The Failure of Washington Mutual

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Recommended: Two additional determinants of culture within an organization

Founded in Seattle in 1889, Washington Mutual (WaMu) originated as a mutual savings and loan institution that went public in 1983 and as a result of lending practices, hiring techniques, and other poor decisions failed in 2008. A leader in bank acquisitions from 1983 through 1992, the organization surged to 2,200 branches before its failure. Offering innovative technologies, such as ATMs and “step-rate” loans in the mid-1970’s, and techniques at the time, the firm eventually buckled under the culture generated by Killinger, the president up to the beginning of WaMu’s downward spiral.

WaMu’s culture, cultivated by Killinger during the Occasio Project in 2000, sought to focus on “…relating and selling to customers…” and in turn took questionable actions in lending practices. (Dewar, 2006, p. 6) Prior to Killinger’s efforts, WaMu had strived to offer service to lower and middle class clients through the “step rate” loans of the 1970s and the relaxed identification requirements in specific markets. “For example, most banks required a driver’s license for identification… WaMu also accepted the Mexican Metricula ID.” (Dewar, 2006, p. 4) During Killinger’s tenure, the firm sought to hire staff for the “brand” as opposed to banking skills and acumen. Rallies and morale building exercises as well as community relations were the normative behavior, as the organization sought to increase sales of loan products to clients. “WaMu offered exotic pay-option loans (that) allowed borrowers to roll many of their interest payments onto their principal instead of paying them.” (Palmeri, 2008) Combined with sales strategies regarding loan product sales to unqualified and under-qualified applicants, this was a recipe for disaster.

The sourc...

... middle of paper ...

...nd the risks associated with specific investments and implied backing by the FDIC where inappropriate. Managers’ incentives posed an agency problem, as their pay was directly related to this questionable practice. Hiring was performed under the incentive system to overemphasize the impact of sales personalities, rather than basic banking skill sets and ethics in lending practices opening the proverbial road to low quality loans. Quotas to maximize manager’s pay, combined with the corporate culture, combined to contribute to the agency problem.

Works Cited

Dewar, R. a. (2006). Washington Mutual: A Very Old Bank Can Grow - A Lot! Harvard Business Review .

Palmeri, C. (2008, September 26). JP Morgan Chase to Buy Washington Mutual. Businessweek .

WaMu Equity Group. (n.d.). The WaMu Story. Retrieved November 11, 2011, from WaMu Story: http://www.wamustory.com

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