WASHINGTON — The Federal Deposit Insurance Corp. sued three top executives of Washington Mutual Bank, alleging their "extreme and historically unprecedented risks" in the bank's mortgage lending operations helped cause the biggest bank failure in U.S. history.
The lawsuit, filed late Wednesday in U.S. District Court in Seattle, targets former chief executive officer Kerry Killinger, chief operating officer Stephen Rotella and David Schneider, who ran the Seattle thrift company's home loans division. The suit also charges that Killinger's and Rotella's wives were involved in property transfers before and after Wamu's September 2008 failure.
The court documents indicate that an exact of amount of damages being sought has not yet been set, but they could exceed $900 million. The suit seeks damages at least equal to the amount of properties that the agency alleges were "fraudulently transferred" by the Killingers and the Rotellas, and an order freezing such assets.
The complaint says the three men's "gross negligence and breaches of fiduciary duty" caused "Wamu to lose billions of dollars."
"They focused on short-term gains to increase their own compensation, with reckless disregard for Wamu's longer-term safety and soundness," it said.
The suit said that Killinger developed the company's high-risk lending strategy and that he, Rotella and Schneider put it into practice. The home loans division "recklessly made billions of dollars in risky single-family residential … loans, dramatically increasing the risk profile of loans in Wamu's held-for-investment … loan portfolio," the suit alleges.
The portfolio included payment-option adjustable-rate mortgages, home equity lines of credit and subprime mortgages, the FDIC said. The strategy also included use of stated-income and stated-asset loans, documents say, and loans were pushed in real estate areas where housing prices had grown so quickly that they were "most at risk for significant decline."
"Defendants thus gambled billions of dollars of Wamu's money on the prospect that the Bank somehow would manage to avoid losses on higher-risk loans to high-risk borrowers in high-risk areas, despite their own awareness of the inevitable decline in the overheated housing market," the FDIC said.
The suit says Wamu took those risks even though it knew it lacked the infrastructure to handle so many risky loans. "The bank could not adequately track and analyze its loans, measure or price for its risks, or timely adjust to changes in the market," it said.
Lawyers for Killinger responded in a long e-mailed statement that the suit was "baseless and unworthy of the government."
"The factual allegations are fiction," said Brendan Sullivan Jr. of Williams & Connolly and Barry Kaplan of Wilson Sonsini Goodrich & Rosati. "The legal conclusions are political theater. Trial in a courtroom that honors the rule of law — and not the will of Washington, D.C. — will confirm that Kerry Killinger's management, diligence and commitment to Washington Mutual responsibly and consistently served the interests of its depositors, customers and shareholders."
Echoing Killinger's own congressional testimony about the failure, the defense attorneys cited the federal assistance — including Troubled Asset Relief Program funds — that went to other large institutions suffering losses from the housing crisis, but not to Wamu.
"Had the benefits extended to Wall Street institutions within weeks of the seizure — e.g., increases in insurance limits, guarantees of bank debt, Tarp purchases and capital injections, and added liquidity by the Federal Reserve — been extended to Washington Mutual, it too would have weathered the global financial crisis," they said.
With the filing, the FDIC has now commenced six lawsuits pinning the blame for failures on former officers and directors. But the action against Wamu's former management is by far the most significant. Wamu, whose assets stood at more than $300 billion when it failed, was the biggest bank ever to be seized by the government. However, the FDIC's transfer of Wamu's operations to JPMorgan Chase & Co. cost the Deposit Insurance Fund nothing.
An FDIC spokesman said the agency does not comment on pending litigation, but he said the agency "as receiver will initiate lawsuits against former officers, directors and other professionals of failed institutions when the case has merit and is expected to be cost-effective. This is done on behalf of creditors of the failed institution. The FDIC investigates every failure to determine whether there is a solid basis for legal action, and a sound source for recovery."
