20:57.930 --> 00:21:00.190 more, and I'll just sell it or refinance out 00:21:00.190 --> 00:21:02.869 of this crazy loan. It relied entirely on home 00:21:02.869 --> 00:21:05.390 prices going up forever. Correct. The entire 00:21:05.390 --> 00:21:08.549 model was a bet on a perpetual housing bubble. 00:21:08.690 --> 00:21:11.720 And the culture at Wamuu... Encouraged selling 00:21:11.720 --> 00:21:14.059 these things. Encouraged is putting it very lightly. 00:21:14.279 --> 00:21:17.079 There was immense pressure on sales agents to 00:21:17.079 --> 00:21:20.359 approve loans. The verification of income and 00:21:20.359 --> 00:21:22.960 assets, which used to be the bedrock of banking 00:21:22.960 --> 00:21:25.380 practice, became an afterthought. These were 00:21:25.380 --> 00:21:27.740 the liar's loans. They called them liar's loans 00:21:27.740 --> 00:21:31.880 or in -enjo loans. No intem, no joe, or assets. 00:21:31.940 --> 00:21:34.180 You basically just stated your income and it 00:21:34.180 --> 00:21:36.789 was taken at face value. I read that they were 00:21:36.789 --> 00:21:39.710 paying real estate agents massive fees just to 00:21:39.710 --> 00:21:42.049 bring these people in the door. Yes, fees of 00:21:42.049 --> 00:21:45.369 over $10 ,000 in some cases just for referring 00:21:45.369 --> 00:21:48.210 a borrower. So let me get this straight. You 00:21:48.210 --> 00:21:51.390 have a bank that is paying people to bring in 00:21:51.390 --> 00:21:53.750 customers who can't afford to pay back the money 00:21:53.750 --> 00:21:56.730 to give them loans with trick payments. And the 00:21:56.730 --> 00:21:58.369 bank is recording the money they aren't getting 00:21:58.369 --> 00:22:01.609 paid as profit on their income statement. that 00:22:01.609 --> 00:22:04.250 is a perfect succinct summary of the disaster 00:22:04.250 --> 00:22:06.829 they were essentially paying people to take their 00:22:06.829 --> 00:22:09.349 money and as long as housing prices kept going 00:22:09.349 --> 00:22:12.329 up the math sort of worked on paper if the borrower 00:22:12.329 --> 00:22:14.369 couldn't pay they could just refinance or sell 00:22:14.369 --> 00:22:17.009 the house at a profit Everyone wins. But housing 00:22:17.009 --> 00:22:19.769 prices didn't keep going up. No, the bubble burst. 00:22:20.009 --> 00:22:22.730 And when it did, the math stopped working instantly. 00:22:22.970 --> 00:22:25.269 The borrowers couldn't refinance because the 00:22:25.269 --> 00:22:27.470 house was worth less than the loan. They were 00:22:27.470 --> 00:22:29.690 underwater. They couldn't pay the higher rates 00:22:29.690 --> 00:22:32.609 because the teaser period ended and the payments 00:22:32.609 --> 00:22:35.549 skyrocketed. What we call payment shock. The 00:22:35.549 --> 00:22:38.029 bill comes due. The bill comes due. The recapture 00:22:38.029 --> 00:22:39.730 of that deferred interest became impossible. 00:22:40.029 --> 00:22:43.410 Default skyrocketed. And suddenly all that phantom 00:22:43.410 --> 00:22:47.500 profit turned into very. very real losses. This 00:22:47.500 --> 00:22:51.160 brings us to the unraveling. 2007 and 2008. The 00:22:51.160 --> 00:22:53.180 party is starting to wind down and people are 00:22:53.180 --> 00:22:55.799 looking very nervous. The cracks started showing 00:22:55.799 --> 00:23:00.559 in late 2007. In December, Wamuu closed 160 home 00:23:00.559 --> 00:23:04.259 loan offices and cut 2 ,600 jobs. That was a 00:23:04.259 --> 00:23:06.420 huge signal to the market that the volume game 00:23:06.420 --> 00:23:10.079 was over. Then in April 2008, they cut another 00:23:10.079 --> 00:23:13.279 3 ,000 jobs and stopped wholesale lending, which 00:23:13.279 --> 00:23:15.200 was buying loans from outside brokers. They were 00:23:15.200 --> 00:23:16.779 trying to staunch the bleeding. They tried to 00:23:16.779 --> 00:23:19.319 save it, though, right? There was a rescue attempt, 00:23:19.519 --> 00:23:22.259 a big capital injection? There was. In April 00:23:22.259 --> 00:23:25.940 2008, they secured a $7 billion capital infusion 00:23:25.940 --> 00:23:29.880 led by TPG Capital. TPG, a major private equity 00:23:29.880 --> 00:23:32.940 firm, put in $2 billion and other investors put 00:23:32.940 --> 00:23:34.720 in the rest. They were trying to shore up the 00:23:34.720 --> 00:23:36.940 balance sheet. $7 billion is a lot of money. 00:23:36.980 --> 00:23:39.430 Why didn't it work? It was a bandage on a gunshot 00:23:39.430 --> 00:23:41.589 wound. The losses from the subprime portfolio 00:23:41.589 --> 00:23:44.130 were growing faster than anyone publicly admitted. 00:23:44.329 --> 00:23:46.710 And this deal created a lot of friction. How 00:23:46.710 --> 00:23:49.309 so? Well, for one, it diluted the existing shareholders, 00:23:49.549 --> 00:23:51.430 meaning their slice of the pie got much smaller 00:23:51.430 --> 00:23:53.690 and they were furious. And to make matters worse, 00:23:53.869 --> 00:23:56.549 to add insult to injury, WAMU executives had 00:23:56.549 --> 00:23:58.650 changed the rules so that mortgage losses were 00:23:58.650 --> 00:24:01.089 excluded from their bonus computations. Wait, 00:24:01.170 --> 00:24:03.680 wait, let me get this straight. The ship is sinking. 00:24:03.799 --> 00:24:06.079 The shareholders are bailing water because their 00:24:06.079 --> 00:24:08.700 stock is plummeting. And the captains are ensuring 00:24:08.700 --> 00:24:12.519 their bonuses are calculated based on what? The 00:24:12.519 --> 00:24:15.339 number of life rafts. Effectively, yes. They 00:24:15.339 --> 00:24:18.220 excluded the very thing that was destroying the 00:24:18.220 --> 00:24:20.119 company from the formula that determined their 00:24:20.119 --> 00:24:23.119 pay. It was a massive, almost unbelievable governance 00:24:23.119 --> 00:24:26.380 failure. It enraged the investors. And speaking 00:24:26.380 --> 00:24:29.140 of captains, this is where Kerry Killinger finally 00:24:29.140 --> 00:24:31.819 gets the boot. Too little, too late. Much, much 00:24:31.819 --> 00:24:34.579 too late. In June 2008, he's stripped of the 00:24:34.579 --> 00:24:36.740 chairman title. On September 8th, he's fired 00:24:36.740 --> 00:24:39.740 as CEO. And they bring in the knee guy, Alan 00:24:39.740 --> 00:24:42.759 H. Fishman. Poor Alan Fishman. He was named CEO 00:24:42.759 --> 00:24:44.859 on September 8th. He was in charge for exactly 00:24:44.859 --> 00:24:48.140 17 days. Talk about bad timing. He barely had 00:24:48.140 --> 00:24:49.960 time to find the bathroom before the feds showed 00:24:49.960 --> 00:24:52.359 up. But there is a subplot here involving another 00:24:52.359 --> 00:24:54.480 bank, right? A bank that had been lurking in 00:24:54.480 --> 00:24:58.059 the shadows for a while. JPMorgan Chase. Yes. 00:24:58.519 --> 00:25:00.680 This is crucial for understanding the endgame. 00:25:01.279 --> 00:25:04.740 Back in March 2008, around the time Bear Stearns 00:25:04.740 --> 00:25:07.640 was collapsing, Jamie Dimon, the CEO of J .P. 00:25:07.640 --> 00:25:10.319 Morgan, secretly sent a team to Seattle. They 00:25:10.319 --> 00:25:12.940 called it Project West. Project West. They met 00:25:12.940 --> 00:25:15.099 with Wamuu executives and offered to buy the 00:25:15.099 --> 00:25:18.440 company for $8 a share. $8 a share, and Killinger 00:25:18.440 --> 00:25:21.299 said. He said no. He rejected the offer flat 00:25:21.299 --> 00:25:22.920 out. He thought it was too low. He thought they 00:25:22.920 --> 00:25:25.140 could ride it out. He believed the power of yes 00:25:25.140 --> 00:25:27.099 would somehow see them through. Spoiler alert, 00:25:27.259 --> 00:25:29.279 they could not. Let's get to the final days, 00:25:29.460 --> 00:25:33.259 the run. Now, when I think of a bank run, I think 00:25:33.259 --> 00:25:36.319 of it's a wonderful life, people banging on the 00:25:36.319 --> 00:25:38.220 doors, George Bailey trying to calm everyone 00:25:38.220 --> 00:25:40.920 down, handing out dollar bills. Was it like that? 00:25:41.039 --> 00:25:42.740 There were some lines and some branches, sure. 00:25:42.900 --> 00:25:45.099 But in 2008, a bank run doesn't primarily happen 00:25:45.099 --> 00:25:46.940 on the sidewalk. It happens on the server. It 00:25:46.940 --> 00:25:49.039 was a silent run. Electronic withdrawals. Exactly. 00:25:49.559 --> 00:25:52.259 Mid -September 2008. We are in the Lehman Brothers 00:25:52.259 --> 00:25:55.039 era of panic. Lehman had just failed on September 00:25:55.039 --> 00:25:57.779 15th. The entire financial world is terrified. 00:25:58.160 --> 00:26:00.039 Whamu gets hit with a credit rating downgrade 00:26:00.039 --> 00:26:02.619 and the floodgates open. So it's not mom and 00:26:02.619 --> 00:26:04.779 pop pulling out 100 bucks. No, this is institutional 00:26:04.779 --> 00:26:07.579 investors, corporations, small businesses and 00:26:07.579 --> 00:26:10.500 savvy, wealthy depositors just going online and 00:26:10.500 --> 00:26:12.559 clicking transfer. How much money left the building? 00:26:12.700 --> 00:26:15.819 In just nine days, customers withdrew $16 .7 00:26:15.819 --> 00:26:20.809 billion in deposits. 16. Ah. 16 .7 billion. In 00:26:20.809 --> 00:26:24.569 nine days, that's nearly $2 billion a day just 00:26:24.569 --> 00:26:27.289 vanishing into the ether. No bank on earth can 00:26:27.289 --> 00:26:29.710 survive that. A bank doesn't keep all its cash 00:26:29.710 --> 00:26:32.390 in a vault. It's lent out in mortgages and business 00:26:32.390 --> 00:26:35.609 loans. When depositors demand $16 billion back 00:26:35.609 --> 00:26:38.750 instantly, the bank becomes illiquid. It might 00:26:38.750 --> 00:26:41.690 still have assets, houses, buildings, loan portfolios, 00:26:41.829 --> 00:26:43.730 but it doesn't have the cash to pay the people 00:26:43.730 --> 00:26:46.650 at the window. It's over. So we arrive at the 00:26:46.650 --> 00:26:49.789 birthday, September 25, 2008. The end of the 00:26:49.789 --> 00:26:52.039 line. The FDIC, the Federal Deposit Insurance 00:26:52.039 --> 00:26:54.119 Corporation, had been watching this very closely. 00:26:54.259 --> 00:26:56.640 They knew Wamuu was bleeding out, so they organized 00:26:56.640 --> 00:26:59.160 a secret auction of Wamuu Bank. Who was invited 00:26:59.160 --> 00:27:02.339 to this secret party? Very few institutions had 00:27:02.339 --> 00:27:04.700 the capital or the stomach to swallow a bank 00:27:04.700 --> 00:27:07.539 that size in that environment. Citigroup was 00:27:07.539 --> 00:27:10.500 there, Wells Fargo, Banco Santander from Spain, 00:27:10.660 --> 00:27:13.599 and of course, JPMorgan Chase. And the winner? 00:27:14.179 --> 00:27:17.079 predictably, was JPMorgan Chase. The same bank 00:27:17.079 --> 00:27:19.599 that offered $8 a share back in March, but the 00:27:19.599 --> 00:27:23.140 deal they got in September was very, very different. 00:27:23.359 --> 00:27:24.880 Okay, walk us through the mechanics of the seizure. 00:27:24.980 --> 00:27:26.420 It happened on a Thursday night, which you've 00:27:26.420 --> 00:27:29.079 noted before is weird. It is highly unusual. 00:27:29.559 --> 00:27:32.519 Standard regulatory procedure is to seize a failing 00:27:32.519 --> 00:27:34.880 bank on a Friday evening. You wait until the 00:27:34.880 --> 00:27:37.880 doors close at 5 .00 p .m. It gives the regulators 00:27:37.880 --> 00:27:40.460 the entire weekend to reconcile the books, switch 00:27:40.460 --> 00:27:42.599 over the computer systems, change the signage, 00:27:42.680 --> 00:27:44.900 and prepare to reopen on Monday morning under 00:27:44.900 --> 00:27:47.799 new ownership so customers don't panic. But Wamuu 00:27:47.799 --> 00:27:51.200 was seized on Thursday. Why? The run was so severe 00:27:51.200 --> 00:27:53.319 and leaks about the imminent seizure were starting 00:27:53.319 --> 00:27:55.799 to get out to the press. The regulators felt 00:27:55.799 --> 00:27:57.960 they couldn't wait another 24 hours. They were 00:27:57.960 --> 00:28:00.059 afraid that if they opened for business on Friday 00:28:00.059 --> 00:28:02.779 morning, the run would intensify and drain whatever 00:28:02.779 --> 00:28:05.579 cash was left. So they pulled the plug early. 00:28:05.720 --> 00:28:08.000 They did. Shortly after the markets closed on 00:28:08.000 --> 00:28:10.900 Thursday, the Office of Thrift Supervision, the 00:28:10.900 --> 00:28:13.400 OTS, seized the bank. This is a bit of alphabet 00:28:13.400 --> 00:28:16.839 soup. The OTS seized it. Yes, the OTS was their 00:28:16.839 --> 00:28:20.069 primary regulator. They seized it. and declared 00:28:20.069 --> 00:28:22.869 it failed due to illiquidity they immediately 00:28:22.869 --> 00:28:26.410 placed it into fdic receivership and the fdic 00:28:26.410 --> 00:28:29.609 immediately sold the banking assets to jp morgan 00:28:29.609 --> 00:28:32.650 chase for how much 1 .9 billion dollars wait 00:28:32.650 --> 00:28:36.630 1 .9 billion chase offered to buy them for eight 00:28:36.630 --> 00:28:38.630 dollars a share back in march which would have 00:28:38.630 --> 00:28:40.970 been what was the market cap then tens of billions 00:28:40.970 --> 00:28:43.829 it was an astronomical difference but for 1 .9 00:28:43.829 --> 00:28:46.690 billion dollars chase got all the branches all 00:28:46.690 --> 00:28:50.190 the deposits and all the assets But, and this 00:28:50.190 --> 00:28:52.170 is the crucial legal distinction that wiped people 00:28:52.170 --> 00:28:55.569 out, Chase did not buy the holding company, Washington 00:28:55.569 --> 00:28:58.930 Mutual, Inc. And they did not take on the unsecured 00:28:58.930 --> 00:29:01.690 debt or the equity claims. Okay, this is where 00:29:01.690 --> 00:29:03.289 it gets complicated for the shareholders, right? 00:29:03.349 --> 00:29:05.430 Because usually, a company gets bought, the shareholders 00:29:05.430 --> 00:29:07.789 get something. It may be a lower price, but something. 00:29:08.029 --> 00:29:10.789 In this case, because the bank itself, the primary 00:29:10.789 --> 00:29:13.089 asset, was seized and sold out from under the 00:29:13.089 --> 00:29:15.369 holding company that people owned stock in, the 00:29:15.369 --> 00:29:17.789 shareholders were effectively wiped out. The 00:29:17.789 --> 00:29:20.369 stock price collapsed overnight to 16 cents. 00:29:20.609 --> 00:29:23.509 From a high of, what, $45 the previous year? 00:29:23.650 --> 00:29:26.309 That is a total wipeout. A total wipeout. And 00:29:26.309 --> 00:29:29.609 the next day, September 26, Washington Mutual, 00:29:29.609 --> 00:29:32.369 Inc., the empty shell that used to own a bank, 00:29:32.470 --> 00:29:35.410 filed for Chapter 11 bankruptcy. So if I'm a 00:29:35.410 --> 00:29:37.430 customer with a checking account, I wake up on 00:29:37.430 --> 00:29:39.509 Friday morning, what happens to me? Absolutely 00:29:39.509 --> 00:29:42.109 nothing. And that's the miracle of the FDIC system. 00:29:42.390 --> 00:29:44.990 The branches opened, the ATM cards worked, your 00:29:44.990 --> 00:29:47.299 money was safe. It was now guaranteed. Guaranteed 00:29:47.299 --> 00:29:49.599 by the Fortress balance sheet of JPMorgan Chase. 00:29:50.220 --> 00:29:52.500 The system worked exactly as it was designed 00:29:52.500 --> 00:29:55.200 to protect the depositor. But for the investor, 00:29:55.319 --> 00:29:57.859 the employee with stock options and their 401k, 00:29:57.880 --> 00:30:00.380 the bondholder, it was a catastrophe. And that 00:30:00.380 --> 00:30:02.460 catastrophe sparked a lot of anger. I've heard 00:30:02.460 --> 00:30:05.019 about the Womoku theories. This wasn't just seen 00:30:05.019 --> 00:30:07.700 as a normal failure. Oh, it's a deep rabbit hole. 00:30:08.119 --> 00:30:10.700 There was immense fury from shareholders. They 00:30:10.700 --> 00:30:13.000 claimed the bank was seized for political reasons. 00:30:13.279 --> 00:30:15.880 They argued that the liquidity crisis was temporary 00:30:15.880 --> 00:30:18.240 caused by the market wide panic and that the 00:30:18.240 --> 00:30:21.559 bank actually had enough assets to meet its obligations 00:30:21.559 --> 00:30:24.420 if the government had just given them a lifeline. 00:30:24.500 --> 00:30:26.859 The lifeline like the one they gave to Bear Stearns 00:30:26.859 --> 00:30:29.539 or AIG. That's the argument. That is exactly 00:30:29.539 --> 00:30:32.900 the argument. Why was WAMU allowed to fail when 00:30:32.900 --> 00:30:35.500 others were bailed out? There was a complaint 00:30:35.500 --> 00:30:38.019 filed by an investment strategist named Mike 00:30:38.019 --> 00:30:41.559 Stathis from AVA Investment Analytics. He filed 00:30:41.559 --> 00:30:44.079 a complaint with the SEC alleging insider trading 00:30:44.079 --> 00:30:46.140 and questioning the evidence for insolvency. 00:30:46.299 --> 00:30:49.579 He even claimed a WAMU executive told an AP reporter 00:30:49.579 --> 00:30:52.119 the seizure was happening for political reasons. 00:30:52.440 --> 00:30:54.720 And the idea that JP Morgan got a sweetheart 00:30:54.720 --> 00:30:58.460 deal. $1 .9 billion for a bank with that massive 00:30:58.460 --> 00:31:00.799 national footprint. looked like the sale of the 00:31:00.799 --> 00:31:03.480 century. Chase basically acquired a nationwide 00:31:03.480 --> 00:31:05.799 branch network overnight for a fraction of what 00:31:05.799 --> 00:31:07.619 it would cost to build it. They got all those 00:31:07.619 --> 00:31:10.420 Ocasio branches, the massive footprint in California, 00:31:10.680 --> 00:31:13.079 Texas, Florida and New York. But Chase would 00:31:13.079 --> 00:31:15.579 argue they took on a lot of garbage, too. A lot 00:31:15.579 --> 00:31:17.960 of risk. Right. They would argue they saved the 00:31:17.960 --> 00:31:20.599 system from a $300 billion collapse that could 00:31:20.599 --> 00:31:23.819 have drained the FDIC insurance fund. And Chase 00:31:23.819 --> 00:31:26.799 did have to deal with the incredibly toxic mortgage 00:31:26.799 --> 00:31:29.740 portfolio they inherited. They spent years and 00:31:29.740 --> 00:31:32.720 billions cleaning up those option ARMs. So the 00:31:32.720 --> 00:31:36.740 brand disappears. By the end of 2009, all those 00:31:36.740 --> 00:31:39.700 Ocasio branches are Chase branches. The woohoo 00:31:39.700 --> 00:31:42.700 is silenced forever. The brand was retired completely. 00:31:43.519 --> 00:31:46.019 Chase closed hundreds of redundant branches, 00:31:46.319 --> 00:31:48.140 especially in places like New York and Chicago 00:31:48.140 --> 00:31:50.519 where they already had a presence. If there was 00:31:50.519 --> 00:31:52.920 a chase across the street from a Wamuu, the Wamuu 00:31:52.920 --> 00:31:55.599 closed. The friendly, khaki -wearing vibe was 00:31:55.599 --> 00:31:58.079 replaced by the blue octagon of Chase. The legal 00:31:58.079 --> 00:32:00.380 battles dragged on for years. This wasn't a clean 00:32:00.380 --> 00:32:03.519 break. Oh, massive, ugly legal battles. Wamuu 00:32:03.519 --> 00:32:05.519 Inc., which was now just the estate of the holding 00:32:05.519 --> 00:32:08.380 company in bankruptcy, sued the FDIC for $13 00:32:08.380 --> 00:32:11.839 billion. They claim the seizure was unjustified 00:32:11.839 --> 00:32:13.859 and the sale price was a fire sale valuation. 00:32:14.339 --> 00:32:16.539 Do they win? Not exactly. It was a complete mess 00:32:16.539 --> 00:32:19.259 of settlements that dragged on for years. There 00:32:19.259 --> 00:32:21.880 was also a huge fight with the IRS over $12 .5 00:32:21.880 --> 00:32:26.099 billion in back taxes. In a bold move, Wamuu's 00:32:26.099 --> 00:32:28.839 estate actually claimed the IRS owed them a refund 00:32:28.839 --> 00:32:31.079 because of the massive losses they took. That 00:32:31.079 --> 00:32:33.519 is bold. I lost so much money you should pay 00:32:33.519 --> 00:32:36.059 me. Eventually, they reached a settlement where 00:32:36.059 --> 00:32:39.440 a refund of about $5 .7 billion was shared among 00:32:39.440 --> 00:32:42.259 the various parties and creditors. But the bankruptcy 00:32:42.259 --> 00:32:45.960 itself was a saga. Judge Mary Walrath in Delaware 00:32:45.960 --> 00:32:49.039 rejected multiple reorganization plans. She was 00:32:49.039 --> 00:32:50.980 very concerned about insider trading allegations 00:32:50.980 --> 00:32:53.099 involving hedge funds that were buying up the 00:32:53.099 --> 00:32:55.500 debt and trying to control the process. It was 00:32:55.500 --> 00:32:57.720 a mess all the way down. It seems like even in 00:32:57.720 --> 00:33:00.720 death, Wamu couldn't escape the drama and the 00:33:00.720 --> 00:33:03.000 questionable behavior. It eventually emerged 00:33:03.000 --> 00:33:06.160 from bankruptcy in 2012 as WMI Holdings Corporation. 00:33:06.500 --> 00:33:09.160 It was a shadow of its former self, essentially 00:33:09.160 --> 00:33:11.359 a shell company looking for a purpose with some 00:33:11.359 --> 00:33:13.339 tax assets. And where is it now? Does it still 00:33:13.339 --> 00:33:16.740 exist? In 2018, WMI Holdings merged with NationStar 00:33:16.740 --> 00:33:20.619 to form the Mr. Cooper Group. Mr. Cooper, a large 00:33:20.619 --> 00:33:23.759 mortgage servicer, a far cry from the friend 00:33:23.759 --> 00:33:27.220 of the family or the Walmart of banking. It's 00:33:27.220 --> 00:33:30.160 an almost generic anonymity now. The final ghost 00:33:30.160 --> 00:33:33.400 of WAMU. So what does this all mean? We have 00:33:33.400 --> 00:33:35.299 looked at the history, the rise, the hubris, 00:33:35.319 --> 00:33:37.880 and the spectacular fall. When you look at the 00:33:37.880 --> 00:33:40.460 entire Wamuu story, what is the big takeaway 00:33:40.460 --> 00:33:42.559 for you? For me, I think Wamuu represents the 00:33:42.559 --> 00:33:44.880 danger of losing corporate identity. They completely 00:33:44.880 --> 00:33:46.980 forgot who they were. They started as a mutual 00:33:46.980 --> 00:33:49.819 bank, a safe harbor for local savings. Their 00:33:49.819 --> 00:33:52.099 purpose was clear. Protect the money. Safety 00:33:52.099 --> 00:33:54.579 first. Safety first. Then they tried to transform 00:33:54.579 --> 00:33:56.980 into a high growth retailer of risk. They wanted 00:33:56.980 --> 00:33:58.720 the stability of a bank with the growth of a 00:33:58.720 --> 00:34:00.680 tech stock and the ubiquity of a coffee shop. 00:34:01.180 --> 00:34:03.000 You can't be all those things at once without 00:34:03.000 --> 00:34:04.599 cutting corners. And the corners they cut were 00:34:04.599 --> 00:34:06.779 the ones that mattered most, underwriting standards 00:34:06.779 --> 00:34:10.360 and ethics. It really is a story of hubris. Killinger 00:34:10.360 --> 00:34:13.320 wanted to disrupt the industry. And he did, just 00:34:13.320 --> 00:34:15.579 not in the way he intended. He proved that you 00:34:15.579 --> 00:34:18.480 can build a massive empire on yes, but it collapses 00:34:18.480 --> 00:34:20.920 just as fast if the foundation is rotten. And 00:34:20.920 --> 00:34:23.639 it serves as a stark reminder of the fragility 00:34:23.639 --> 00:34:27.599 of confidence in banking. $300 billion in assets 00:34:27.599 --> 00:34:29.739 didn't matter when the confidence evaporated. 00:34:30.800 --> 00:34:34.039 119 years of history was erased in nine days. 00:34:34.360 --> 00:34:35.920 That is the thought I want to leave everyone 00:34:35.920 --> 00:34:38.739 with today. The power of yes built the empire, 00:34:39.000 --> 00:34:43.119 but the inability to say no to bad loans, to 00:34:43.119 --> 00:34:46.420 risky expansion, to the lure of quick, easy profits 00:34:46.420 --> 00:34:49.690 destroyed it. It makes you wonder about the institutions 00:34:49.690 --> 00:34:52.110 we trust today. Is your bank a friend of the 00:34:52.110 --> 00:34:54.710 family, looking out for your savings? Or is it 00:34:54.710 --> 00:34:56.289 a retailer just looking to sell you the next 00:34:56.289 --> 00:34:58.489 product, whether you can afford it or not? It's 00:34:58.489 --> 00:35:00.110 a question worth asking every time you walk up 00:35:00.110 --> 00:35:02.989 to the teller window. Or, you know, the concierge 00:35:02.989 --> 00:35:05.409 podium. Exactly. Thanks for diving deep with 00:35:05.409 --> 00:35:08.090 us today. My pleasure. It's a fascinating and 00:35:08.090 --> 00:35:08.889 cautionary tale.