S. Hrg. 111–671 

WALL STREET AND THE FINANCIAL CRISIS: 

THE ROLE OF HIGH RISK HOME LOANS 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

VOLUME 1 OF 5 

APRIL 13, 2010 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

( 


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WALL STREET AND THE FINANCIAL CRISIS: THE ROLE OF HIGH RISK HOME LOANS 

VOLUME 1 OF 5 


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U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office,

http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,

U.S. Government Printing Office. Phone 202–512–1800, or 866–512–1800 (toll-free). E-mail, gpo@custhelp.com.

57–319 PDF 2010

S. Hrg. 111–671 

WALL STREET AND THE FINANCIAL CRISIS: 

THE ROLE OF HIGH RISK HOME LOANS 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

VOLUME 1 OF 5 

APRIL 13, 2010 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

( 


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(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

ROLAND W. BURRIS, Illinois 

PAUL G. KIRK, JR., Massachusetts 

SUSAN M. COLLINS, Maine 

TOM COBURN, Oklahoma 

JOHN MCCAIN, Arizona 

GEORGE V. VOINOVICH, Ohio 

JOHN ENSIGN, Nevada 

LINDSEY GRAHAM, South Carolina 

ROBERT F. BENNETT, Utah 

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

PATRICIA R. HOGAN, Publications Clerk and GPO Detailee 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan, Chairman 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

PAUL G. KIRK, JR., Massachusetts 

TOM COBURN, Oklahoma 

SUSAN M. COLLINS, Maine 

JOHN MCCAIN, Arizona 

JOHN ENSIGN, Nevada 

ELISE J. BEAN, Staff Director and Chief Counsel 

ZACHARY I. SCHRAM, Counsel 

NINA E. HOROWITZ, GAO Detailee 

CHRISTOPHER J. BARKLEY, Minority Staff Director 

ANTHONY G. COTTO, Counsel to the Minority 

MARY D. ROBERTSON, Chief Clerk 


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(III) 

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1 

Senator Coburn ................................................................................................. 12 

Prepared statements: 

Senator Levin .................................................................................................... 119 

Senator Coburn ................................................................................................. 130 

Senator Collins ................................................................................................. 132 

WITNESSES 

TUESDAY, APRIL 13, 2010 

James G. Vanasek, Former Chief Credit Officer (1999–2004) and Chief Risk 

Officer (2004–2005), Washington Mutual Bank ................................................ 14 

Ronald J. Cathcart, Former Chief Enterprise Risk Officer (2006–2008), Washington Mutual Bank ............................................................................................. 18 

Randy Melby, Former General Auditor, Washington Mutual Bank ................... 20 

David Schneider, Former President of Home Loans, Washington Mutual 

Bank ...................................................................................................................... 51 

David Beck, Former Division Head of Capital Markets, Washington Mutual 

Bank ...................................................................................................................... 53 

Stephen J. Rotella, Former President and Chief Operating Officer, Washington Mutual Bank ............................................................................................. 83 

Kerry K. Killinger, Former President, Chief Executive Officer, and Chairman 

of the Board, Washington Mutual Bank ............................................................ 85 

ALPHABETICAL LIST OF WITNESSES

Beck, David: 

Testimony .......................................................................................................... 53 

Prepared statement .......................................................................................... 163 

Cathcart, Ronald J.: 

Testimony .......................................................................................................... 18 

Prepared statement .......................................................................................... 138 

Killinger, Kerry K.: ..................................................................................................

Testimony .......................................................................................................... 85 

Prepared statement with attachments ........................................................... 179 

Melby, Randy: 

Testimony .......................................................................................................... 20 

Prepared statement .......................................................................................... 146 

Rotella, Stephen J.: 

Testimony .......................................................................................................... 83 

Prepared statement .......................................................................................... 169 

Schneider, David: 

Testimony .......................................................................................................... 51 

Prepared statement .......................................................................................... 158 

Vanasek, James G.: 

Testimony .......................................................................................................... 14 

Prepared statement .......................................................................................... 134 

EXHIBIT LIST 

* Retained in the files of the Subcommittee 

1.a. Memorandum from Permanent Subcommittee on Investigations Chairman Carl Levin and Ranking Minority Member Tom Coburn to the 

Members of the Subcommittee ..................................................................... 207 


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b. Washington Mutual Practices That Created A Mortgage Time Bomb, 

chart prepared by the Permanent Subcommittee on Investigations ........ 213 

c. Securitizations of Washington Mutual and Long Beach Subprime Home 

Loans, chart prepared by the Permanent Subcommittee on Investigations ................................................................................................................ 214 

d. Excerpts from Documents Related to Washington Mutual’s Subprime 

Lender: Long Beach Mortgage Corporation (‘‘LBMC’’) Lending and 

Securitization Deficiencies, chart prepared by the Permanent Subcommittee on Investigations ........................................................................ 215 

e. Excerpts from Documents Related to Washington Mutual’s Prime Home 

Loan Lending and Securitization Deficiencies, chart prepared by the 

Permanent Subcommittee on Investigations .............................................. 217 

f. Excerpts from Documents Related to Washington Mutual Compensation 

and Incentives, chart prepared by the Permanent Subcommittee on 

Investigations ................................................................................................. 219 

g. Select Delinquency and Loss Data for Washington Mutual 

Securitizations, as of February 2010, chart prepared by the Permanent 

Subcommittee on Investigations .................................................................. 221 

h. Washington Mutual CEO Kerry Killinger: $100 Million In Compensation, 2003-2008, chart prepared by the Permanent Subcommittee on 

Investigations ................................................................................................ 222 

i. WaMu Product Originations and Purchases By Percentage—2003-2007, 

chart prepared by the Permanent Subcommittee on Investigations ......... 223 

j. Estimation of Housing Bubble: Comparison of Recent Appreciation vs. 

Historical Trends, chart prepared by Paulson & Co, Inc. ........................... 224 

k. Washington Mutual Organizational Chart, prepared by Washington 

Mutual, taken from Home Loans 2007 Plan, Kick Off, Seattle, August 

4, 2006 ............................................................................................................ 225 

l. Excerpts from Documents Related to Washington Mutual Securitization 

of Delinquency-Prone Loans, First Quarter of 2007, chart prepared by 

the Permanent Subcommittee on Investigations ......................................... 226 

m. WaMu Originations and Purchases by Loan Type 2003-2007, chart 

prepared by the Permanent Subcommittee on Investigations ................. 228 

Documents Related to Higher Risk Lending Strategy: 

2.a. Washington Mutual, Higher Risk Lending Strategy, ‘‘Asset Allocation 

Initiative,’’ Board of Directors, Finance Committee Discussion, January 

2005 ................................................................................................................. 229 

b. Washington Mutual, Asset Allocation Initiative: Higher Risk Lending 

Strategy and Increased Credit Risk Management, Board of Director 

Discussion, December 21, 2004 ..................................................................... 248 

c. Washington Mutual, Higher Risk Lending Strategy, And Increased 

Credit Risk Management, Board of Director Discussion, January, 2005 .. 262 

3. Washington Mutual, Home Loans Discussion, Board of Directors Meeting, 

April 18, 2006 (excerpts) .................................................................................. 278 

4. WaMu Presentation, Be Bold!, prepared by David Schneider, Home Loans 

President (We Are ALL in Sales) ..................................................................... 290 

5. Washington Mutual, Subprime Mortgage Program, January 2007 (excerpts) ................................................................................................................ 295 

6.a. Washington Mutual Chairman and CEO Kerry Killinger Memorandum 

to the Board of Directors, dated June 2007, re: WaMu Strategic Direction .................................................................................................................. 332 

b. Washington Mutual, Home Loans—2007 Strategy Team Goals, Updated 

11/12/2007 .................................................................................................... 342 

c. Washington Mutual Chairman and CEO Kerry Killinger Memorandum 

to the Board of Directors, dated June 2005, re: Strategic Direction ......... 343 

d. Washington Mutual Chairman and CEO Kerry Killinger Memorandum 

to the Board of Directors, dated June 2006, re: Strategic Direction ......... 357 

e. Washington Mutual Chairman and CEO Kerry Killinger Memorandum 

to the Board of Directors, dated June 2008, re: WaMu Strategic Direction .................................................................................................................. 370 

7. Management Presentation, WaMu Home Loans (excerpts) ........................... 383 


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Documents Related to Long Beach: 

8.a. OTS internal email, dated April 2005, re: Fitch—LBMC Review 

([Securitizations] prior to 2003 have horrible performance. LBMC finished in the top 12 worst annualized [net credit losses] in 1997 and 

1999 thru 2003. . . . At 2/05, LMBC was #1 with a 12% delinquency 

rate. Industry was around 8.25%.) ............................................................... 388 

b. FDIC/Washington State Joint Visitation Report of Washington Mutual 

Bank, dated January 13, 2004 (It concluded that 40% (109 of 271) 

of loans reviewed were considered unacceptable due to one or more 

critical errors. This raised concerns over LBMC’s ability to meet the 

representations and warranty’s made to facilitate sales of loan 

securitizations, and management halted securitization activity.) .............. 389 

9. Washington Mutual, LBMC Post Mortem—Early Findings Read Out, November 1, 2005 (First Payment Defaults (FPD’s) are preventable and/ 

or detectable in nearly all cases (99%) . . . High incident rate of potential 

fraud among FPD cases) .................................................................................. 395 

10. Washington Mutual Memorandum to the Washington Mutual, Inc. and 

WaMu Board of Directors’ Audit Committees, dated April 17, 2006, re: 

Long Beach Mortgage Company—Repurchase Reserve Root Cause Analysis 

. . . LBMC experienced a dramatic increase in EPD’s, during the third 

quarter of 2005. . . . [R]elaxed credit guidelines, breakdowns in manual 

underwriting processes, and inexperienced subprime personnel. . . . coupled with a push to increase loan volume and the lack of an automated 

fraud monitoring tool, exacerbated the deterioration in loan quality.) ......... 408 

11. WaMu internal email, dated April 2006, re: Jax ([D]elinquencies are 

up 140% and foreclosures close to 70%. . . . It is ugly.) ................................ 414 

12. WaMu internal email, dated September 2006, re: nat city mid-quarter 

update (LBMC is terrible . . . [W]e are cleaning up a mess. Repurchases, 

EPDs, manual underwriting, very weak servicing/collections practices and 

a weak staff.) ..................................................................................................... 415 

13.a. WaMu internal email, dated December 2006, re: SubPrime Analysis 

(Short story is this is not good. . . . [L]arge potential risk from what 

appears to be a recent increase in repurchase requests. . . . We are 

all rapidly losing credibility as a management team.) ............................... 418 

b. FDIC Memorandum, dated June 5, 2007, re: WaMu-Long Beach Mortgage Company (LMBC) Repurchases ........................................................... 422 

14. WaMu, Home Loans—SubPrime, Quarterly Credit Risk Review, December 

2006 (excerpts) .................................................................................................. 427 

15. WaMu internal email, dated December 2006, re: It’s suprime day at 

WSJ (attaching Wall Street Journal articles on subprime)(. . . our 2006 

Long Beach securities have much higher delinquency rates early in their 

life than the 2003 and 2005 vintages.) ............................................................ 443 

16. WaMu internal email, dated January 2007, re: Confidential (Long Beach 

represents a real problem for WaMu.) ............................................................. 448 

17. WaMu internal email, dated February 2007, re: Long Beach 2nd Lien 

Disposition (In 2006 Beck’s team started sprinkling seconds in deals as 

they could.) ........................................................................................................ 450 

18. WaMu, HL Risk Management, Quarterly Credit Risk Review, SubPrime, 

1st Quarter, 2007 (The root cause of over 70% of FPDs involved operational issues such as missed fraud flags, underwriting errors, and condition clearing errors.) (excerpts) ........................................................................ 453 

19. WaMu, Audit Report, Long Beach Mortgage Loan Origination & Underwriting, August 20, 2007 ([T]he overall system of risk management and 

internal controls has deficiencies related to multiple, critical origination 

and underwriting processes . . . These deficiencies require immediate effective corrective action to limit continued exposure to losses.) ...................... 462 

20. WaMu internal email, dated August 2007, re: Long Beach Mortgage Loan 

Origination & Underwriting (Requires Improvement)(This seems to me 

to be the ultimate in bayonetting the wounded, if not the dead.) .................. 475 


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21. WaMu Corporate Credit Review, Home Loans, Wholesale Specialty Lending-FPD, 2007 Targeted Review (132 of the 187 (71%) files were reviewed 

[and] . . . confirmed fraud on 115 [and 17 were] . . . ‘‘highly suspect’’. 

. . . 80 of the 112 (71%) stated income loans were identified for lack 

of reasonableness of income[.] 133 (71%) had credit evaluation or loan 

decision errors . . . 58 (31%) had appraisal discrepancies or issues that 

raised concerns . . .) ......................................................................................... 477 

Documents Related to WaMu Retail Channel: 

22.a. WaMu internal memorandum, dated November 2005, re: So. CA Emerging Markets Targeted Loan Review Results (Of the 129 detailed loan 

reviewed that have been conducted to date, 42% of the loans reviewed 

contained suspect activity or fraud, virtually all of it attributable to 

some sort of employee malfeasance or failure to execute company policy .. 496 

b. WaMu Retail Fraud Risk Overview, Prepared by Risk Mitigation, November 16, 2005 ............................................................................................ 497 

23.a. WaMu internal email chain, dated November 2005: re: Retail Fraud 

Risk Overview (I had a very quick meeting with David Schneider, Tony 

Meola and Steve Stein today to review the deck and the memo regarding 

the retail fraud risk review. The good news is that people are taking 

this very seriously.) ........................................................................................ 509 

b. WaMu internal email chain, dated August 2005, re: [names redacted]— 

Risk Mit Loan review data ‘‘Confidential’’ (. . . he ‘‘did not want to 

give axes to the murderers.’’) ......................................................................... 511 

24. WaMu Privileged and Confidential Memorandum, dated April 2008, re: 

Memorandum of Results: AIG/UG and OTS Allegation of Loan Frauds 

Originated by [name redacted] ......................................................................... 515 

25. Office of Thrift Supervision Memorandum, dated June 19, 2008, re: Loan 

Fraud Investigation .......................................................................................... 527 

26. WaMu OTS Exam Summary As of July 22, 2008 (OTS AQ #22 Loan 

Fraud Investigation.) (excerpts) ....................................................................... 530 

27. WaMu internal email chain, dated August 2006, re: Hudson 3010598427 

Purchase (Sales has NOT hit oiur [sic] funding goals.) ................................. 532 

28. WaMu Market Risk Committee (MRC), Minutes of the December 12, 2006 

Meeting (The primary factors contributing to increased delinquency appear 

to be caused by process issues including the sale and securitization of 

delinquent loans, loans not underwritten to standards, lower credit quality 

loans and seller servicers reporting false delinquent payment status.) ......... 537 

29. WaMu internal Memorandum, dated September 2007, re: Westlake HLC 

Investigation Update ......................................................................................... 542 

30. WaMu Significant Incident Notification (SIN), Date Incident Reported— 

04/01/2008, Loss Type—Mortgage Loan (One Sales Associate admitted 

that during that crunch time some of the Associates would ‘‘manufacture’’ 

assets statements from previous loan docs and submit them to the LFC. 

She said the pressure was tremendous from the LFC to get them the 

docs since the loan had already funded and pressure from the Loan 

Consultants to get the loans funded.) .............................................................. 544 

31. WaMu Internal Investigative Report, dated May 2008, re: Westlake Home 

Loan Center (. . . tremendous pressure from the Loan Consultants and 

from the LFC Team Manager to get the asset documents to the LFC 

because the loan was already funded.) ............................................................ 546 

32.a. WaMu internal email chain, dated December 2007, re: Employee 

HELOC Fraud (. . . 75 suspect HELOC loans have been identified 

(approved & in pipeline) . . . with a current outstanding balance of 

$3,318,101.) .................................................................................................... 548 

b. WaMu Significant Incident Notification (SIN), Date Incident Reported— 

05/01/2008, Loss Type—HELOC Fraud (Risk Mitigation reviewed 25 

HELOC loans . . . with a total exposure of $8,538,600.00.) ...................... 552 

33. Radian Guaranty Inc. Review of Washington Mutual Bank, August-September 2007 (This results in an overall ‘‘Unacceptable’’ rating with a 

score of 68.) (excerpts) ...................................................................................... 553 

34. WaMu Corporate Credit Review, 2008 Home Loans, Risk Mitigation and 

Mortgage Fraud, 2008 Targeted Review (excerpts) ........................................ 564 


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Documents Related to Option Arms: 

35 Washington Mutual, Option ARM Focus Groups—Phase II, WaMu Option 

ARM Customers, September 17, 2003 .............................................................. 569 

36. Washington Mutual, Option ARM Focus Groups—Phase I, WaMu Loan 

Consultants and Mortgage Brokers, August 14, 2003 (excerpts) .................. 581 

37 Washington Mutual, Option ARM Credit Risk, August 2006 ........................ 591 

38 Washington Mutual, Option ARM, Board of Directors Meeting, October 

17, 2006 .............................................................................................................. 620 

39. WaMu internal email, dated April 2007, re: Option ARM’s (I think we 

better be well prepared to defend the option ARM portfolio.) ........................ 628 

40.a. WaMu internal email, dated September 2006, re: Tom Casey visit (. . . 

equity investors are totally freaking about housing now.) .......................... 630 

b. WaMu internal email, dated February 2007, re: Option ARM MTA 

and Option ARM MTA Delinquency (We are contemplating selling a 

larger portion of our Option ARMs than we have in the recent past. 

Gain on sale is attractive and this could be a way to address California 

concentration, rising delinquencies, falling house prices in California 

with a favorable arbitrage given that the market seems not to be yet 

discounting a lot for those factors.) .............................................................. 632 

41. WaMu internal email, dated February 2007, re: Some thoughts on targeted population for potential Option ARM MTA loan sale (I thought 

it might be helpful insight to see the information Bob Shaw provides 

below about the components of the portfolio that have been the largest 

contributors to delinquency in recent times.) .................................................. 636 

42.a. WaMu internal email, dated February 2007, re: HFI selection criteria 

changes (Effective March 7, 2007, modify the portfolio opion ARM and 

COFI ARM retention criteria . . . to include only following loans for 

the portfolio (HFI). . . . As a result of this change, we expected to 

securitize and settle about $2 billion more option/COFI ARMs in Q1– 

07. . . . Also included in the attachment, is a pool of $1.3 billion 

option/COFI ARMs funded to portfolio between January 1st and February 22nd that will be re-classified as HFS based on the above recommendations.) .............................................................................................. 637 

b. WaMu internal email, dated February 2007, re: HFI Option Arms redirected to HFS (That amounts to roughly 3B option arms available 

for sale. I would like to get these loans into HFS immediately so that 

I can sell as many as possible in Q1.) .......................................................... 638 

43 WaMu Market Risk Committee (MRC), Minutes of March 9, 2007 Meeting 

(. . . approval to transfer up to $3.0 billion of saleable Option ARM 

and COFI ARM loans originated since January 1, 2007 from HFI to 

Held for Sale (HFS).) ......................................................................................... 641 

44. WaMu Market Risk Committee Minutes, July 11, 2008 (NPA HFI 

HELOC Loan Sales. . . . it is in our best interest to let some one else 

assume the risk of these loans.) (excerpts) ...................................................... 645 

Documents Related to Securitization: 

45. WaMu Wholesale Speciality Lending, Securitization Performance Summary, June 2008 ($77 billion in subprime securitizations listed) ................. 647 

46. Washington Mutual Mortgage Securities Corp., Securitization Performance 

Summary, June 2008 Distribution. ($196 billion in prime securitizations 

listed) ................................................................................................................. 648 

47.a. Two diagrams of a Long Beach mortgage backed security, attached 

to a FDIC Memorandum, dated May 15, 2006, re: WaMu Mortgage 

Securitizations ................................................................................................ 651 

b. List of WaMu-Goldman Loans Sales and Securitizations ......................... 653 

c. WaMu PowerPoint presentation by David Beck, Executive Vice President, WaMu Capital Markets, June 11, 2007 (excerpts) ............................ 656 

48. WaMu Wholesale Specialty Lending, Bond Rating Changes, As of June 

2008 Distribution (excerpts) ............................................................................. 662 

49. WaMu internal email, dated August 2004, re: Interesting Friedman Billings piece re: Mortgage Brokers (Which Product Should Capital Markets 

Being Pushing?) ................................................................................................ 665 


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50. WaMu internal email, dated November 2006, re: Goldman Sachs New 

Issue Home Eq Commentary (External) (LBMC paper is among the worst 

performing paper in the mkt in 2006.) ............................................................ 670 

51. WaMu internal email, dated February 2008, re: Screen shot (Attaching 

copy of Evidence of ‘‘Walking Away’’ In WaMu Mortgage Pool, February 

23, 2008, Mish’s Global Economic Trend Analysis ........................................ 673 

52. WaMu internal email, dated March 2007, re: our discussion yesterday 

and what the street perception will be (WaMu subprime ABS delinquencies 

top ABX components) ........................................................................................ 679 

53. WaMu Leads in Risky Type of Lending—Analysis Shows Thrift Makes 

Frequent Loans for Investment Homes, April 17, 2007, Wall Street Journal ...................................................................................................................... 680 

54.a./b./c.: WaMu/Goldman Sachs email chains, dated March, May, and July 

2007, regarding repurchase issues......................................... 682, 684, 688 

55. WaMu internal email, dated August 2007, re: Scenarios (From today’s 

meeting, I understand that we don’t have the courage to evaluate this 

scenario.) ............................................................................................................ 691 

56. WaMu internal email, dated May 2008, re: WSJ on repurchases—likely 

will lead to some IR questions although we are not mentioned (7 Step 

process) .............................................................................................................. 692 

57. WaMu internal email, dated June 2008, re: Repurchase Recommendations 

W/E 6/20/08 (The actual loans we do buy back are real stinkers.) ............ 697 

58. Worst Ten in the Worst Ten, document prepared by the Office of the 

Comptroller of the Currency (OCC), 11/13/08 (The table below sets forth 

the ten metropolitan areas experiencing the highest rates of foreclosure 

as reported by Realty Trac (the ‘‘Worst Ten’’ MSAs). . . . Long Beach 

Mortgage Co. . . . 11,736.) ............................................................................... 698 

Documents Related to Compensation: 

59.a./b. Documents regarding Long Beach compensation, 2004 (excerpts) and 

2007............................................................................................ 701, 708 

60.a. WaMu, Home Loans, 2007 Product Strategy, Strategy and Business 

Initiatives Update (Retail Loan Consultant 2007 Incentive Plan Focus 

on High Margin Products) (excerpts) ........................................................... 711 

b. Washington Mutual, Home Loan Credit Risk F2F, December 6, 2006 

(Internal Forces . . . Overages; Internal Forces . . . Overage Proposal). 

(excerpts) ........................................................................................................ 722 

c. Excerpt from Washington Mutual Lender’s Addendum to Closing Instructions, September 2007 (showing inclusion of Yield Spread Premium 

in compensation of third part mortgage broker) ......................................... 725 

61. Long Beach processing center internal email, dated September 2004, 

re: Daily Productivity—Dublin (. . . it’s time for the mad dash to the 

finish line!) ........................................................................................................ 726 

62. Washington Mutual—Home Loans flyer, dated November 2006, President’s Club—Take the Lead! ............................................................................ 727 

63.a. Washington Mutual, Home Loans Group, President’s Club 2005—Maui, 

Awards Night Show Script (excerpts) .......................................................... 728 

b. Washington Mutual, Home Loans Group, President’s Club 2006, Funeral Skit related to Countrywide ............................................................... 745 

c. WaMu, Home Loans Group, President’s Club 2006, ‘‘I Like Big Bucks’’ 

Skit ................................................................................................................. 748 

d. SEALED EXHIBIT: Washington Mutual, Home Loans Group, President’s Club 2005—Maui, Awards Night Show Script. (Unredacted 

version of Exhibit 63a.) ................................................................................. *

64. Cheryl Feltgen 2007 Performance Review (Growth 35%) ............................. 750 

65. WaMu internal email, dated January 2008, re: comp (But we have to 

convince our folks that they will all make a lot of money by being with 

WaMu.) .............................................................................................................. 751 


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66. WaMu internal email, dated July 2008, re: Comp (We would like to 

have the HR committee approve excluding the exec com from the 2008 

bonus and to approve the cash retention grants to the non NEOs. This 

would allow me to respond to questions next week regarding the bonus 

plan on the analyst call. And it would help calm down some of the 

EC members.) .................................................................................................... 754 

67. WaMu internal email, dated March 2008, re: WaMu Board Shields Executives’ Bonuses—WSJ Article (March 5, 2008) ................................................. 755 

68. WaMu creditors could challenge payments to Killinger, others, The Seattle 

Times, October 1, 2008 ..................................................................................... 757 

Documents Related to Various Issues: 

69.a. WaMu internal email, dated October 2007, re: Can you take a look 

at this before Monday and give your blessing? (I don’t trust Goldy 

on this. They are smart, but this is swimming with the sharks. They 

were shorting mortgages big time while they were giving CfC advice.) ..... 759 

b. WaMu/Goldman email chain, dated February 2007, re: Request to Talk 

(. . . Goldman and Long Beach/WaMu have had a long standing and 

successful relationship for years.) ................................................................. 761 

70. WaMu internal email, dated May 2005, re: Strategic Planning Meeting 

(The avalanche of publicity on interest only, home equity, neg am and 

sub-prime expansion that has occurred in just the last three or four 

weeks is amazing.) ............................................................................................ 764 

71. WaMu internal email, dated March 2006, re: Organizational Changes 

in Enterprise Risk Management ...................................................................... 766 

72. Washington Mutual Internal Memorandum, dated October 2006, re: State 

of ERM: Effectiveness and Resource Adequacy Overview .............................. 769 

73. WaMu internal email, dated January 2007, re: Year-End 2006 Message 

for the Home Loans Risk Management Team (Recognize that ‘‘we are 

all in sales’’ passionately focused on delivering great products and service 

to our customers.) .............................................................................................. 775 

74. WaMu internal email, dated February 2008, re: Credit Cost Forecast 

(Un)reliability (. . . I would add poor underwriting quality which in 

some cases causes our origination data to be suspect. . . .) .......................... 778 

75. WaMu internal email, dated February 2008, re: 4pm 10K Audit Committee Meeting (I would suggest using the word ‘‘majority’’ and deleting 

the word ‘‘significantly’’. . . .) .......................................................................... 780 

76. WaMu internal email, dated March 2007, re: Draft Subprime Mortgage 

Guidance—Draft WaMu Position (Based on Today’s conversation, I don’t 

see a need to do anything now.) ....................................................................... 784 

77. WaMu internal email, dated March 2007, re: Follow-up information to 

last evening’s call regarding subprime interagency guidance, etc. . . . 

(If we implement the NTM changes to all loans, then we’ll see additional 

drop of 33% of volume.) .................................................................................... 787 

78.a. WaMu internal email chain, dated March 2005, re: Updates (I have 

never seen such a high risk housing market as market after market 

thinks they are unique and for whatever reason are not likely to experience price declines. This typically signifies a bubble.) ................................ 790 

b. WaMu memorandum, dated September 2004, re: Perspective (If the 

economy stalls, the combination of low FICOs, high LTVs and inordinate levels of exceptions will come back to haunt us.) ................................ 792 

79. WaMu internal email, dated August 2007, re: Looking back (Your fingers 

must be smoking.) ............................................................................................. 793 

80. WaMu, July 2008, Home Loans Story, External & Internal Views .............. 797 

81. WaMu internal email, dated February 2007, re: Long Beach 2nd Lien 

Disposition (. . . how best to dispose of 433MM of performing 2nd lien 

loans in the Long Beach warehouse.) .............................................................. 810 

82. Long Beach Mortgage Loan Coordinator Convicted of Lying to Grand 

Jury In Connection With Mortgage Fraud Investigation, Department of 

Justice News Release, December 17, 2007 ..................................................... 814 

83. Subprime Lending: A Net Drain on Homeownership, Center for Responsible Lending Issue Paper No. 14, March 27, 2007 ....................................... 816 


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84. Long Beach Mortgage Loan Purchase Agreement, January 2006 ................ 821 

85. Washington Mutual Bank Mortgage Loan Purchase and Sale Agreement, 

October 2005 ..................................................................................................... 856 

86. WaMu Prospectus Supplements (excerpts): 

a. WaMu Series 2007-OA3 ................................................................................ 894 

b. WMALT Series 2007-OA3 ............................................................................ 897 

c. WaMu Series 2007-OA4 ................................................................................ 900 

d. WMALT Series 2007-OA4 ............................................................................ 903 

87. Responses to supplemental questions for the record submitted by Senator 

John Ensign to Kerry Killinger, Former President, CEO, and Chairman 

of the Board, Washington Mutual Bank ......................................................... 907 

88. Responses to supplemental questions for the record submitted by Senator 

John Ensign to Stephen Rotella, Former President and Chief Operating 

Officer, Washington Mutual Bank .................................................................. 913 

89. SEALED EXHIBIT: Response to supplemental questions for the record 

submitted by Senators Carl Levin and Tom Coburn regarding the potential sale of Washington Mutual Bank submitted to Kerry Killinger, 

Former President, CEO, and Chairman of the Board, Washington Mutual 

Bank ................................................................................................................... *

90. Washington Mutual, Fannie Mae Alliance and Freddie Mac Business 

Relationship Proposal ....................................................................................... 920 

* Retained in the files of the Subcommittee 


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(1) 

WALL STREET AND THE FINANCIAL CRISIS: 

THE ROLE OF HIGH-RISK HOME LOANS 

TUESDAY, APRIL 13, 2010 

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:33 a.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. 

Present: Senators Levin, Kaufman, Coburn, Collins, and Ensign. 

Staff Present: Elise J. Bean, Staff Director/Chief Counsel; 

Zachary I. Schram, Counsel; Mary D. Robertson, Chief Clerk; 

David H. Katz, Counsel; Allison F. Murphy, Counsel; Adam Henderson, Professional Staff Member; Jason E. Medica, Detailee 

(ICE); Christopher Barkley, Staff Director to the Minority; Anthony 

G. Cotto, Counsel to the Minority; Robert Kaplan, Intern; Jeff 

Kruszewski, Law Clerk; Ryan McCord, Law Clerk; Kevin Rosenbaum, Intern; Andrew Tyler, Law Clerk; Tyler Gellasch (Senator 

Levin); Ted Schroeder, Nhan Nguyen, and Geoff Moulden (Senator 

Kaufman); Mark LeDuc, Neil Cutter, and Ivy Johnson (Senator 

Collins); Michael McBride and John Lawrence (Senator Ensign). 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good morning, everybody. Our Permanent Subcommittee on Investigations will come to order. 

In the fall of 2008, America suffered a devastating economic assault. It left deep wounds. Millions lost their jobs; millions lost 

their homes. Good businesses shut down; financial markets froze. 

The stock market plummeted, and once valuable securities turned 

worthless. Storied financial firms teetered on the edge or went 

under. The contagion spread worldwide. And in October 2008, 

American taxpayers were hit with a $700 billion bailout of Wall 

Street. That bailout was a bitter pill to swallow, but it stanched the 

bleeding. The economy stabilized, and the Nation and the world 

began to recover. 

Nearly 2 years later, we are still recovering. As part of that recovery effort, we as a Nation need to understand what went wrong, 

try to hold perpetrators accountable, and fortify our defenses to 

ward off another such assault in the future. 

To rebuild our defenses, it is critical to understand that the recent financial crisis was not a natural disaster. It was a man-made 


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economic assault. People did it. Extreme greed was the driving 

force, and it will happen again unless we change the rules. 

The Senate has a Subcommittee that is designed to do in-depth, 

bipartisan investigations into complex issues. It is the Permanent 

Subcommittee on Investigations, and in November 2008, we decided to devote our resources to an examination of some of the 

causes and consequences of the financial crisis which continues to 

this day. 

In the last year and a half, the Subcommittee has dug into the 

facts. To date, we have conducted over 100 interviews and depositions. We have consulted with dozens of government, academic, and 

private sector experts on a raft of banking, securities, financial, 

and legal issues. We have collected and initiated review of millions 

of pages of documents. Given the extent of the economic damage 

and the complexity of its root causes, the Subcommittee’s approach 

has been to develop detailed case studies to examine each stage of 

the assault and lay bare key issues at the heart of the financial crisis. 

Today’s hearing is the first in a series designed to examine the 

financial firms, the financial instruments, and the regulatory and 

market safeguards that failed us. We will hold four hearings over 

the next 2 weeks. Throughout, the hearings will examine the role 

of Wall Street and its use of complex financial instruments to 

transact business, from mortgage-backed securities to collateralized 

debt obligations (CDOs), structured investment vehicles, credit default swaps, and more. We will examine how high-risk investments 

displaced low-risk investments, even at taxpayer-insured banks; 

how securitizations and financial engineering ran wild; how synthetic investments trumped investments in the real economy; and 

how credit default swaps turned investing in America into gambling on the demise of one American company or another. We will 

explore why the regulators, the credit rating agencies, and the 

market itself failed to rein in the abuses. 

The goals of the Subcommittee hearings are threefold: to construct a public record of the facts in order to deepen public understanding of what happened and try to hold some of the perpetrators accountable; to inform the ongoing legislative debate about the 

need for strong financial reforms; and to provide a foundation for 

building better defenses to protect Main Street from the excesses 

of Wall Street. 

So let us start at the beginning with an overview, before we 

plunge into the specifics of today’s hearing. 

Prior to the early 1970s, when someone wanted to buy a home, 

typically they went to their local bank or mortgage company, applied for a loan, and after providing detailed financial information 

and a downpayment, qualified for a 30-year fixed-rate mortgage. 

The local bank or mortgage company then commonly kept that 

mortgage until the homeowner paid it off 15 or 30 years later. 

Bank regulations required lenders to keep a certain amount of capital for the loans they issued, so there was a limit to how many 

home loans one bank could have on its books. 

Banks got the idea of selling the loans on their books to someone 

else. They made profit on the sales while getting fresh capital to 

make new loans to prospective borrowers. Better yet would be if 


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they could sell the loans on their books in bulk in quick, efficient, 

and predictable ways. 

Wall Street came up with the mechanism of securitization. Lenders bundle up large numbers of home loans into a loan pool and 

calculate the amount of mortgage payments going into that pool 

from the borrowers. A shell corporation or trust is formed to hold 

the loan pool, and the revenue stream is used to create bonds 

called mortgage-backed securities that could be sold to investors. 

Wall Street firms helped design the loan pools and securities, 

worked with the credit rating agencies to obtain favorable ratings 

for the securities, and sold the securities to investors like pension 

funds, insurance companies, municipalities, university endowments, and hedge funds. 

For a while, securitization worked well, but at some point things 

got turned on their head. The fees that banks and Wall Street 

firms made from their securitization activities were so large that 

securitization ceased to be a means to keep capital flowing to housing markets and became an end in itself. Mortgages began to be 

produced for Wall Street instead of Main Street, and Wall Street 

bond traders sought more and more mortgages in order to generate 

fees for their companies and large bonuses for themselves. 

To satisfy Wall Street’s growing appetite for mortgage-backed securities and to generate additional income for themselves, banks 

began to issue mortgages to not only well-qualified borrowers, but 

also high-risk borrowers. High-risk loans provided a new fuel for 

the securitization engines on Wall Street. Banks liked high-risk 

loans because they tended to generate higher fees and interest 

rates and produced more profits than low-risk loans. They could 

also be sold quickly, keeping the risk off the bank’s books. Wall 

Street treated high interest rate loans like gold ore and were willing to pay more for them. 

Lenders began steering borrowers looking for a 30-year fixed 

mortgage to higher-risk loans instead, often using gimmicks like 

low initial teaser rates. Some lenders began qualifying borrowers 

if they could afford to pay a low initial rate rather than if they 

could pay the higher later rate, expanding the number of borrowers 

who could qualify for the loan. These practices also allowed borrowers to qualify for larger loans. 

When a borrower sought a bigger house, the loan officer or mortgage broker profited from higher fees and commissions, the bank 

profited from higher fees and a better price on the secondary market, and Wall Street profited from a larger yield to be sliced up and 

sold to investors for big fees. Volume and speed, as opposed to loan 

quality, became the keys to a profitable securitization business. 

Lenders that sold the loans they originated passed on the risk and 

so lost interest in whether the sold loans would be repaid. Even 

some purchasers lost interest in the creditworthiness of the securities they bought so long as they could purchase insurance in the 

form of credit default swaps that paid off if a mortgage-backed security defaulted. 

As long as home prices kept rising, the high-risk loans that became fuel for the securitization market posed few problems. Those 

who could not pay off their loans refinanced or sold their homes, 


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1See Exhibit No. 1j, which appears in the Appendix on page 224. 

and as Exhibit 1j 1 shows—a chart which we will put up here—over 

the 10 years before the crisis hit, housing prices shot up faster 

than they had in decades. Those higher home prices were made 

possible in part by the high-risk loans that allowed borrowers to 

buy more house than they could really afford. 

Some who saw the housing bubble was going to burst made bets 

against existing mortgage-backed securities. They sold those securities short, even in some cases while selling the same securities to 

their customers. Some even made bets against mortgage-backed securities they did not own, using what are called naked credit default swaps. Wall Street made money hand over fist. 

But the party could not last, and we all know what happened. 

The housing bubble burst, and prices stopped climbing. Investors 

started having second thoughts about the mortgage-backed securities being churned out by Wall Street. In July 2007, two Bear 

Stearns offshore hedge funds specializing in mortgage-related securities suddenly collapsed. That same month, the credit rating agencies downgraded hundreds of subprime mortgage-backed securities, 

and the subprime market went cold. Banks, security firms, hedge 

funds, and other investors were left holding suddenly unmarketable mortgage-backed securities whose value was plummeting. The 

economic assault had begun. 

Banks and mortgage brokers began closing their doors. In January 2008, Countrywide Financial Corporation, a $100 billion thrift 

specializing in home loans, was seized by the Federal Deposit Insurance Corporation, the FDIC, and sold to the Bank of America. 

That same month, one credit rating agency downgraded nearly 

7,000 mortgage-backed securities and CDOs, an unprecedented 

mass downgrade. 

In March 2008, as the financial crisis worsened, the Federal Reserve engineered the sale of Bear Stearns to JP Morgan Chase. In 

September 2008, in rapid succession, Lehman Brothers declared 

bankruptcy, AIG required an $85 billion taxpayer bailout, Fannie 

Mae and Freddie Mac were taken over by the government, and 

Goldman Sachs and Morgan Stanley converted to bank holding 

companies to gain access to Federal Reserve lending programs. A 

week later, on September 25, 2008, Washington Mutual Bank, a 

$300 billion thrift, then the sixth largest depository institution in 

America, was seized and sold to JP Morgan Chase. It was the largest bank failure in U.S. history. 

By then, hundreds of billions of dollars in toxic mortgages had 

been dumped into the financial system like polluters dumping poison into a river. The toxic mortgages polluted the river of commerce not upstream, but downstream, Wall Street bottled the polluted water, and rating agencies slapped an attractive label on 

each bottle, promising safe drinking water. Wall Street sold the 

bottles to investors. Regulators observed the whole sordid process 

but did little to stop it while profits poured into the participating 

banks and security firms. Investors the world over—pension funds, 

universities, municipalities, and more, not to mention millions of 

homeowners, small businesses, and U.S. taxpayers—are still paying the price and footing the cleanup bill. That is the big picture. 


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1See Exhibit No. 3, which appears in the Appendix on page 278. 

Today we start to look at the individual pieces of that picture in 

order to deepen our understanding of what happened. We begin by 

shining a spotlight on the high-risk home loans and mortgagebacked securities that those loans produced, using as a case history 

the policies and practices of Washington Mutual Bank. This Friday, 

we will examine the banking regulators charged with ensuring the 

safety and soundness of the U.S. banking system, again using 

Washington Mutual as a case history. In the following two hearings, we will turn to the role of credit rating agencies, investment 

banks, and others. 

Washington Mutual Bank (WaMu), rose out of the ashes of the 

great Seattle fire to make its first home loan in 1890. For many 

years, it was a mid-sized thrift specializing in home mortgages. In 

the 1980s and 1990s, WaMu entered a period of rapid growth and 

acquisition, expanding until it became the Nation’s largest thrift, 

with $188 billion in deposits and 43,000 employees. In 2003, its 

long-term CEO, Kerry Killinger, said he wanted WaMu to become 

the Walmart of banking, catering to middle- and lower-income 

Americans and helping the less well off buy homes. 

WaMu held itself out as a well-run, prudent bank that was a pillar of its community. But in 2005, WaMu formalized a strategy 

that it had already begun to implement—a movement from low-risk 

to high-risk home loans. That move to high-risk lending was motivated by three little words: ‘‘gain on sale.’’ 

Gain on sale is a measure of the profit made when a loan is sold 

on the secondary market. This chart, which we will put up over 

there, is taken from Exhibit 3 in the books.1 It shows a slide from 

an April 18, 2006, PowerPoint presentation entitled ‘‘Shift to Higher Margin Products,’’ which was given to the WaMu board of directors by the president of WaMu’s Home Loans Division. 

In the upper left, there is a box in that Exhibit 3 that lists the 

gain on sale for each type of loan that WaMu offers, and as you 

can see from this chart, the least profitable loans are governmentbacked and fixed loans. The most profitable are Option ARM, home 

equity, and subprime loans. Subprime at 150 basis points is eight 

times more profitable than a fixed loan at 19 basis points. 

Now, those numbers are not estimates or projections, by the way. 

They are the product of actual loan data collected by WaMu. 

WaMu traditionally had sold mortgages to well-qualified or 

prime borrowers. But in 1999, WaMu bought Long Beach Mortgage 

Company, LBMC, which was exclusively a subprime lender, lending to people whose credit histories did not support their getting 

a traditional mortgage. Long Beach operated by having third-party 

mortgage brokers bring proposed subprime loans to its doors, 

issuing financing to the borrower, and paying the brokers a fee. 

Even then, Long Beach made loans for the express purpose of packaging them, selling them to Wall Street and profiting from the gain 

on sale. 

In 2003, Long Beach made and securitized about $4.5 billion in 

home loans. By 2006, its loan operations had increased six-fold, 

and Long Beach’s conveyor belt sent almost $30 billion in subprime 

home loans into the financial system. 


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1See Exhibit No. 8a, which appears in the Appendix on page 388. 

2See Exhibit No. 8b, which appears in the Appendix on page 389. 

3See Exhibit No. 10, which appears in the Appendix on page 408. 

4See Exhibit No. 11, which appears in the Appendix on page 414. 

5See Exhibit No. 12, which appears in the Appendix on page 415. 

6See Exhibit No. 50, which appears in the Appendix on page 670. 

Subprime lending can be a responsible business. Most subprime 

borrowers pay their loans on time and in full. Long Beach, however, was not a responsible lender. Its loans and mortgage-backed 

securities were among the worst performing in the subprime industry. An internal email at WaMu’s primary Federal regulator, the 

Office of Thrift Supervision (OTS), stated that Long Beach mortgage-backed securities ‘‘prior to 2003 have horrible performance.’’1

LBMC finished in the top 12 worst annualized net credit losses in 

1997 and 1999 through 2003, and this email said LBMC, or Long 

Beach, ‘‘nailed down the number 1 spot as top loser . . . in 2000 

and placed third in 2001.’’ 

In 2003, things got so bad that WaMu’s Legal Department put 

a stop to all Long Beach securitizations until the company cleaned 

up its act. An FDIC report noted at the time that of 4,000 Long 

Beach loans reviewed, less than one-quarter, about 950, could be 

sold to investors.2 Another 800 were unsalable, and the rest, over 

half of the loans, had deficiencies that had to be fixed before a sale 

could take place. Several months later, WaMu allowed Long Beach 

to start securitizing its loans again as well as selling them in bulk 

through what were called whole loan sales. 

In 2004, trouble erupted again. An internal WaMu audit of Long 

Beach found that ‘‘relaxed credit guidelines, breakdowns in manual 

underwriting processes, and inexperienced subprime personnel. 

. . . coupled with a push to increase loan volume and the lack of 

an automatic fraud monitoring tool’’ led to deteriorating in loan 

quality.3 Many of the loans defaulted within 3 months of being sold 

to investors. Investors demanded that Long Beach repurchase 

them. Long Beach had to repurchase over $875 million in loans in 

2005 and 2006, lost over $107 million from the defaults, and had 

to cover a $75 million shortfall in its repurchase reserves. 

In response, WaMu fired Long Beach’s senior management and 

moved the company under the direct supervision of the president 

of its Home Loans Division, David Schneider. Washington Mutual 

promised its regulator that Long Beach would improve. But it did 

not. 

In 2008, WaMu’s president, Steve Rotella, emailed the CEO, 

Kerry Killinger, that Long Beach’s ‘‘delinquencies are up 140% and 

foreclosures close to 70%. . . . It is ugly,’’ he wrote.4 Five months 

later, in September, he emailed that Long Beach has 

‘‘[r]epurchases, [early payment defaults], manual underwriting, 

very weak servicing/collections practices and a weak staff.’’5 Two 

months after that, in November 2006, the head of WaMu Capital 

Markets in New York, David Beck, wrote to Mr. Schneider that, 

‘‘[Long Beach] paper is among the worst performing in the market. 

. . .’’6

At the end of 2006, Long Beach saw another surge in early payment defaults. Mr. Schneider sent an email to his subordinates 

that, ‘‘We are all rapidly losing credibility as a management 


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1See Exhibit No. 13a, which appears in the Appendix on page 418. 

2See Exhibit No. 16, which appears in the Appendix on page 448. 

3See Exhibit No. 1c, which appears in the Appendix on page 214. 

4See Exhibit No. 79, which appears in the Appendix on page 793. 

team.’’1 2008 was no better. Audit after audit detailed problems. 

WaMu’s chief risk officer, Ron Cathcart, forwarded an email from 

a colleague about Long Beach, noting ‘‘Appraisal deficiencies . . . 

Material misrepresentations . . . Legal documents were missing or 

contained errors or discrepancies . . . loan decision errors . . . deterioration was accelerating in recent vintages with each vintage 

since 2002 having performed worse than the prior vintage.’’2

In June 2007, WaMu shut down Long Beach as a separate entity 

and took over its subprime lending operations. It issued several 

subprime securitizations. The subprime market then froze in the 

fall of 2007, and WaMu ended all of its subprime lending. By then, 

as shown in this chart,3 from 2000 to 2007, Long Beach and WaMu 

together had securitized at least $77 billion in subprime loans. 

Today, although AAA-rated securities are supposed to be very 

safe with low default rates of 1 to 2 percent, Long Beach’s mortgage-backed securities have loan delinquency rates of 20, 30, 40, 

and even 50 percent, meaning as much as half of their underlying 

loans have gone bad. Those are AAA-rated securities. 

Washington Mutual’s problems were not confined to its subprime 

operations, and the chart that I referred to is going up now showing this huge, steep increase in securitizations of Washington Mutual and Long Beach subprime home loans through 2006. Then, of 

course, the bottom fell out in 2007. 

Washington Mutual’s problems, as I indicated, were not confined 

to its subprime operations. In August 2007, more than a year before the collapse of the bank, WaMu’s president, Steve Rotella, 

emailed CEO, Kerry Killinger, saying that aside from Long Beach, 

WaMu’s prime business ‘‘was the worst managed business I had 

seen in my career.’’4

When Washington Mutual talked about its prime mortgage business, it used the term loosely. While the borrowers who received 

loans from WaMu’s loan officers tended to have better credit scores 

than Long Beach’s subprime borrowers, that was not always the 

case. WaMu loan officers routinely made very risky loans to people 

with below average credit scores. And just like at Long Beach, in 

WaMu’s loan business volume was king. Loan officers got paid per 

loan and got paid more per loan if certain volume targets were met. 

Loan processors were given volume incentives as well as were entire loan processing centers. Even risk managers were evaluated in 

part on the extent to which they supported revenue growth targets. 

Loan officers also got paid more for closing high-risk loans than 

low-risk loans. 

Not surprisingly, people cut corners to keep the conveyor belt 

moving and increase their pay. For example, a April 2008 placement from a WaMu internal corporate fraud investigator states, 

‘‘One Sales Associate admitted that during the crunch time some 

of the Associates would ‘manufacture’ asset statements from previous loan documents’’ because the pressure was tremendous and 


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1See Exhibit No. 30, which appears in the Appendix on page 544. 

2See Exhibit No. 23b, which appear in the Appendix on page 511. 

3See Exhibit No. 22a, which appear in the Appendix on page 496. 

4See Exhibit No. 24, which appears in the Appendix on page 515. 

they had been told to get the loans funded, ‘‘whatever it took.’’ 1

Her words, ‘‘whatever it took.’’ 

In fact, WaMu personnel regularly identified fraud problems 

with its so-called prime loans, but the problems received little attention from management. Perhaps the most compelling evidence 

involves two top loan producers at two different WaMu offices 

called Montebello and Downey in Southern California. Each of 

those loan offices made hundreds of millions of dollars in home 

loans each year and consistently won recognition for their efforts. 

In 2005, an internal WaMu review found that loans from those two 

offices had ‘‘an extremely high incidence of confirmed fraud.’’ These 

are quotes: ‘‘58 percent for Downey, 83 percent for Montebello.’’2

The review found that, ‘‘virtually all of it’’—and they are referring here now to confirmed fraud—‘‘virtually all of it stemming 

from employees in these areas circumventing bank policy surrounding loan verification and review.’’ 3 The review went on: 

‘‘Based on the consistent and pervasive pattern of activity among 

these employees, we are recommending firm action be taken to address these particular willful behaviors on the part of the employees named.’’ 

That review had taken over a year to complete and was discussed with senior management at the bank, including Home 

Loans president, David Schneider, but virtually none of the proposed recommendations were implemented. The fraud problem was 

left to fester until 2 years later when, in June 2007, one of the 

bank’s mortgage insurance companies refused to insure any more 

loans issued by the loan producer from the Montebello office and 

complained to WaMu’s State and Federal regulators about fraudulent borrower information. 

WaMu then conducted another internal investigation, this one 

lasting 10 months. In April 2008, a WaMu audit and legal team 

produced an internal memorandum which at first WaMu tried to 

keep from its regulator, OTS. But the OTS examiner in charge demanded to see the memorandum, and it was eventually turned 

over. He told our staff that once he read it, he considered it ‘‘the 

last straw’’ that changed his view of how the bank dealt with fraud. 

The April 2008 memorandum, which is Exhibit 24,4 stated that 

employees at the Montebello Loan Center ‘‘consistently described 

an environment where production volume rather than quality and 

corporate stewardship were the incented focus.’’ At that loan center, 62 percent of the sampled loans from 2 months in 2007 contained misrepresentations and suspected loan fraud. The memorandum noted that similar levels of fraud had been uncovered at 

the same loan center in 2005, and that no action had been taken 

in response. The memorandum raised the question of whether the 

billions of dollars in loans from that center should be reviewed 

given the longstanding fraud problem and the fact that the loans 

may have been sold to investors. Those fraudulent loans, shocking 

in themselves, were symptomatic of a larger problem. 


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1See Exhibit No. 28, which appears in the Appendix on page 537. 

2See Exhibit No. 34, which appears in the Appendix on page 564. 

WaMu failed to ensure that its employees issued loans that met 

the bank’s credit requirements. Report after report indicated that 

WaMu loan personnel often ignored the bank’s credit standards. 

December 12, 2006, minutes from a WaMu Market Risk Committee 

stated, for example, ‘‘[d]elinquency behavior was flagged in October 

[2006] for further review and analysis. . . . The primary factors 

contributing to increased delinquency appear to be caused by process issues including the sale and securitization’’—sale and 

securitization—‘‘of delinquent loans, loans not underwritten to 

standards, lower credit quality loans and seller services reporting 

false delinquent payment status.’’1

A September 2008 review found that controls intended to prevent 

the sale of fraudulent loans to investors were ‘‘not currently effective,’’ and there was no ‘‘systematic process to prevent a loan . . . 

confirmed to contain suspicious activity from being sold to an investor.’’2 In other words, even where a loan was marked with a red 

flag indicating fraud, that did not stop the loan from being sold to 

investors. The 2008 review found that of 25 loans tested, ‘‘11 reflected a sale date after the completion of the investigation which 

confirmed fraud’’ and said ‘‘there is evidence that this control weakness has existed for some time.’’ 

Sales associates manufacturing documents, large numbers of 

loans that don’t meet credit standards, offices issuing loans in 

which 58, 62, or 83 percent contained evidence of fraudulent borrower information, loans marked as containing fraud but then sold 

to investors anyway—those are massive, deep-seated problems, and 

they are problems that inside the bank were communicated to senior management but were not fixed. 

Now, WaMu’s flagship mortgage product, the Option ARM, was 

also marked by shoddy lending practices. The Option ARM is an 

adjustable rate mortgage which typically allowed borrowers to pay 

an initial ‘‘teaser rate,’’ sometimes as low as 1 percent for the first 

month, and then imposed a much larger floating interest rate 

linked to an index. The option in the loan name refers to an arrangement which allowed borrowers to choose each month among 

four types of payments: payments that would pay off the loan in 

15 or 30 years, an interest-only payment, or a minimum payment 

that did not cover even the interest owed, much less the principal. 

If the minimum payment options were chosen, the unpaid interest would be added to the loan’s principal, causing the loan amount 

to increase rather than decrease over time. In other words, the borrower could make payments as required but still owe the bank 

more money on the principal each month. It was a negative amortizing loan. 

Option ARMs allowed borrowers to make very low minimum payments for a specified period of time, before being switched to higher 

payment amounts. Most borrowers chose the minimum payment 

option. After 5 years, or when the loan principal reached a specific 

amount of negative amortization, such as 110 or 115 or 125 percent 

of the original loan amount, whichever came first, the Option ARM 

would recast. The borrower would then be required to make the 


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1See Exhibit No. 35, which appears in the Appendix on page 569. 

fully amortizing payment needed to pay off the loan within the remaining loan period. The required payment was typically much 

greater, often double the prior payment, causing payment shock 

and increasing loan defaults. 

WaMu was eager to steer borrowers to Option ARMs. Because of 

the gain from their sale, the loans were profitable for the bank, and 

because of the compensation incentives, they were profitable for 

mortgage brokers and loan officers. In 2003, WaMu held focus 

groups with borrowers, loan officers, and mortgage brokers to determine how to push that product. A 2003 report summarizing the 

focus group research stated, ‘‘Few participants fully understood the 

Option ARM. . . . Participants generally chose an Option ARM because it was recommended to them by their loan consultant. . . . 

Only a couple of people had any idea how the interest rate on their 

loan was determined.’’1

It said that while borrowers ‘‘generally thought that negative amortization was a moderately or very bad concept,’’ that perception 

could be turned around by mentioning ‘‘that price appreciation 

would likely overcome any negative amortization.’’ And the report 

stated, ‘‘The best selling point for the Option ARM loan was [borrowers] being shown how much lower their monthly payment 

would be . . . versus a fixed-rate loan.’’ 

That year, 2003, WaMu originated $30 billion in Option ARMs. 

To increase Option ARM sales, WaMu increased the compensation 

paid to employees and outside mortgage brokers for the loans and 

allowed borrowers to qualify for the loan by evaluating whether 

those borrowers could pay a low or even the minimum amount 

available under the loan rather than the higher payments that 

would follow recast. In 2004, WaMu doubled its production of Option ARMs to more than $67 billion. 

WaMu loan officers told the Subcommittee that they expected the 

vast majority of Option ARM borrowers to sell or refinance their 

homes before their payments increased. As long as home prices 

were appreciating, most borrowers were able to refinance. Once 

housing prices stopped rising, however, refinancing became difficult. At recast, many people became stuck in homes they could 

not afford and began defaulting in record numbers. 

WaMu became one of the largest originators of those types of 

loans in the country. From 2006 until 2008, WaMu securitized or 

sold a majority of the Option ARMs it originated, infecting the financial system with these high-risk mortgages. Like Long Beach 

securitizations, WaMu Option ARM securitizations performed badly 

starting in 2006, with loan delinquency rates between 30 and 50 

percent and rising. 

Destructive compensation schemes played a role in the problems 

just described. Hearing exhibits will show how Washington Mutual 

and Long Beach compensated their loan officers and processors for 

loan volume and speed over loan quality. Loan officers were also 

paid more for overcharging borrowers, obtaining higher interest 

rates or more points than called for in the loan pricing set out in 

the bank’s rate sheets, and were paid more for including stiff prepayment penalties. Loan officers and third-party mortgage brokers 


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1See Exhibit No. 1b, which appears in the Appendix on page 213. 

were also paid more for originating high-risk loans than low-risk 

loans. These incentives contributed to shoddy lending practices in 

which credit evaluations took a back seat to approving as many 

loans as possible. 

The compensation problems didn’t stop in the loan offices. They 

went all the way to the top. WaMu’s CEO received millions of dollars in pay, even when his high-risk loan strategy began losing 

money, even when the bank began to falter, and even when he was 

asked to leave his post. From 2003 to 2007, Mr. Killinger was paid 

between $11 million and $20 million each year in cash, stock, and 

stock options. That is on top of four retirement plans, a deferred 

bonus plan, and a separate deferred compensation plan. In 2008, 

when he was asked to leave the bank, Mr. Killinger was paid $25 

million, including $15 million in severance pay. That is $25 million 

for overseeing shoddy lending practices that pumped billions of dollars of bad mortgages into the financial system, another painful example of how executive pay at some U.S. financial firms rewards 

failure. 

The information uncovered by this Subcommittee is laid out in 

over 500 pages of exhibits. These documents detail not only the 

shoddy lending practices at Washington Mutual and Long Beach, 

they show what senior management knew and what they said to 

each other about what they found. Senior executives described 

Long Beach as, ‘‘terrible’’ and ‘‘a mess,’’ with default rates that 

were, ‘‘ugly.’’ With respect to WaMu retail home loans, internal reviews described, ‘‘extensive fraud’’ from employees willfully, ‘‘circumventing bank policy.’’ Controls to stop fraudulent loans from 

being sold to investors were described as, ‘‘ineffective.’’ WaMu’s 

president described it as, ‘‘the worst managed business he had seen 

in his career.’’ That was the reality inside Washington Mutual. 

To keep that conveyor belt running and feed the securitization 

machine on Wall Street, Washington Mutual engaged in lending 

practices that created a mortgage time bomb. We have an exhibit, 

Exhibit 1b,1 which summarizes the lending practices that produced 

high-risk mortgages and junk securities, including targeting highrisk borrowers, steering borrowers to higher-risk loans, increasing 

sales of high-risk loans to Wall Street, not verifying income and 

using stated income or liar loans, accepting inadequate documentation loans, promoting teaser rates, interest-only and pick-a-payment loans which were often negatively amortizing, ignoring signs 

of fraudulent borrower information, and more. 

The last two bullet points on the chart deserve particular scrutiny. We are going to hear today how, at a critical time, Washington Mutual securitized loans that had been selected specifically 

for sale because they were likely to go delinquent without informing investors of that fact. Getting them sold became an urgent goal. 

We will also hear that, at times, Washington Mutual securitized 

loans that had already been identified as being fraudulent, also 

without informing investors. 

WaMu built its conveyor belt of toxic mortgages to feed Wall 

Street’s appetite for mortgage-backed securities. Because volume 

and speed were king, loan quality fell by the wayside and WaMu 


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churned out more and more loans that were high-risk and poor 

quality. Once a Main Street bank focused on financing mortgages 

for its customers, Washington Mutual was taken in by the shortterm profits that even poor-quality mortgages generated on Wall 

Street. 

Washington Mutual was not, of course, the only one running a 

conveyor belt, dumping high-risk, poor-quality mortgages into the 

financial system. Far from it. Some of the perpetrators like Countrywide and New Century have already been hit with Federal enforcement actions and shareholder lawsuits. Others may never be 

held accountable. But all of us are still paying the price. 

This Subcommittee investigation and the Wall Street excesses 

that we have uncovered provide an eerie replay of a 1934 Senate 

Committee investigation into the causes and consequences of the 

1929 Stock Market Crash. That 1934 investigation found, among 

other things, the following. 

‘‘One, many instances where investment bankers were derelict in 

the performance of their fundamental duty to the investing public 

to safeguard, to the best of his ability, the intrinsic soundness of 

the securities that he issues. 

‘‘Two, an utter disregard by officers and directors of banks of the 

basic obligations and standards arising out of the fiduciary relationship extending not only to stockholders and depositors but to 

persons seeking financial accommodation or advice. 

‘‘Three, compensation arrangements that were an incentive to 

bank and securities officers to have the institutions engage in speculative transactions and float securities issues which were hostile 

to the interests of these institutions and the investing public. 

‘‘Four, in retrospect, the fact will emerge with increasing clarity, 

this investigation found, that the excessive and unrestrained speculation which dominated the securities markets in recent years has 

disrupted the flow of credit, dislocated industry and trade, impeded 

the flow of interstate commerce, and brought in its train social consequences inimical to the public welfare.’’ 

That is what the Senate Committee found in 1934. Ironically, 

several of the banks investigated in 1934 were also participants in 

the 2008 financial crisis, another crisis fueled by Wall Street excesses. 

The question facing Congress is whether we have the political 

will to try to curb those excesses. Hopefully, this investigation and 

our findings and recommendations will help strengthen the political will to put an end to the excesses of Wall Street. 

Finally, I want to commend my Ranking Member, Senator 

Coburn, and his staff for their great support and involvement in 

this investigation. They have walked with us. They have worked 

with us each step of the way. I now turn to Senator Coburn for his 

opening remarks. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. Thank you, Mr. Chairman. Thank you for having this hearing. I think it is going to be beneficial as we go 

through the process of all of these hearings in looking at what happened, and why it happened. 


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We know that risky home loans played a particularly important 

part in the financial crisis that befell us. While we are focusing 

today on the case study of Washington Mutual, this is merely a 

starting chapter in a much longer and very complex story. 

The tale of WaMu is emblematic of what happened to many 

home lenders in the never-ending effort to grow and get a larger 

share of the booming housing market. Traditional risk management gave way to the chase for volume and profit. When the housing market finally tanked, WaMu and other lenders imploded. 

WaMu was no fly-by-night operation. As the sixth-largest bank 

in the country with over $330 billion in assets, it had more than 

a century of experience in the mortgage business. It bragged often 

that it survived both the Great Depression and the savings and 

loan crisis. Make no mistake, the collapse of this institution is a 

very big deal. Following by just 10 days the collapse of Lehman 

Brothers, WaMu’s collapse helped send the financial markets into 

a tailspin. Confidence was king in those few days, and seeing a 

giant mortgage lender fail and fall so fast sent a chill through Wall 

Street. 

Our investigation has focused on the 5-year period between 2003 

and 2008 following WaMu’s decision to dive head first into highrisk lending. The bank drastically altered its business model from 

long-term fixed-rate mortgages to higher-risk loans made to higherrisk borrowers. Easy money from the Federal Reserve and soaring 

home values created in WaMu executives a misplaced sense of confidence. Whereas before, taking on risk was something that was approached with caution, the fact would now seem that it was a fast 

and easy way to make money. 

WaMu’s corporate culture had no place for individuals concerned 

about high-risk lending, but instead brushed them aside and ignored them, according to the testimony that we have received. 

Sales associates have admitted that they were under immense 

pressures to sell and just get the loans done. Add to that the environment of a voracious appetite for mortgage-backed securities 

from Wall Street and Fannie Mae and Freddie Mac, and all the 

pieces were in place for an epic fall of this once venerable financial 

institution. 

As competition for borrowers grew and granting loans to those 

with questionable credit histories and less-than-complete documentation became all the rage, underwriting standards started to 

verge on the absurd. WaMu emphasized the power of and made 

sure anyone and everyone got a loan. Something is definitely wrong 

when you need more documentation to rent a movie than to get a 

$1 million home loan. 

We here in Congress are certainly not without blame. Like so 

many Americans, for years, we insisted on seeing the housing market through rose-colored glasses. Congress failed to do its oversight 

on Fannie Mae and Freddie Mac, failed to do its oversight on the 

Federal Reserve, failed to do its oversight on the FDIC, and failed 

to do its oversight in any other number of areas, including the 

SEC. We failed to do the correct oversight that would have brought 

these things to light earlier, before we had such a catastrophe. 

Because of reckless Federal policies, too many families found 

themselves locked into mortgages they did not understand and abVerDate Nov 24 2008 08:28 Nov 29, 2010 Jkt 057319 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 P:\DOCS\57319.TXT SAFFAIRS PsN: PAT

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1The prepared statement of Mr. Vanasek appears in the Appendix on page 134. 

solutely could not afford. In my home State of Oklahoma, we have 

suffered 22,000 foreclosures in the past 18 months and 50,000 foreclosures are projected by 2012. 

As we move forward, understanding events like the collapse of 

WaMu are essential to ensuring that we do not make the same 

mistakes again. But I will emphasize again, the mistakes didn’t 

have to be made had Congress done its job, and we failed miserably. 

I look forward to hearing from our witnesses today and I look forward to being the pinprick to make sure that we continue to do the 

oversight in the future, and I thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Coburn. 

Let me now call our first panel of witnesses for this morning’s 

hearing: James Vanasek, the former Chief Credit Officer from 1999 

to 2004 and Chief Risk Officer from 2004 to 2005 of Washington 

Mutual Bank; Ronald Cathcart, the Chief Risk Officer of Washington Mutual Bank from 2006 to 2008; and Randy Melby, the 

former General Auditor of Washington Mutual Bank. We appreciate each of you being with us this morning. 

Pursuant to Rule 6, all witnesses who testify before the Subcommittee are required to be sworn, so I would ask each of you to 

stand. Please raise your right hand. 

Do you swear that the testimony you are about to give to this 

Subcommittee will be the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Mr. VANASEK. I do. 

Mr. CATHCART. I do. 

Mr. MELBY. I do. 

Senator LEVIN. We are going to be using a timing system today. 

About one minute before the red light comes on, you will see the 

light change from green to yellow, which will give you an opportunity to conclude your remarks. Your written testimony will be 

printed in its entirety in the record. We would ask that you attempt to limit your oral testimony to no more than 5 minutes. 

Mr. Vanasek, we are going to have you go first, followed by Mr. 

Cathcart, and then finish up with Mr. Melby, and then we will 

turn to questions after that is concluded. 

Mr. Vanasek, please proceed. Make sure your microphone is on, 

too, and that you speak right into it. 

TESTIMONY OF JAMES G. VANASEK,1 FORMER CHIEF CREDIT 

OFFICER (1999–2004) AND CHIEF RISK OFFICER (2004–2005), 

WASHINGTON MUTUAL BANK 

Mr. VANASEK. OK. Mr. Chairman, Senator Coburn, and distinguished Members of the Committee, thank you for the opportunity 

to discuss the mortgage and financial crisis from the perspective of 

a Chief Credit Officer in the sixth-largest bank in this country. 

I was the Chief Credit Officer and later the Chief Risk Officer 

of Washington Mutual during the period of September 1999 to December 2005, when I retired. Prior to serving in this capacity, I had 

worked for several large banking companies in senior credit-oriented roles, including PNC, First Interstate Bank, Norwest/Wells 


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Fargo. Altogether, I have 38 years of experience in credit-oriented 

positions and have been fortunate enough to have well-established 

histories and constructive relationships with all of the major banking regulators. 

The failure of Washington Mutual occurred in September 2008, 

nearly 3 years after my retirement, so much of what I will tell you 

today is historical information about the company’s strengths and 

weaknesses during the years of my direct involvement. 

Washington Mutual was a reflection of the mortgage industry 

characterized by very fast growth, rapidly expanding product lines, 

and deteriorating credit underwriting. This was a hyper-competitive environment in which mistakes were made by loan originators, 

lending institutions, regulatory agencies, rating agencies, investment banks that packaged and sold mortgage-backed securities, 

and the institutions that purchased these excessively complex instruments. 

It was both the result of individual failures and systemic failures 

fueled by self interest, failure to adhere to lending policies, very 

low interest rates, untested product innovations, weak regulatory 

oversight, astonishing rating agency lapses, weak oversight by 

boards of directors, a cavalier environment on Wall Street, and 

very poorly structured incentive compensation systems that paid 

for growth rather than quality. 

One must also seriously question the wisdom of the elimination 

of Glass-Steagall and its impact on the securitization market. 

Washington Mutual was a company that had grown with exceptional speed due to acquisitions primarily in California during the 

industry crisis of the early 1990s. By 2000, it was a company in 

search of identity. At one point, the CEO wanted the company to 

expand the commercial lending area in an effort to earn a higher 

price earnings ratio on the stock, only to abandon the strategy 3 

years later. 

The focus then shifted to rapidly expanding the branch network 

by opening as many as 250 locations within 12 months in cities 

where the company had no previous retail banking experience. Ultimately, this proved to be an unsuccessful strategy due in part to 

the effort to grow too quickly. 

The focus then shifted away from the diversification to becoming 

the so-called low-cost producer in the mortgage industry. This effort was likewise unsuccessful, in large measure due to an expensive undertaking to write a completely new mortgage loan origination and accounting software system that ultimately failed and had 

to be written off. 

By mid-2005, the focus had shifted again to becoming more of a 

higher-risk subprime lender at exactly the wrong time in the housing market cycle. This effort was characterized by statements advocating that the company become either via acquisition or internal 

growth a dominant subprime lender. In addition to subprime, the 

company was a large lender of adjustable-rate mortgages, having 

had 20 years’ experience with the product. As in the case of 

subprime, the product had only been available to a narrow segment 

of customers. Adjustable-rate mortgages were sold to an ever-wider 

group of borrowers. Product features were also expanded. 


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Historically, plain vanilla mortgage lending had been a relatively 

safe business. During the period 1999 to 2003, Washington Mutual 

mortgage losses were substantially less than one-tenth of one percent, far less than losses of commercial banks. But rapidly increasing housing prices masked the risks of a changing product mix and 

deteriorating underwriting, in part because borrowers who found 

themselves in trouble could almost always sell their homes for 

more than the mortgage amount, at least until 2006 or 2007. 

There is no one factor that contributed to the debacle. Each 

change in product features and underwriting was incremental and 

defended as necessary to meet competition. But these changes were 

taking place within the context of a rapidly increasing housing 

price environment and were, therefore, untested in a less favorable 

economic climate. 

It was the layering of risk brought about by these incremental 

changes that so altered the underlying credit quality of mortgage 

lending which became painfully evident once housing prices peaked 

and began to decline. Some may characterize the events that took 

place as a ‘‘perfect storm,’’ but I would describe it as an inevitable 

consequence of consistently adding risk to the portfolio in a period 

of inflated housing price appreciation. 

The appetite of Wall Street and investors worldwide created huge 

demand for high-yielding subprime mortgages that resulted in a 

major expansion of what was historically a relatively small segment of the business led by Household Finance. The Community 

Reinvestment Act also contributed by demanding loans—that 

banks make loans to low-income families, further expanding 

subprime lending. 

One obvious question is whether or not these risks were apparent to anyone in the industry or among the various regulatory or 

rating agencies. There is ample evidence in the record to substantiate the fact that it was clear that the high-risk profile of the entire industry, to include Washington Mutual, was recognized by 

some but ignored by many. Suffice it to say, meeting growth objectives to satisfy the quarterly expectations of Wall Street and investors led to mistakes in judgment by the banks and the mortgage 

lending company executives. A more difficult question is why 

boards of directors, regulatory agencies, and rating agencies were 

seemingly complacent. 

Another question may be my personal role and whether I made 

significant effort to alter the course of lending at Washington Mutual. In many ways and on many occasions, I attempted to limit 

what was happening. Just a few examples may suffice. 

I stood in front of thousands of senior Washington Mutual managers and executives in an annual management retreat in 2004 

and countered the senior executive ahead of me on the program 

who was rallying the troops with the company’s advertising line, 

‘‘The power of yes.’’ The implication of that statement was that 

Washington Mutual would find some way to make a loan. The tag 

line symbolized the management attitude about mortgage lending 

more clearly than anything I can tell you. 

Because I believed this sent the wrong message to the loan originators, I felt compelled to counter the prior speaker by saying to 

the thousands present that the power of yes absolutely needed to 


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be balanced by the wisdom of no. This was highly unusual for a 

member of the management team to do, especially in such a forum. 

In fact, it was so far out of the norm for meetings of this type that 

many considered my statement exceedingly risky from a career perspective. 

I made repeated efforts to cap the percentage of high-risk and 

subprime loans in the portfolio. Similarly, I put a moratorium on 

non-owner-occupied loans when the percentage of these assets grew 

excessively due to speculation in the housing market. I attempted 

to limit the number of stated income loans, loans made without 

verification of income. But without solid executive management 

support, it was questionable how effective any of these efforts 

proved to be. 

There have been questions about policy and adherence to policy. 

This was a continual problem at Washington Mutual, where line 

managers, particularly in the mortgage area, not only authorized 

but encouraged policy exceptions. There had likewise been issues 

regarding fraud. Because of the compensation systems rewarding 

volume versus quality and the independent structure of the originators, I am confident at times borrowers were coached to fill out 

applications with overstated incomes or net worth to meet the minimum underwriting requirements. Catching this kind of fraud was 

difficult at best and required the support of line management. Not 

surprisingly, loan originators constantly threatened to quit and to 

go to Countrywide or elsewhere if the loan applications were not 

approved. 

As the market deteriorated, in 2004, I went to the Chairman and 

CEO with a proposal and a very strong personal appeal to publish 

a full-page ad in the Wall Street Journal disavowing many of the 

then-current industry underwriting practices, such as 100 percent 

loan-to-value subprime loans, and thereby adopt what I termed responsible lending practices. I acknowledged that in so doing the 

company would give up a degree of market share and lose some of 

the originators to the competition, but I believed that Washington 

Mutual needed to take an industry-leading position against deteriorating underwriting standards and products that were not in the 

best interests of the industry, the bank, or the consumers. There 

was, unfortunately, never any further discussion or response to the 

recommendation. 

Another way I attempted to counteract the increasing risk was 

to increase the allowance for loan and lease loss to cover the potential losses. Regrettably, there has been a longstanding unresolved 

conflict between the SEC and the accounting industry on one side 

and the banks and the bank regulators regarding reserving methodology. The SEC and accounting profession believed that more 

transparency in bank earnings is essential to investors and that 

the way to achieve transparency is to keep reserves at levels reflecting only very recent loss experience. But banking is a cyclical 

business, which the banks and the bank regulators recognize. It is 

their belief and certainly my personal belief that building reserves 

in good times and using those reserves in bad times is the entire 

purpose of the loan loss reserves. What is more, the investors, the 

FDIC, and the industry are far better protected reserves that are 

intended to be sufficient to sustain the institution through the cycle 


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1The prepared statement of Mr. Cathcart appears in the Appendix on page 138. 

rather than draining reserves at the point where losses are at their 

lowest point. 

At one point, I was forced by external auditors to reduce the loan 

loss reserve of $1.8 billion by $500 million or risk losing our audit 

certification. As the credit cycle unfolded, those reserves were sorely needed by the institution. In my opinion, the Basel Accord on 

bank capital requirements repeats the same mistake of using 

short-term history rather than through-the-cycle information to establish required capital levels, and as such has been a complete 

and utter failure. 

The conventional wisdom repeated endlessly in the mortgage industry and at Washington Mutual was that while there had been 

regional recessions and price declines, there had never been a true 

national housing price decline. I believe that is debatable. But it 

was widely believed, and partially on this premise, the industry 

and Washington Mutual marched forward with more and more 

subprime high loan-to-value and option payment products, each one 

adding incrementally to the risk profile. 

Thank you for your time and attention. I will be happy to address your questions. 

Senator LEVIN. Thanks, Mr. Vanasek. Mr. Cathcart. 

TESTIMONY OF RONALD J. CATHCART,1 FORMER CHIEF ENTERPRISE RISK OFFICER (2006–2008), WASHINGTON MUTUAL 

BANK 

Mr. CATHCART. Chairman Levin, Ranking Member Coburn, and 

Members of the Committee, thank you for the opportunity to comment on my history with Washington Mutual Bank and to provide 

a risk management perspective on some root causes of the U.S. financial services crisis. 

Before leading the Enterprise Risk Management Group at 

WaMu, I spent more than 20 years working in risk management 

positions at World Bank of Canada, Bank One, and CIBC. I joined 

WaMu’s management team in December 2005 and served as the 

Chief Enterprise Risk Officer through April 2008. 

When I arrived at WaMu, I inherited a Risk Department that 

was isolated from the rest of the bank and was struggling to be effective at a time when the mortgage industry was experiencing unprecedented demand for residential mortgage assets. I understood 

that the regulatory agencies and WaMu’s Board of Directors were 

interested in expanding risk management functions within the 

company to meet this demand. The general function of risk management is to measure, monitor, and establish parameters to control risk so that the company is prepared for potential loss. In 

order to meet this objective, during my first few months, I reorganized the department in order to align risk management with the 

company’s business lines and to embed risk managers in each of 

the four business units. 

The company’s strategic plan to shift its portfolios towards higher margin products was already underway when I arrived at 

WaMu. Basically, this strategy involved moving away from traditional mortgage lending into alternative lending programs involvVerDate Nov 24 2008 08:28 Nov 29, 2010 Jkt 057319 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 P:\DOCS\57319.TXT SAFFAIRS PsN: PAT

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ing adjustable-rate mortgages as well as into subprime products. 

The strategic shift to higher-margin products resulted in the bank 

taking on a higher degree of credit risk because there was a greater chance that borrowers would default. 

In hindsight, the shift to both adjustable-rate Option ARM loans 

and subprime products was a significant factor in the failure of 

WaMu and contributed to the financial crisis generally. These products depended on house price appreciation to be viable. When housing prices decelerated, they became problem assets. 

In early 2006, a high volume of Option ARM loans was being 

originated and securitized at WaMu and throughout the West 

Coast mortgage industry. Wall Street had a huge appetite for Option ARMs and WaMu could sell these loans as quickly as it could 

originate them. With an incentive to bundle and sell large quantities of loans as quickly as possible, banks all over the country, including WaMu, became conduits for the securitization and sale of 

loans to Wall Street. The banking industry began to move away 

from the traditional model, where banks held the loans they originated, towards a new model where banks acted as conduits. The 

demand for securitized mortgage products encouraged poor underwriting, and guidelines which had been established to mitigate and 

control risk were often ignored. 

The source of repayment for each mortgage shifted away from 

the individual and their credit profile to the value of the home. 

This approach of focusing on the asset rather than on the customer 

ignores the reality that portfolio performance is ultimately determined by customer selection and credit evaluation. Even the most 

rigorous efforts to measure, monitor, and control risk cannot overcome poor product design and weak underwriting and organizational practices. 

Another key component of WaMu’s higher-risk strategy involved 

efforts to increase the company’s exposure to the subprime market. 

These efforts focused on lending to customers who did not meet the 

credit qualifications to obtain traditional mortgages. In order to be 

successful, any bank offering subprime products must operate with 

a high degree of credit discipline. However, the credit performance 

of Long Beach-originated loans did not meet acceptable risk standards and the high level of early payment defaults suggested poor 

customer selection and underwriting practices. Risk management, 

therefore, determined that Long Beach had outsized risk parameters and we implemented standards to tighten them. 

In the end, WaMu’s subprime exposure never reached the levels 

envisaged in the 2005 strategy. In fact, thanks in part to tightening 

of controls and risk parameters, these were reduced. 

Financial conditions in late 2007 and early 2008 deteriorated further in 2007 and 2008. As head of risk, I began to be excluded from 

key management decisions. By February 2008, I had been so fully 

isolated that I initiated a meeting with the director, where I advised that I was being marginalized by senior management to the 

point that I was no longer able to discharge my responsibilities as 

Chief Enterprise Risk Officer of WaMu. Within several weeks, I 

was terminated by the chairman. 

In conclusion, let me identify some of the factors which contributed to the decline of the U.S. financial market. A confluence of 


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1The prepared statement of Mr. Melby appears in the Appendix on page 146. 

factors came together to create unprecedented financial conditions 

which the market was not equipped to handle. Due to a lack of regulation and lax lending standards, mortgage brokers operated without oversight and underwriting quality suffered as a result. The 

banking industry’s focus shifted from customer selection to assetbased lending as banks became conduits for Wall Street, which 

could and would securitize whatever mortgage pool the bank originated. Rating agencies and regulators seemed to be lulled into a 

sense of complacency, and the Government-Sponsored Enterprises 

opened their risk envelopes and guaranteed and warehoused increasingly risky products. 

Thank you for the opportunity to share my thoughts and experiences. I look forward to the Subcommittee’s review of this matter 

and I am prepared to answer any questions. 

Senator LEVIN. Thank you very much, Mr. Cathcart. We thank 

you all for your statements, which we have had an opportunity to 

read. 

Mr. Melby. 

TESTIMONY OF RANDY MELBY,1 FORMER GENERAL AUDITOR, 

WASHINGTON MUTUAL BANK 

Mr. MELBY. Mr. Chairman and Members of the Subcommittee, 

good morning. My name is Randy Melby. I joined WaMu in June 

2004 and became general auditor in December 2004. I have close 

to 30 years of bank experience with 27 of those years as a professional internal auditor for Norwest, who later acquired Wells 

Fargo, and 2 years leading a large commercial loan operations division for Wells Fargo, along with my current position as chief risk 

officer for BankUnited in Miami Lakes, Florida. I am also a certified internal auditor. 

As general auditor for WaMu, I reported directly to the chairman 

of the Audit Committee of the corporate board of directors and administratively to the chief risk officer who reported directly to the 

CEO. I was not a member of the executive committee, which was 

comprised of the CEO’s direct reports and select direct reports of 

the president and COO. 

My primary role as general auditor was to provide an independent, objective assessment of WaMu’s system of internal control 

and underlying business processes. We conducted our work in accordance with the Institute of Internal Auditors’ Standards for the 

Professional Practice of Internal Auditing and Code of Ethics and 

employed the Committee of Sponsoring Organizations of the 

Treadway Commission, or more commonly referred to as COSO, for 

defining, evaluating, testing, and reporting on WaMu’s policies, 

processes, and information systems. 

My primary objectives were twofold: One, to assist the board, 

management, and employees in the effective discharge of their responsibilities by providing analysis, testing, recommendations, advice, and information concerning the adequacy and effectiveness of 

WaMu’s internal control structure related to safeguarding of assets, 

compliance with applicable laws and regulations, and achievement 


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of management’s operational objectives; and, two, to promote effective business processes to internal control at a reasonable cost. 

The board, management, and employees of WaMu were accountable and responsible for establishing both an adequate and effective internal control environment and for balancing risk and reward in determining and executing business strategies. In other 

words, internal audit does not set or determine business strategies. 

We audit those processes established to execute against business 

strategies determined by both the board and management. As defined by COSO, internal control is a process effected by the board, 

management, and employees designed to provide reasonable assurance regarding the achievement of objectives related to the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. 

I was hired by the Audit Committee to assist the board, management, and employees strengthen WaMu’s overall system of internal 

control by improving and upgrading its internal audit function. 

When I joined WaMu in 2004, the company was at the tail end 

of a string of significant acquisitions that resulted in, among other 

things, multiple and disparate systems and a manually intensive 

business process environment. And the Internal Audit Department 

was very traditional and in need of being elevated to the next level 

of professionalism, credibility, and to be positioned as a forerunner 

in effecting change and delivering strategic and value-added internal audit services. 

For example, in 2005, we turned over close to 50 percent of the 

audit staff, or approximately 40 to 45 people. Most of this turnover 

was by design, and we began upgrading the overall quality and experience of the audit team. Turnover was cut in half to 24 percent 

in 2006 and improved to below 20 percent in 2008, which is in line 

with other large financial services’ internal audit departments. In 

addition, 2005 was a year where we focused on our Internal Audit 

Department infrastructure by initiating an audit process improvement project, enhanced our professional practices group, developed 

internal metrics and MIS, started performing cross-organizational 

audits, and improved overall Audit Committee reporting. 

In 2006, I hired a deputy general auditor, an IT audit director, 

a professional practices audit director, and an audit director to 

oversee and redesign our audit approach for assessing credit risk. 

All came from outside of WaMu and reported directly to me and 

came with over 75 combined years of internal audit experience. 

These changes were significant, specifically as it relates to credit 

risk. Corporate Credit Review was positioned within WaMu as an 

independent function that was separate from internal audit. This 

group was responsible for providing an independent assessment of 

WaMu’s overall credit risk and credit quality and reported up 

through the enterprise chief risk officer. These changes were designed to provide enhanced audit coverage of the credit review 

function. We redesigned our audit processes. The company acquired 

Providian Card Services, and we integrated the Providian audit 

team into our Audit Department, approximately 30 professional internal auditors, and we continued performing more risk-based and 

strategic audits. 


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1See Exhibit No. 1c, which appears in the Appendix on page 214. 

Last, we received an external review, which is required by the 

Institute of Internal Auditors’ Standards for the Professional Practice of Internal Auditing, and received the highest rating assigned. 

In 2007, we continued hiring external talent to keep pace with 

the rapid changes occurring within WaMu. We achieved our full 

staffing plan for the first time since I joined the company, which 

allowed us to reduce our reliance on external co-source resources. 

We enhanced the overall quality of our ongoing risk assessments 

with the focus on emerging risks, and Corporate Fraud Investigations was merged and integrated into the Audit Department, and 

I hired an Investigations Director from the outside who reported directly to me. 

In 2008, we continued enhancing the quality of our assurance 

work. We enhanced our continuous risk assessment process with a 

focus on enterprise-wide risk assessments, and we continued performing high-risk, cross-organizational audits. 

Last, during my tenure as General Auditor, Internal Audit consistently reported to executive management and the Audit Committee those areas of the company that required significant improvement as well as those areas that were well controlled. 

I look forward to answering any of your questions to the best of 

my ability. Thank you. 

Senator LEVIN. Thank you very much. 

We are going to have an opening round, which is a 20-minute 

opening round, so that each of us will take up to that. In our subsequent rounds, we may have a little shorter period, but we will start 

with that approach. 

First, let me start with questions about Long Beach Mortgage. 

This was WaMu’s primary subprime lender. Let me start with you, 

Mr. Vanasek. Did Long Beach have an effective risk management 

regime when you arrived at WaMu? 

Mr. VANASEK. No, sir, they did not. 

Senator LEVIN. And did they develop an effective risk management regime while you were there? 

Mr. VANASEK. No, sir, they did not. 

Senator LEVIN. Mr. Cathcart, when you were there from 2006 to 

2008 at WaMu, did Long Beach have an effective risk management 

regime? 

Mr. CATHCART. No, sir. 

Senator LEVIN. Thank you. Now, since Long Beach was exclusively a subprime lender, its loans were all high risk in a sense. 

I gather that subprime loans are high risk for a number of reasons. 

Is that correct? 

Mr. CATHCART. Yes, that is correct. 

Senator LEVIN. Mr. Vanasek, would you agree? 

Mr. VANASEK. Yes, I agree. 

Senator LEVIN. Now, take a look, if you all would, at Exhibit 1c.1

This is based on WaMu data, and it shows the Long Beach and 

WaMu securitizations of subprime loans. In 6 years, starting from 

2000 all the way through 2006, the securitization of subprime home 

loans went from $2.5 billion all the way up to $29 billion. And then 

in 2007, the number dropped dramatically, not because Long Beach 


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decided to stop securitizing loans, but because by September of that 

year, investors had stopped buying subprime mortgage-backed securities. The credit rating agencies had started to downgrade those 

securities in July, and the market froze at that point. 

Mr. Vanasek and Mr. Cathcart, did either of you become involved 

with managing the risks associated with securitization at Long 

Beach? 

Mr. VANASEK. No, sir. 

Mr. CATHCART. No, sir. 

Senator LEVIN. All right. Is it fair to say that WaMu was not 

particularly worried about the risk associated with Long Beach 

subprime mortgages because it sold those loans and passed the risk 

on to investors? Mr. Vanasek. 

Mr. VANASEK. Yes, I would say that was a fair characterization. 

From the beginning, all Long Beach mortgage loans were sold to 

the street. 

Senator LEVIN. And then the risk, therefore, would be passed on 

to the purchasers. Is that correct? 

Mr. VANASEK. Yes. 

Senator LEVIN. Mr. Cathcart, do you agree with that? 

Mr. CATHCART. Well, there was a retained interest in the 

securitized assets in the neighborhood of $200 or $300 million that 

did represent risk to the bank. 

Senator LEVIN. For the part that was retained, which was a 

small percentage. 

Mr. CATHCART. That is correct. And that ended up being written 

off. But to that extent, there was a residual risk. Other than that, 

the loans were securitized. 

Senator LEVIN. And passed along to investors. 

Mr. CATHCART. Correct. 

Senator LEVIN. Now, this high-risk strategy of WaMu, the shift 

from low risk to high risk, was first implemented in 2004. From 

2003 to 2006, subprime originations were up, and securitizations 

were up even more. They had doubled from 2005 to 2006, according 

to this chart, and that is based on WaMu’s statistics. Presumably, 

that was because WaMu was acquiring subprime loans through its 

subprime conduit or other channels or even taking subprime loans 

from the WaMu portfolio and securitizing them. Is that correct? 

Mr. VANASEK. Yes. Washington Mutual purchased subprime 

loans from Ameriquest Mortgage primarily, New Century on occasion, and that was a separate pool, separate and distinct from Long 

Beach. 

Senator LEVIN. All right. Now, Mr. Vanasek, let me start with 

you. Were you aware during your tenure how these Long Beach 

loans and securities that were sold to investors performed? 

Mr. VANASEK. To a degree. 

Senator LEVIN. And what did you understand how they performed? 

Mr. VANASEK. They had not performed well as time went on. 

There had always been questions about the underwriting of Long 

Beach mortgages. The company went through, during my tenure, 

three changes in executive management in order to more effectively 

manage the company. 

Senator LEVIN. At least that was the goal. 


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1See Exhibit No. 10, which appears in the Appendix on page 408. 

Mr. VANASEK. Yes. 

Senator LEVIN. Mr. Melby, one of the first audits that you 

oversaw after joining WaMu was an April 2006 audit of Long 

Beach, and that is Exhibit 10,1 if you will look in your exhibit book. 

This is entitled ‘‘Memorandum, April 17, 2006,’’ to the Board of Directors’ Audit Committees of Washington Mutual. It is from you, 

and it is regarding ‘‘Long Beach Mortgage Company Repurchase 

Reserve Root Cause Analysis.’’ This was submitted to the Board’s 

Audit Committee. Is that correct? 

Mr. MELBY. That is correct. 

Senator LEVIN. And on page 1 at the bottom, it says the following: ‘‘LBMC [Long Beach] experienced a dramatic increase in 

early payment defaults.’’ Those are EPDs. Do you see that about 

eight lines from the bottom? 

Mr. MELBY. Yes, I do. 

Senator LEVIN. ‘‘LBMC [Long Beach] experienced a dramatic increase in EPDs [early payment defaults] during the third quarter 

of 2005,’’ it says there, and, ‘‘The early payment default recourse 

provisions of whole loan sales agreements led to a large volume of 

required loan repurchases.’’ 

Now I am going to say—and you can say if this is accurate—that 

Long Beach ended up repurchasing more than $800 million in 

loans, incurring a loss of $100 million. And your memo goes on to 

say at the bottom of page 1 and the top of page 2 that Long Beach 

‘‘did not record an appropriate level of repurchase reserves’’ for the 

repurchase obligations and, ‘‘As a result, gains on those sales were 

overstated and not corrected until the first quarter of 2006.’’ Is that 

correct? 

Mr. MELBY. That is correct. 

Senator LEVIN. Then on page 2, the first bullet point, ‘‘Management Control Weaknesses’’ were identified by you at that first bullet point, which is about two-thirds of the way down. ‘‘Relaxed credit guidelines, breakdowns in manual underwriting processes, inexperienced subprime personnel, coupled with a push to increase loan 

volume and the lack of an automated fraud monitoring tool exacerbated the deterioration in loan quality.’’ Is that correct? 

Mr. MELBY. That is correct. 

Senator LEVIN. Did the audit find that Long Beach then was consistently approving poor loans? 

Mr. MELBY. That is a fair assessment. 

Senator LEVIN. And did it find that Long Beach had weak controls over the loan approval process? 

Mr. MELBY. Yes. 

Senator LEVIN. And the push to increase loan volume made 

things worse? 

Mr. MELBY. In my opinion, it did. 

Senator LEVIN. And did you inform senior management of the 

problems? 

Mr. MELBY. We did, yes. 

Senator LEVIN. What was their response? 

Mr. MELBY. An action plan was put together, which is part of Internal Audit’s process and something that—they were receptive to 


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1See Exhibit No. 16, which appears in the Appendix on page 448. 

2See Exhibit No. 19, which appears in the Appendix on page 462. 

the changes. It is something that was monitored on a go-forward 

basis. 

Senator LEVIN. So they indicated they would make changes. 

Mr. MELBY. They did, yes. 

Senator LEVIN. Mr. Cathcart, look at Exhibit 16,1 if you would. 

Now we are at January 2007. This is an email chain at the end 

of December 2006 and beginning of January 2007 between you and 

your colleagues at Washington Mutual about the quality of assets 

at Long Beach. And you write, ‘‘Long Beach represents a real problem for WaMu.’’ That is the way you start that memo. What was 

the problem that you were identifying at that time? 

Mr. CATHCART. I had seen a number of internal audits prepared 

by Randy Melby’s group that indicated significant control weaknesses. I was seeing reports that indicated poor performance of the 

securitized portion of Long Beach mortgages which put us in the 

lowest quartile of performance. And I believed that we had gaps in 

our controls associated with Long Beach. 

Senator LEVIN. And had there been a surge of loans that had to 

be repurchased as well? 

Mr. CATHCART. There was a surge of loans just after I arrived, 

and I believe that was the $800 million that Mr. Melby was just 

talking about. 

Senator LEVIN. All right. Now, in 2006, Washington Mutual 

made Long Beach a direct subsidiary of the bank and put it under 

the direct supervision of the Home Loans Division, but that did not 

seem to help. Mr. Melby, take a look at Exhibit 19.2 Your audit 

team—this is August 20, 2007—issued another Long Beach audit 

report, and it reported a failure to follow underwriting guidelines 

and if you look at Exhibit 19, accurate reporting and tracking of 

exceptions to policy does not exist. That is on page 2. Do you see 

that? 

Mr. MELBY. I do, yes. 

Senator LEVIN. That is called a high risk to the business unit. 

Is that correct? 

Mr. MELBY. That is correct. 

Senator LEVIN. And in this audit, you also say that when credit 

rules were tight, a Long Beach employee did not always comply 

and instead approved loans that were riskier than the bank said 

it wanted to originate. Is that correct? 

Mr. MELBY. That is correct. 

Senator LEVIN. Now, specialty lending is what Washington Mutual called its subprime operations after it abolished Long Beach 

as a separate entity and took over the subprime lending function 

itself, right? 

Mr. MELBY. That is correct, yes. 

Senator LEVIN. Now, wholesale specialty lending was its brokerinitiated subprime operation, right? 

Mr. MELBY. That is my understanding, yes. 

Senator LEVIN. Mr. Cathcart. 

Mr. CATHCART. Yes, that is correct. 


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1See Exhibit No. 21, which appears in the Appendix on page 477. 

Senator LEVIN. Now, if you will look at Exhibit 21,1 you will see 

there a review of wholesale specialty lending FPD, which is first 

payment defaults, and that was distributed to you, Mr. Cathcart, 

so presumably you saw that at the time. Is that correct? 

Mr. CATHCART. Yes, it is. 

Senator LEVIN. It also went to the chairman and chief executive 

officer, Mr. Killinger. Do you see that on the right? 

Mr. CATHCART. Yes, I do. 

Senator LEVIN. And to Mr. Rotella, Steve Rotella. Do you see 

that on the right? 

Mr. CATHCART. Yes, I do. 

Senator LEVIN. And to David Schneider. 

Mr. CATHCART. Correct. 

Senator LEVIN. OK. He was the president of Home Loans at that 

time. 

Now, on page 3 of that report, it identifies two high-risk issues, 

and this is on the top of page 3. Do you see where it says that? 

‘‘Ineffectiveness of Fraud Detection Tools.’’ 

Mr. CATHCART. Correct. 

Senator LEVIN. And ‘‘Weak credit infrastructure impacting credit 

quality,’’ do you see that? 

Mr. CATHCART. Yes. 

Senator LEVIN. And those were high risk? 

Mr. CATHCART. Correct. 

Senator LEVIN. To the company. 

Mr. CATHCART. Yes. 

Senator LEVIN. Now, this review that we are looking at—and this 

is, again, Exhibit 21—this review looked at 187 loans that had first 

payment defaults. In other words, the first payment was not even 

made in those 187 loans. I am now reading down here on page 3 

of this exhibit. One hundred thirty-two of the 187 were reviewed, 

and 115 had confirmed fraud. Do you see where that is there? 

Mr. CATHCART. Yes. 

Senator LEVIN. So 132 sampled were identified with red flags, 

reading from this report, and of that, 115 had confirmed fraud, 80 

had unreasonable income listed, which means that the income that 

someone said they had was not reasonable for that occupation or 

that person. Is that correct? 

Mr. CATHCART. Correct. There should be a reasonableness test 

when these subprime mortgages are originated. 

Senator LEVIN. And 80 of these 115—sorry, 80 of the 132 had unreasonable income. Then it says 133 had evaluation or loan decision errors. Do you see that? 

Mr. CATHCART. Yes, I do. 

Senator LEVIN. Do you see where it says 87 exceeded program 

parameters? 

Mr. CATHCART. Yes. 

Senator LEVIN. Now, why didn’t WaMu clean this up, do you 

know? I mean, this is a report that went right to Mr. Killinger. Mr. 

Rotella and Mr. Schneider received copies of this audit. Do you 

know why this continued, why this was not cleaned up at that 

time? 


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1See Exhibit No. 22a, which appears in the Appendix on page 496. 

Mr. CATHCART. I can only tell you that it was my role as chief 

enterprise risk officer to ensure that both senior management and 

the Board was made aware of these findings and that they understood the contents. I cannot speak for management actions. 

Senator LEVIN. All right. Mr. Vanasek, do you want to add anything to that? Do you know why they were not cleaned up? 

Mr. VANASEK. No. I was retired by that time. 

Senator LEVIN. You were retired by then. Mr. Melby. 

Mr. MELBY. My response would be similar to Mr. Cathcart’s. Our 

job is to report the issues. We do extensive follow-up, and we reported up through the Board accordingly. 

Senator LEVIN. All right. Now, according to this memo, the push 

to increase loan volume made things worse. Is that correct? 

Mr. CATHCART. That is correct 

Senator LEVIN. OK. Now, if you would look at Exhibit 22, the 

problem at WaMu was not confined to Long Beach. Exhibit 22a.1

Now, this is an internal WaMu memo from November 2005 called 

‘‘Southern California Emerging Markets Targeted Loan Review Results.’’ It says at the top, ‘‘Due to a sustained history of confirmed 

fraud findings over the past three years from the Emerging Markets and Retail Broker Program areas, the Home Loans Risk Mitigation Team recently conducted a targeted review of loans originated in two Southern California Community Fulfillment Centers.’’ 

Now, Community Fulfillment Centers are WaMu’s loan processing 

offices. Is that correct, Mr. Vanasek? 

Mr. VANASEK. Yes. 

Senator LEVIN. OK. Now, the memo was addressed to you. Do 

you remember the investigation? 

Mr. VANASEK. I do. 

Senator LEVIN. We are going back here to 2005. The investigation focused on two WaMu loan offices called Montebello and Downey, and reviewed the loans issued by WaMu employees and also 

loans that were brought to the offices by third-party mortgage brokers who were paid a fee when a loan that they brought was financed by the bank. Is it correct that Montebello and Downey offices were headed by two of WaMu’s top loan producers and that 

a lot of loans came out of each of those offices, as much as $1 billion in mortgages in a year? 

Mr. VANASEK. Yes, that is correct. 

Senator LEVIN. And the memo discusses a year-long internal investigation that WaMu’s own employees conducted into suspected 

fraud affecting loans issued by the Montebello and Downey offices, 

which are referred to as Community Fulfillment Centers (CFCs). 

Among the findings, here is what the memo says, in the middle of 

the page there: ‘‘ . . . an extensive level of loan fraud exists in the 

Emerging Markets CFCs, virtually all of it stemming from employees in these areas circumventing bank policy surrounding loan 

verification and review . . . 42% of the loans reviewed’’—and this, 

again, is in the middle of the page—‘‘42% of the loans reviewed 

contained suspect activity or fraud, virtually all of it attributable 

to some sort of employee malfeasance or failure to execute company 

policy.’’ 


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1See Exhibit No. 22b, which appears in the Appendix on page 497. 

2See Exhibit No. 23b, which appears in the Appendix on page 511. 

Behind Exhibit 22a is that PowerPoint presentation, Exhibit 

22b,1 called ‘‘Retail Fraud Risk Overview,’’ and that provides a lot 

of detail about this 2005 investigation, as well as Exhibit 23b,2

which is an email with data showing that the percentage of loans 

containing fraudulent information at the Montebello office was 83 

percent and the percentage at the Downey office was 58 percent. 

So now back to Exhibit 22b. It gives some examples of the fraud 

found. Here is one on page 10 of that memo, ‘‘Fraud Loan Samples.’’ Here is what that sample says. This is page 10, Exhibit 22b, 

loan number, and it gives the number. ‘‘Misrepresentation [of] the 

borrower’s identification and qualifying information were confirmed 

in every aspect of this file’’—misrepresentation, every aspect of this 

file—‘‘including Income . . . Possible Strawbuyer or Fictitious borrower. The credit package was found to be completely fabricated. 

Throughout the process, red flags were over-looked, process requirements were waived. . . .’’ 

Mr. Vanasek, those fraud percentages, 83 percent, 58 percent, 

those are truly eye-popping numbers, are they not? 

Mr. VANASEK. They are. 

Senator LEVIN. And the report said that most of the fraud was 

due to willful behavior of WaMu employees. Did that surprise you 

when you read it? 

Mr. VANASEK. No. 

Senator LEVIN. The memo came out in November 2005. You left 

the bank in December 2005. 

Now, Mr. Melby, you had become auditor a year earlier, in December 2004. Were you told about this report? 

Mr. MELBY. Not at the time. 

Senator LEVIN. All right. So you didn’t know about this report at 

the time. 

Mr. MELBY. At the time, no. 

Senator LEVIN. Now take a look at Exhibit 22a. 

Let me just ask you, Mr. Vanasek, you said you were not surprised at those numbers. As I said, these are really unbelievable 

numbers to an outsider like me, I mean, fraud at that level. Why 

weren’t you surprised? 

Mr. VANASEK. There had been long rumors of those offices regarding this kind of activity and suspicion about it. Nancy Gonseth, 

the author of this memo, came forward and talked to a number of 

people on my staff. We invited Ms. Gonseth to come to Seattle and 

sit down and see if it moved from the area of suspicion to the area 

of fact, and this report that you see is the net result of that discussion. It was forwarded to David Schneider, as head of the mortgage 

lending area, for action. I did not have the authority to remove 

these loan originators. 

Senator LEVIN. All right. Now, let me just finish this line of questioning, and I will turn this over then to you, Senator Coburn. I 

am a little over my 20 minutes, but it is all right. I will just finish 

this one line of questioning. 

Now, in Exhibit 22a, it said that, ‘‘Based on the consistent and 

pervasive pattern of activity among these employees, we are recomVerDate Nov 24 2008 08:28 Nov 29, 2010 Jkt 057319 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 P:\DOCS\57319.TXT SAFFAIRS PsN: PAT

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mending firm action be taken. . . .’’ And no action was taken in 

2005. Now, did that surprise you, Mr. Vanasek? 

Mr. VANASEK. No. 

Senator LEVIN. Why not? 

Mr. VANASEK. Because there was this long history of rumor and 

suspicion about these offices. They were high-volume producers in 

low economic areas, so they contributed heavily to CRA targets. 

They were the highest producers, as you have indicated, in the 

company. And in fairness to Mr. Schneider, it would take some 

time for him to investigate and deal with these issues. So by the 

time I left, he had not completed that activity. 

Senator LEVIN. All right. Now, Mr. Cathcart, you started in 2006 

as WaMu’s chief risk officer, but were you told at the time about 

this fraud investigation so you could evaluate risks? 

Mr. CATHCART. No, I was not. 

Senator LEVIN. All right. Thank you. Senator Coburn. 

Senator COBURN. Thank you. Kind of continuing along with what 

Senator Levin has started, and I will get back to it in detail, Mr. 

Vanasek, you left in 2005, correct? 

Mr. VANASEK. Correct. 

Senator COBURN. You retired? 

Mr. VANASEK. Yes. 

Senator COBURN. Why did you choose to retire? 

Mr. VANASEK. I had originally agreed with Mr. Killinger when I 

was employed that I would work 6 years with Washington Mutual. 

I was 62 years old. I have a heart condition and four cardiac stents. 

I thought it time for the sake of my health to leave. 

Senator COBURN. There is no question in what Senator Levin 

had laid out that there, in several of the offices of WaMu, especially in Downey and Montebello, that there was fraudulent activity going on, correct? 

Mr. VANASEK. Yes. 

Senator COBURN. I mean, your own internal sources said there 

were fraudulent activity. 

Mr. VANASEK. Right. 

Senator COBURN. By your own audits and your own investigation. Was the Board aware of that? Were you ever asked to go before the Board, or did you report to the Board? Were your reports 

given to the Board? 

Mr. VANASEK. I gave reports to the Board on a regular basis to 

the Finance Committee. I reported on performance of the organization. These kinds of issues were generally handed to the audit area 

and to the business unit for reconciliation or resolution. If they 

were not resolved, then, of course, they could be taken to the Board 

for discussion. 

Senator COBURN. In hindsight, it looks like this was systemic activity. 

Mr. VANASEK. Yes. 

Senator COBURN. Would you agree? 

Mr. VANASEK. Yes. 

Senator COBURN. When did you, at any point in time in your 

time as a Risk Manager for them, believe that this was widespread 

fraudulent activity? 


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Mr. VANASEK. When Nancy Gonseth came forward with some 

pretty credible material. Prior to that, it had been largely rumor. 

Senator COBURN. OK. But you saw it not just as a specific one 

or two offices? Did you think that there was fraudulent activity 

outside of those one or two offices? 

Mr. VANASEK. Yes, Senator. In an organization as large as Washington Mutual, with the incentive system constructed as it was, 

that rewarded growth rather than quality, it was inevitable that 

certain people would coach borrowers to meet the minimums. They 

would game the system from time to time. But as I indicated in my 

earlier statement, it was extremely hard to catch. Unless you could 

sit down with the borrower and find out what their real income 

was—and they would, of course, have to admit what their real income was—it was hard to tell. You could be suspicious on the nature of what kind of occupation they might have—— 

Senator COBURN. But documentation of income is one of the requirements for a mortgage, correct? 

Mr. VANASEK. No. When Washington Mutual moved to a substantial number of stated income, that became an even more difficult task. 

Senator COBURN. So the policy was you didn’t have to prove your 

income? You could just state your income? 

Mr. VANASEK. That is correct. 

Senator COBURN. And that was corporate policy? 

Mr. VANASEK. Yes. 

Senator COBURN. So no proof of income, just a statement of income? 

Mr. VANASEK. That is true. 

Senator COBURN. And did that violate any banking or mortgage 

lending rules? 

Mr. VANASEK. Well, it certainly violated old standing rules, but 

it had become very common and highly competitive in the industry. 

And it initially started because people were self-employed and it 

was difficult to get to what their income might be. But it broadened 

beyond self-employed people over time and it was a cost efficiency 

measure. 

Senator COBURN. Mr. Cathcart, did you attend any Board meetings to give a perspective on the company’s risk profile? 

Mr. CATHCART. Yes, I did. 

Senator COBURN. And how was that received? 

Mr. CATHCART. I reported regularly to the Audit Committee and 

to the Finance Committee during each of their meetings, and every 

6 months, I gave a full risk report to the full Board of Directors. 

My first report was in the middle of 2006. I think it was April 

2006. During those meetings, I went through all of the risk functions which reported to Enterprise Risk Management, starting with 

credit risk, obviously. But it included credit risk, market risk, operational risk, compliance, internal audit, which reported to me administratively. But I summarized findings in that report. Liquidity 

risks, regulatory relations, which were the groups that reported to 

me. In those reports, I highlighted for the Board what I saw at the 

time and what our group saw at the time as the five top risks that 

the bank was confronting at the time of the report. 


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1See Exhibit No. 78a, which appears in the Appendix on page 790. 

Senator COBURN. And were the items that Senator Levin highlighted, Exhibits 10 and 22 in terms of this own internal look—are 

you aware that at any time the Board was made aware of each of 

those studies, whether the CEO or others were? Was the Board as 

a whole ever made aware of those studies, that you are aware of? 

Mr. CATHCART. I don’t recall any reports to the Board that highlighted these problems. 

Senator COBURN. Would you think that would be important to 

Board members, to understand that 73 percent or 53 percent of the 

loans didn’t qualify even under the loose standards? 

Mr. CATHCART. Yes, Senator, I considered it material. And although I wasn’t aware of this particular issue, I was concerned that 

the internal Fraud Investigations Group, which looked at employee 

fraud, was not as effective as it could be. So during my tenure, 

after several quarters, I moved that group, which at the time reported into the retail part of the bank. I moved it under the Chief 

Internal Auditor, Randy Melby, who took over the function. He restaffed it, put a new hire in charge, and after that happened, these 

internal employee fraud investigations were picked up, taken up by 

audit. And as a result, that way, I could be very sure the Board 

was aware of the results, which is what happened after that 

change took place. 

Senator COBURN. Were you ever rebuked by the Board for giving 

too pessimistic an outlook in terms of the risks of the actions of the 

mortgage unit? 

Mr. CATHCART. No, I wasn’t. 

Senator COBURN. Were there any questions of the Board members to you about your assessment of the risk parameters that we 

talked about in terms of what Senator Levin outlined in both Exhibit 10 and Exhibit 22? 

Mr. CATHCART. Well, I can recall certainly my first risk report to 

the Board, which was in April 2006, there was no discussion. 

Senator COBURN. Is it your feeling, both Mr. Vanasek and Mr. 

Cathcart, that the Board was responsive to the areas of concern 

that you raised? 

Mr. CATHCART. I would say the Board was responsive. The Board 

would continually ask management why progress hadn’t been made 

on certain chronic issues which were repeat items from both internal audit, credit review, and from the regulators. But it appeared 

as if there was little consequence to these problems not being fixed. 

Senator COBURN. OK. Thank you. 

Mr. Vanasek, on Exhibit 78a,1 there is an email exchange between you and Mr. Killinger where he said, ‘‘I have never seen 

such a high-risk housing market. . . . This typically signifies a 

bubble.’’ You responded, ‘‘All the classic signs are there.’’ Wasn’t 

this email written just months after WaMu made a strategic decision to shift to riskier lending? 

Mr. VANASEK. Yes, it was. 

Senator COBURN. How do you account for the fact that somebody 

has seen a bubble, and by definition, a bubble is going to burst, and 

then their corporate strategy is to jump into the middle of that 

bubble? 


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Mr. VANASEK. Well, frankly, that is quite hard to answer with 

anything that would satisfy you. I can only say that at the point 

in time, the conventional mortgage, a 30-year mortgage, yielded 

very little, so the company was constantly concerned about the reaction of Wall Street to earnings and profitability, and therefore 

pursued these strategies in the face of that. 

Senator COBURN. So why was it that a 30-year mortgage was 

yielding poorly as compared to these other high-risk loans? What 

do you make account for the fact that a significant margin could 

not be made in a 30-year loan? 

Mr. VANASEK. It had become a very homogeneous product in the 

market and there was such demand for it that margins shrank and 

it just wasn’t very interesting. 

Senator COBURN. Did it have anything to do with the fact that 

the GSEs were the major suppliers of funds for those? 

Mr. VANASEK. I really couldn’t answer that. They did bridge into 

Option ARMs and other products over time, but I can’t speak to 

their interest in purchasing fixed rate versus adjustable rate. 

Senator COBURN. During your time, underwriting standards 

across the industry declined. 

Mr. VANASEK. Right. 

Senator COBURN. Did you ever step in and try to get people to 

take a more conservative approach at WaMu? 

Mr. VANASEK. Constantly. 

Senator COBURN. Were you listened to? 

Mr. VANASEK. Very seldom. 

Senator COBURN. Were you ever felt that your opinions were 

unwelcomed, and could you be specific? 

Mr. VANASEK. Yes. I used to use a phrase. It was a bit of humor 

or attempted humor. I used to say the world was a very dark and 

ugly place in reference to subprime loans. I cautioned about 

subprime loans consistently. The problem we had at Washington 

Mutual was the line managers and people like myself, members of 

the Executive Committee, if we were in conflict—let us suppose I 

was in conflict with the head of mortgage lending. We had no way 

to resolve that because the chairman would not engage in conflict 

resolution. He was very conflict-averse. 

So it was left to the two of us to work it out ourselves. Sometimes that implied a bit of compromise on my part to allow, for example, a small amount of some particular underwriting to be done, 

even though I didn’t particularly favor it. In the context of a $300 

million institution, I tried to limit it to a point where it wouldn’t 

be terribly effective, but still allowed the line unit to compete. But 

the absence of pure conflict resolution, where I might say, I don’t 

want to do any more subprime mortgages versus what the chairman wanted to do or the head of mortgage wanted to do, there was 

no way to resolve it. 

Senator COBURN. At any time in your thinking prior to your retirement, did you see some of the handwriting on the wall for the 

direction WaMu was going? 

Mr. VANASEK. Well, as indicated by my earlier statement, at the 

end of 2004, and I believe that is the correct date, I sat down with 

the chairman and made a one-on-one, which I found to be the most 

effective way to reach him, impassioned argument to stand up and 


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take an industry-leading position. I thought he could stand out as 

the leading mortgage executive if he could blow a whistle and say, 

enough is enough. The deterioration in mortgage underwriting has 

gone too far and we at Washington Mutual will not participate any 

further. 

Senator COBURN. You mentioned earlier the Community Reinvestment Act (CRA) and you correlated it with the two areas that 

Senator Levin had noted that were high, actually fraudulent mortgage applications. Do you think that WaMu’s decisions, especially 

in these two areas, were more likely related to getting the points 

up on the CRA versus just too good sales or agents that were closing loans and brokering loans? 

Mr. VANASEK. I don’t think CRA led or forced WaMu into doing 

a great deal more low-income moderate housing, moderate-income 

lending. It had a small influence. But the real influence was the 

pure profitability of subprime lending. 

Senator COBURN. Right, the up-front profitability. 

Mr. VANASEK. Correct. 

Senator COBURN. Make the loans, package the loans, sell the 

loans, collect the money, with a small residual for WaMu in terms 

of risk. 

Mr. VANASEK. And some subprime mortgage loans purchased 

from others, namely Ameriquest, were retained on the balance 

sheet. They tended to be higher quality subprime loans and they 

were monitored very closely. I held quarterly business reviews with 

every business unit reviewing their delinquencies and growth and 

changes in policies and so forth in an effort to maintain control of 

the growth. 

Senator COBURN. So basically, you were buying higher-quality 

subprime loans from competitors than what you were selling into 

the market? 

Mr. VANASEK. Correct. 

Senator COBURN. You and Mr. Cathcart both had mentioned the 

impact of the rating agencies. Just honestly, do you think the rating agencies were accurate, did a fair job, or were part of the problem? 

Mr. VANASEK. I think they were very much a part of the problem. 

If you read Michael Lewis’s book, as I understand you have, you 

will understand exactly how that worked. They sold, or they rated 

securities based on average FICO scores, credit scores. Everyone in 

the business knows that you can barbell a securitization in such a 

fashion to put 50 percent good loans and 50 percent higher-risk 

subprime loans in and you are still going to take an unbelievable 

beating. 

Senator COBURN. Mr. Cathcart, your comments on that? 

Mr. CATHCART. I would agree that the rating agencies played a 

significant part in the outsized nature of the securitization market. 

The ratings—first of all, the incentives, I think, are inappropriate 

where the issuers pay for the rating. Second of all, the models that 

were brought to—— 

Senator LEVIN. Are you saying it is inappropriate? 

Mr. CATHCART. Inappropriate that the issuer should pay the rating agency to rate the issuer’s paper. It seems to me the investor 


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should be paying for it if they are looking for third-party verification. 

The simplistic models that were used, maybe as a matter of convenience, which didn’t take in the so-called black swan events that 

if you are looking at a AAA paper you really need to look at because models are not going to give you the level of confidence necessary for a AAA paper at 99.9 percent, whatever percent is required, probability of non-default. 

The volumes were so significant and the opportunities to make 

money that I would have expected that shortcuts were being taken 

as part of just getting these securitizations out into the market as 

quickly as possible. 

The overcomplexity of a number of these products, some of the 

more absurd examples, such as the CDOs-cubed and securities like 

that, which where I have read a number of very in-depth research 

papers that try and evaluate the tiered risk of these securitizations 

and it is almost, frankly, impossible to figure it out. 

That is just a cluster of factors. And I would add, not wanting 

to take too much time, the over-dependence or over-reliance on the 

rating agencies by government regulatory bodies, even to the tune 

of bank regulations allowing, for example, AAA securities to be 

held as risk-free assets on the bank’s balance sheet. This gives 

more credence to the rating agencies than they should have and it 

absolves financial institutions from having to make their own independent risk assessments when they load their balance sheets up 

with securities. 

Senator COBURN. This is for Mr. Vanasek and Mr. Cathcart 

again. It is true that risk management employees reported both to 

each of you and also other senior business executives. Was there 

a line around you in management with the people that worked for 

you? 

Mr. CATHCART. Could you clarify—— 

Mr. VANASEK. Yes. 

Senator COBURN. I am just wondering if the people that worked 

for you in risk management had a way around you to senior executives, or did it all go through you? 

Mr. VANASEK. It all went through me. 

Senator COBURN. And there was nothing around you? 

Mr. CATHCART. That was not the case in my situation. There was 

a way around me. 

Senator COBURN. Explain that to us if you would, please. 

Mr. CATHCART. The chairman adopted a policy of what he called 

double reporting, and in the case of the Chief Risk Officers, although it was my preference to have them reporting directly to me, 

I shared that reporting relationship with the heads of the businesses so that clearly any of the Chief Risk Officers reporting to 

me had a direct line to management apart from me. 

Senator COBURN. And was that a negative or a positive in terms 

of the ultimate outcome, in your view? 

Mr. CATHCART. It depended very much on the business unit and 

on the individual who was put in that double situation. I would say 

that in the case of home loans, it was not satisfactory because the 

Chief Risk Officer of that business favored the reporting relationship to the business rather than to risk. 


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Senator COBURN. And this is a hard question to answer, but I 

hope you will make an attempt to do it. Was there a point in time 

when you recognized the writing on the wall in terms of the fraudulent activity? Mr. Vanasek, you saw a bubble coming, and Mr. 

Cathcart, I am not sure that we have any comments from you. But 

was there a point in time when you knew that things were going 

to come unwound? 

Mr. CATHCART. Well, it is the old image of boiling a frog. It happened gradually. I think if we had all been paying attention, we 

all would have realized it began in Q3 of 2006, when HSBC had 

the big write-downs on subprime, which we at the time attributed 

to poor integration with Household Financial. As it turns out, that 

was the thin edge of the wedge. And I would say it is fair to say 

that I didn’t realize that was the beginning of it. 

I would also say that there was an ingrained belief, and I certainly shared it, that the house prices in the country would not reduce simultaneously because they had not—— 

Senator COBURN. In other words, there would be a geographical 

difference? 

Mr. CATHCART. There would be a geographical difference. And so 

the biggest concern I had was the overconcentration of Washington 

Mutual’s portfolio in California—— 

Senator COBURN. Florida and California. 

Mr. CATHCART [continuing]. Florida, as well—where I did believe 

there was a significant risk because my belief was that a regional 

meltdown was possible. 

But I would say that it wasn’t really until probably the second 

quarter of 2007 when liquidity started drying up, and I understood 

what that meant to the portfolio, that I realized that we were in 

significant difficulty. The drying up of liquidity, not just because 

the bank itself might have difficulty funding itself, but more importantly, the market for the mortgages which, if you think about 

Washington Mutual as a large manufacturer, a huge machine, the 

supply is very difficult to slow down and the market for the supply 

was drying up very quickly, and that resulted in all of the mortgages that had previously been warehoused for sale having to go 

on the balance sheet. So what I foresaw was stress on capital and, 

of course, the whole implications of bringing all those mortgages 

onto the balance sheet. 

Senator COBURN. Mr. Vanasek. 

Mr. VANASEK. Senator, I would have answered the question 

somewhat differently. I realized by 2004 that the industry was in 

some degree of difficulty. Obviously, I didn’t know then and I didn’t 

foresee the magnitude of the difficulty. I didn’t see the broad-based 

failure in financial institutions to the degree that they subsequently unfolded. But it was clear to me that the practices were 

fundamentally unsound, and it couldn’t go on forever. We had 

housing prices increasing much more rapidly than incomes and you 

knew that ultimately there was a limit to this. It just practically 

could not go on. So that was part of my 2004, in effect, urgent message to management that we needed to drop these practices and become more conservative at that point in time. 

Senator COBURN. And unfortunately, they did not heed that advice. 


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1The prepared statement of Senator Collins appears in the Appendix on page 132. 

Mr. VANASEK. Correct. 

Senator COBURN. In the viewpoint of packaging loans to be resold, what was the attitude inside WaMu in terms of—everybody 

knew they had a lot of poor loans. I mean, all this data we have 

collected. Yet WaMu was still packaging loans and the rating agencies were still giving them AAA—credit rating agencies. What was 

the attitude? You could package as much junk as you want and 

still get a AAA rating and move it out the door? What was the culture that said we can keep doing this even though we know we are 

selling a product that is not worth the paper it is written on? 

Mr. VANASEK. I would suggest you need to address that question 

to Mr. Beck and Mr. Schneider, who were responsible on the credit 

side. We were not responsible for selecting mortgages that would 

go into pools. We had no part in that whatsoever. 

Senator COBURN. But you did see it happening? 

Mr. VANASEK. We did see large volumes of mortgage-backed securities being created—— 

Senator COBURN. Right. 

Mr. VANASEK [continuing]. And it was viewed as a profit center 

in the Washington Mutual Capital Corp. But I didn’t know or 

didn’t see that they were being selective in terms of what was 

going in versus what was not going in. 

Senator COBURN. All right. Mr. Cathcart, any comments on that? 

Mr. CATHCART. Well, I would agree that as a Chief Risk Officer, 

I didn’t participate in the selection process and had understood 

that these were almost pari passu type selections, in other words, 

randomly sampled portfolios, and if that isn’t the case, that would 

surprise me. I think there was a belief that the rating agencies, if 

the rating agencies were able to—and I wasn’t part of the process, 

but if the rating agencies were satisfied with the tranching of the 

securitization, then it would satisfy the market. But I would agree 

with Mr. Vanasek that the question is properly directed at the 

group that sold the portfolios. 

Senator COBURN. All right. Thank you. Thank you, Mr. Chairman. I would ask unanimous consent for Senator Collins’ opening 

statement to be placed in the record.1

Senator LEVIN. Thank you very much for that. It will be made 

part of the record. Senator Kaufman. 

Senator KAUFMAN. Thank you, Mr. Chairman, and thank you for 

holding this incredibly important hearing at an incredibly important time. 

Mr. Vanasek, you mentioned in your opening statement that you 

thought the repeal of Glass-Steagall was a big mistake. Could you 

kind of expand on why you thought that was a big mistake? 

Mr. VANASEK. Yes. I think when you create a situation like 

Washington Mutual Capital Corporation, you encourage the very 

question that just was asked of me. I also thought that perhaps the 

talent was not sufficiently available for all of the companies that 

suddenly started creating mortgage-backed securities and filling 

the marketplace. 


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Senator KAUFMAN. And this may be above your pay grade. What 

would you think about reinstituting that in light of what happened? 

Mr. VANASEK. I think certainly I am not an expert on GlassSteagall, but I think certainly elements of it deserve to be considered. 

Senator KAUFMAN. Thank you. You mentioned about FICO 

scores, and I understand you don’t do the individual mortgages and 

you are not familiar with the section in The Big Short where he 

talks about in horrifying detail, how FICO scores were just used. 

Mr. VANASEK. Yes. 

Senator KAUFMAN. Can you comment on how FICO scores were 

used at Washington Mutual? 

Mr. VANASEK. Yes. FICO scores were the best single indicators 

we had in terms of predicting default or successful underwriting. 

We moved more and more to FICO scores over time because of 

what was happening with conventional underwriting, where we 

would have in the past looked at either tax returns or pay stubs 

or other things we would have looked at, we would have had different kinds of appraisals. They wouldn’t have been drive-by appraisals. It would have been full appraisals, and so forth. So in the 

absence of those more detailed forms of underwriting and analysis, 

we had relied more heavily on FICO. 

Senator KAUFMAN. And the barbelling you were talking about, do 

you think that went on? 

Mr. VANASEK. I am sure that it went on. It was evidenced thoroughly in the book that certain packagers of mortgages did that 

and then the rating agencies would take and pool them and rate 

80 percent of them AAA, even though the individual mortgages 

were nowhere near AAA. 

Senator KAUFMAN. And do you think it went on at Washington 

Mutual? 

Mr. VANASEK. I can’t answer that. I don’t, again, know the selection process that went into the pools. 

Senator KAUFMAN. Where that went on, how would you characterize that behavior? I mean, is that just kind of the rules of the 

road, let the buyer beware, caveat emptor? 

Mr. VANASEK. I think it was gaming the rating agencies. 

Senator KAUFMAN. Gaming, meaning—— 

Mr. VANASEK. Meaning that they knew how the ratings agencies 

were putting these ratings on the pools and so long as that was the 

case, they didn’t see any problem with putting low FICO score 

mortgages in with high FICO score mortgages if they could still get 

the AAA rating. 

Senator KAUFMAN. But then you had to wrap these mortgages up 

and get them into mortgage-backed securities and sell them to people. I mean, was there any requirement that you disclose that you 

were using this technique to get around the rating agencies? 

Mr. VANASEK. I don’t believe there was. I believe the rating agencies—their job was to look at the distribution of FICO scores within 

those mortgages and I am not sure that they did it. 

Senator KAUFMAN. Yes, but I am just saying, now we get past 

them. They are doing it. We have gotten around them. We have figured a way to get around them. But then we actually take the seVerDate Nov 24 2008 08:28 Nov 29, 2010 Jkt 057319 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 P:\DOCS\57319.TXT SAFFAIRS PsN: PAT

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curities with the rating agencies and we are giving them out to the 

people who are purchasing the mortgage-backed securities. Now, I 

think they would assume, not just because a rating agency said it, 

but it would seem to me that Washington Mutual kind of said that 

this was not being arranged in a deceptive way. 

Is that fair to—I mean, what is the responsibility to the people? 

OK, the rating agencies, we know they failed their responsibility. 

What is the responsibility to Washington Mutual when it sells 

mortgage-backed securities to disclose to the folks that buy them 

that this is how we go about business? I understand the rating 

agencies failed theirs. What about Washington Mutual’s responsibility? 

Mr. VANASEK. I think we had a responsibility to share with them 

the distribution of FICO scores and other characteristics of the 

mortgages in a full disclosure environment. 

Senator KAUFMAN. Mr. Cathcart, what do you think? 

Mr. CATHCART. I am not familiar with the disclosure rules surrounding the securitizations and didn’t participate in the selection 

or the disclosure. 

Senator KAUFMAN. All right. 

Mr. CATHCART. But I would like to pick up on something that 

Mr. Vanasek said concerning FICO scores. There were two things 

that happened with respect to FICO scores. There was definitely an 

overdependence on them, but under the surface, the bank had 

changed the way it originated. Banks changed the way they were 

originating loans, which I think is what Mr. Vanasek already said. 

But the second change was the customer behavior also changed 

and we had a phenomenon which we had never seen before, which 

was that a buyer who bought a house that ended up being so-called 

underwater, where the house was worth less than the mortgage, 

actually stopped making payments. We first saw this in 2006, and 

what resulted is when you looked at the delinquency rates for a 

population of borrowers, you found that the high FICO score borrowers were delinquent at exactly the same rate as the low FICO 

score borrowers, which in theory was impossible. So it had the 

whole industry scratching its head. That phenomenon appeared 

about Q4 of 2006. 

In retrospect, what became clear was that in the past, borrowers 

would have first let their credit cards go and the very last asset 

that they allowed to go delinquent was their home. This time 

around, it literally went in reverse, where it was deteriorating 

housing prices that caused the mortgage to go delinquent and the 

credit cards were preserved. And we actually saw that phenomenon 

in our credit card portfolio, where we found that people who didn’t 

own houses had performance that did not deteriorate in the earlier 

stages of the cycle, whereas people who owned homes deteriorated. 

And that was completely counterintuitive. 

So these sorts of changes, when you throw them into an environment where there is an overdependence on FICO, results in really 

basically steering with the lights out. 

Senator KAUFMAN. Mr. Melby, do you have any comments on 

that, FICO scores? 

Mr. MELBY. I have nothing more to add. 


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Senator KAUFMAN. And asking, Mr. Cathcart, in The Big Short, 

which we have all read, to our alarm, they said a FICO score in 

light of your comment that low FICO scores were being delinquent 

as high as higher, in his book, he says a FICO score of 550 was 

virtually certain to default and should never have been lent money 

in the first place. Is that an overstatement or is that really—when 

you say low and high, were you talking about, like, 550? 

Mr. CATHCART. Five-fifty is extremely low—— 

Senator KAUFMAN. Right. 

Mr. CATHCART [continuing]. And the only way to—that would 

definitely be subprime, probably deep subprime. There are ways to 

lend into that market that involve such techniques as calling the 

borrower the day before the loan is due, keeping track of them, almost handling them by hand. 

Senator KAUFMAN. But what really was happening, what Michael 

Lewis says, is they were taking the 550s and throwing them in to 

get an average that passed the rating game, realizing that the 550s 

are going to fail and there wasn’t going to be anybody calling them 

on the phone and holding their hand, right? Is that fair to say? 

Mr. CATHCART. If the right collections and management procedures aren’t in place, that loan will default with high probability. 

Senator KAUFMAN. Right. If we did this in any other business 

and then sold it to somebody like we sold the mortgage-backed securities, that would be fraud. I mean, essentially, if you did this, 

if a car company did it, they got five cars, junkers and good ones, 

and put them together and sold them at the auction market, they 

would be called back and say, you can’t do that. Mr. Vanasek. 

Mr. VANASEK. I agree. 

Senator KAUFMAN. Mr. Vanasek, we have talked about the rating 

agencies and we have talked about the people inside WaMu. How 

would you characterize the behavior of the bank regulators during 

this whole period? And then, Mr. Cathcart, I am going to ask you 

when you took over for Mr. Vanasek how you would characterize 

the bank regulators. 

Mr. VANASEK. I am very pleased that you asked me that question 

because my opinion is that the OTS Examiner-in-Charge during 

the period of time in which I was involved—his name is Lawrence 

Carter—did an excellent job of finding and raising the issues. Likewise, I found good performance from Steve Funaro, the FDIC Examiner-in-Charge. They were both there the entire time that I was 

there. 

What I cannot explain is why the superiors in the agencies didn’t 

take a tougher tone with the banks given the degree of findings, 

negative findings. My experience with the OTS, versus with the 

OCC, was completely different. So there seemed to be a tolerance 

there or a political influence on senior management of those agencies that prevented them from taking a more active stance. By a 

more active stance, I mean putting the banks under letters of 

agreement and forcing change. 

Senator KAUFMAN. Mr. Cathcart. 

Mr. CATHCART. Well, I, like Mr. Vanasek, have actually operated 

in banks under three regulators, in Canada under the Office of the 

Supervisor of Financial Institutions, at Bank One under the OCC, 

and then at Washington Mutual under the OTS, and I would agree 


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that the approach that the OTS took was much more light-handed 

than I was used to. It seemed as if the regulator was prepared to 

allow the bank to work through its problems and had a higher degree of tolerance than I had expected with the other—than I had 

seen with the other two regulators. I would say the relationship 

was good, but in the case of Long Beach Mortgage, for example, in 

my experience, regulators would have closed that channel down if 

management hadn’t much earlier than the OTS was prepared to. 

Senator KAUFMAN. For both of you, wouldn’t one explanation be 

that the people at the very top as the agencies had a self-regulatory attitude? As a matter of fact, the Securities and Exchange 

Commission, at the very top, Alan Greenspan, we should be selfregulating. I mean, as opposed to a political thing that somehow 

someone is getting a political deal because they know someone. I 

know that is way above your pay grade—which of those seem more 

compelling as an excuse for the fact? 

Mr. CATHCART. I wouldn’t characterize it as an excuse, but I 

would say that the OTS did believe in self-regulation. 

Senator KAUFMAN. Mr. Vanasek. 

Mr. VANASEK. I think you have to look at the fact that Washington Mutual made up a substantial portion of the assets of the 

OTS and one wonders if the continuation of the agency would have 

existed had Washington Mutual failed. So I think they had a very 

strong mutual interest in the company succeeding. 

Senator KAUFMAN. Thank you. Mr. Cathcart, Mr. Vanasek talked 

about a stated income loan. Can you give us your definition of a 

stated income loan? 

Mr. CATHCART. A stated income loan is one where the loan consultant asks the person how much they make and they enter that 

onto the credit application. 

Senator KAUFMAN. And there is no further follow-up of that number? 

Mr. CATHCART. Correct. 

Senator KAUFMAN. When was that developed? I guess it was during your period, Mr. Vanasek, is that right? 

Mr. VANASEK. It preceded me by some period of time, but it became a higher percentage of the loans over time as it became more 

market acceptable. 

Senator KAUFMAN. And Mr. Cathcart, why do you think stated 

income loans became a higher percentage of the loans that were 

being originated? 

Mr. CATHCART. Well, as Mr. Vanasek said, it originated as a 

product for self-employed individuals who didn’t have pay stubs 

and whose financial statements didn’t necessarily reflect what they 

made. It was intended to be available for only the most creditworthy borrowers and it was supposed to be tested for reasonableness so that a person who said that they were a waiter or a lowerpaid individual couldn’t say that they had an income of $100,000. 

I think that the standards eroded over time. At least I have become aware, reading all that has happened. 

Senator KAUFMAN. Right. 

Mr. CATHCART. Standards eroded over time and that it became 

a competitive tool that was used by banks to gather business, so 

that if a loan consultant could send his loan to Bank A or Bank 


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B, the consultant would say, well, why don’t you go to Bank B? You 

don’t have to state your income. 

I do think, thinking it through, that there was a certain amount 

of coaxing that was possible between the loan consultant and the 

individual, which would be something which would be invisible to 

a bank that received the application and the only test for that 

would be reasonableness, which as you have heard there were some 

issues with in the portfolio. 

Senator KAUFMAN. Mr. Vanasek, how far up the management 

chain in Washington Mutual do you think they are aware that the 

percentage of stated loan incomes that people were engaging in, 

what Mr. Cathcart said, and that more and more this is becoming 

a way to get around the rules in order to package as many mortgages as possible to then sell off in mortgage-backed securities? 

Mr. VANASEK. I have to believe that given the long-term experience of the executives that they knew. 

Senator KAUFMAN. Mr. Cathcart. 

Mr. CATHCART. I would say that all of the review functions were 

identifying that as a risk issue and that, therefore, both senior 

management and the Board were aware. 

Senator KAUFMAN. Mr. Melby. 

Mr. MELBY. I would agree. 

Senator KAUFMAN. What size mortgages could you get stated income on? Could it go on in any mortgage that Washington Mutual 

offered, do you know? 

Mr. VANASEK. I am not aware of any particular limit that existed, but I could be incorrect. 

Mr. CATHCART. I do not recall the guidelines. I believe stated income was a carve-out of the entire population so there were certain 

prequalifications in place that would allow the offering of a stated 

income loan. But I do not have any details associated with that. 

Senator KAUFMAN. Mr. Vanasek, do you think when a stated income loan was resold, do you think the prospectus disclosed that, 

in fact, the loan was made without verification of a borrower’s income? 

Mr. VANASEK. Well, again, Mr. Beck would probably be the best 

source for that, but the indications were that it may have been in 

the prospectus. Whether anyone paid attention to all of the detail 

in the prospectus, I do not know. 

Senator KAUFMAN. Mr. Cathcart. 

Mr. CATHCART. I am not familiar with the offering memoranda, 

but I would say that stated income loans were a market standard 

of sorts, and it would not surprise me that buyers were aware that 

stated income loans were in the portfolio. 

Senator KAUFMAN. Mr. Melby, do you have anything to add on 

this? 

Mr. MELBY. I have nothing to add. 

Senator KAUFMAN. Mr. Melby, do you think the line managers 

knew that loan originators were knowingly sponsoring mortgage 

applications that contained lies? 

Mr. MELBY. I think the answer is yes. We had certainly picked 

that up in several of our investigation reports through discussions, 

through our independent investigation work. 


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Senator KAUFMAN. And do you think middle managers also knew 

that? 

Mr. MELBY. That information was communicated via the results 

of that work. 

Senator KAUFMAN. And how about the top managers? 

Mr. MELBY. The memos were also communicated upward. 

Senator KAUFMAN. Do you have any idea what the reaction was 

to that? 

Mr. MELBY. Concerned. The specific investigation I am referring 

to goes back to—Senator Levin had referred to a request by an insurance agency relative to fraud, and so we had conducted an investigation back in—the report was issued in 2008. Those results 

were very telling from the standpoint that we had this pattern of 

conduct that had been occurring for a period of years where limited 

or no action had been taken. So a report was addressed again up 

through executive management and up through the board. 

Senator KAUFMAN. This sounds suspiciously like fraud. I mean, 

if you know that you are selling a product that is not truthful— 

I guess is this just caveat emptor, or is this something that could 

be considered, let us say, poor business practice? 

Mr. MELBY. Concerning, to say the least, yes. 

Senator KAUFMAN. Mr. Cathcart. 

Mr. CATHCART. I cannot comment on that. 

Senator KAUFMAN. OK. Well, do you think that you are knowledgeable of the fact that there were people at the—the line managers knew that loan originators were knowingly sponsoring mortgages that had untruths in it, did you know that? 

Mr. CATHCART. I probably cannot speak to line managers. I can 

speak to what Mr. Melby just referred to, which is the reports that 

went to senior management and the Board. 

Senator KAUFMAN. Right. And those did spell out what was going 

on in terms of—— 

Mr. CATHCART. They identified the problems that we have talked 

about and based on statistically representative samples taken from 

the origination factor. 

Senator KAUFMAN. Mr. Vanasek. 

Mr. VANASEK. Historically, Washington Mutual, in comparison to 

other banks that I worked for, was administratively weak, and it 

did not carry the same priority, in other organizations that I 

worked for. Randy and I both work for Norwest, any suspicion of 

fraud would have resulted in immediate terminations. 

Senator KAUFMAN. Yes, they are administratively weak. Do you 

think based on the presentation up here of how emphasis was 

made on subprime loans, how they are more profitable, do you really think that if, in fact, the company had been losing money because of administration that it would have been just as weak administratively? Do you think if they were reporting the fact that we 

were, not doing enough loans, do you think that would have been 

administered poorly? I mean, it is one thing to say it is administered poorly, it is another when it is an incredible advantage to 

you, to your compensation program, to everything you are doing, to 

continue to administer poorly. How much of that do you think—— 

Mr. VANASEK. Senator, in all due respect, I cannot speculate on 

the motivations of these senior managers. All I can say is it was 


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1See Exhibit No. 24, which appears in the Appendix on page 515. 

not addressed thoroughly and promptly in the fashion that I was 

accustomed to seeing. 

Senator KAUFMAN. Mr. Cathcart, do you have the same opinion, 

that it was not addressed in a timely manner based on the number 

of examples that were being reported to the top of the company, 

that there was, in fact, fraud going on at the lower levels on the 

origination forms? 

Mr. CATHCART. I would agree it was not responded to appropriately, and I would also agree with Mr. Vanasek’s comment that 

Washington Mutual was unusual in the fact that it allowed these 

gaps to continue for as long as it did. 

Senator KAUFMAN. All right. Mr. Melby. 

Mr. MELBY. I would agree with those comments. 

Senator KAUFMAN. I guess that is all the questions I have, Mr. 

Chairman. 

Senator LEVIN. Thank you very much, Senator Kaufman. 

Let me just pick up on that comment of yours, Mr. Melby, about 

the allegations going to the Board in 2008, allegations of fraud. 

This is Exhibit 24,1 which I think you were referring to. We have 

seen the earlier reports showing extensive fraud in applications. 

We have seen that they were not acted upon, and now we have a 

report going to the Board on April 4, 2008. I think this is probably 

what you were referring to, Mr. Melby, when you said that the report on the subject of fraud went to the Board in 2008. Is that correct? 

Mr. MELBY. Yes, that is correct. 

Senator LEVIN. On page 3 of this memo, Exhibit 24, right there 

in the middle, it says that the ‘‘2005 and 2007 reviews found high 

levels of misrepresentation and suspected loan fraud for this [office] 

(62% of the 2007 sampled loans).’’ That was the same office, in 

other words—the events of 2007 were covered in the 2008 report 

that we are looking at. Those high fraud levels continued. This is 

the same office, again, that had 83 percent in the earlier audit, 

right? 

Mr. MELBY. Correct. 

Senator LEVIN. Now, what was your reaction, Mr. Melby, to the 

fraud finding in this 2008 report that another investigation 2 years 

earlier had found similar results? 

Mr. MELBY. Well, this was a series of questions that had been 

asked of me. This is the report and the work that we had done that 

simply pulled it all together. So the previous work done by the Risk 

Mitigation Group within Home Loans back in 2005, subsequent 

samples being tested in late 2005 all the way through 2007, it was 

clear there was a pattern of conduct with the same fraud findings 

were occurring which led us to certainly conclude that action had 

not been taken. 

Senator LEVIN. All right. Now, were you appalled, basically, 

when you found that action had not been taken during this period? 

Mr. MELBY. I was deeply concerned to the point where there was 

no question that this had to be escalated up to the Audit Committee. 


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Senator LEVIN. All right. What was the reaction now? You talked 

to senior managers, I believe Mr. Killinger, Mr. Rotella—is that 

correct?—about this. 

Mr. MELBY. That is correct. 

Senator LEVIN. And what was their reaction? 

Mr. MELBY. It has been a while. Certainly concerned, but I do 

not have an explanation for you as to a response as to why this 

was not addressed. Again, we reported the facts, and our job was 

to make certain that we had action on it this time going forward. 

Senator LEVIN. And when you talked to—I take it you talked 

with Mr. Schneider as well? 

Mr. MELBY. On this report, yes. 

Senator LEVIN. What was his reaction? 

Mr. MELBY. Mr. Schneider was certainly concerned with the 

issues. Mr. Schneider had some concerns with some of the accuracy, I think, of some of the issues in the report. We vetted those 

issues and felt we had done a thorough job and stood by the results 

of our work. 

Senator LEVIN. So he disputed some of the facts. 

Mr. MELBY. We did not sit down specifically and talk. I know Mr. 

Schneider had some concerns with some of the issues, but for the 

most part did not dispute the overall results of the report. 

Senator LEVIN. On page 2 of this exhibit, the second bullet point 

there, it says that Home Loans Risk Mitigation ‘‘generated alerts 

that identified patterns of fraudulent loan practices and provided 

remediation recommendations that were not acted upon by [Home 

Loans] Senior Management. Employee interviews conducted during 

this investigation consistently described an environment where production volume rather than quality and corporate stewardship 

were the incented focus.’’ 

Then if you go back again on page 3, if you look at that bullet 

point at the top of page 3 of that exhibit, it says there that, ‘‘Loan 

Producers were compensated for volume of loans closed and Loan 

Processors were compensated for speed of loan closing rather than 

a more balanced scorecard of timeliness and loan quality.’’ It says 

there that, ‘‘Employee interviews conducted during this investigation consistently described an environment where production volume rather than quality and corporate stewardship were the 

incented focus.’’ 

How did senior management, Mr. Melby, react to the finding that 

compensation incentives put loan speed and volume over loan quality? 

Mr. MELBY. I do not recollect a specific discussion around that 

other than we had concluded and made our conclusion just drawing 

on what we felt was a preponderance of evidence over the prior 2 

years based on other internal reports as well as our own interviews 

with employees. 

Senator LEVIN. Mr. Cathcart, what was your reaction to this 

2008 report? Were you surprised basically that nothing had been 

done following the 2005 investigation? 

Mr. CATHCART. I do not recall this report. It happened shortly before I left. 

Senator LEVIN. All right. Appendix B in this report, near the top 

it says, ‘‘Outside of training sessions that Risk Mitigation conVerDate Nov 24 2008 08:28 Nov 29, 2010 Jkt 057319 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 P:\DOCS\57319.TXT SAFFAIRS PsN: PAT

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1See Exhibit No. 30, which appears in the Appendix on page 544. 

ducted in late 2005, there was little evidence that any of the recommended strategies were followed or that recommendations were 

operationalized.’’ Do you see that? 

Mr. MELBY. Yes. 

Senator LEVIN. OK. How does a bank that turns out loans of 

which 58 or 62 or 83 percent contain misrepresentations or fraudulent borrower information, how does a bank operate that way and 

expect that there is going to be any confidence in the loans that 

it is issuing? In other words, how does it claim to be a reliable institution with these kind of numbers, Mr. Vanasek? 

Mr. VANASEK. Well, it is very difficult, obviously. If you will permit me, Senator, a short story. Earlier on in my career at the bank, 

I conducted three meetings with groups of underwriters in the 

mortgage area at three different locations, and I asked them one 

simple question: Can you make the decisions that you arrive at 

hold? And the answer was universally no, because the loans were 

always escalated up, so if they declined a loan, it was escalated to 

a higher level, a marketing manager who would ultimately approve. That was part of the environment. 

Senator LEVIN. Basically they did not want to slow down loan 

production. 

Mr. VANASEK. Correct. 

Senator LEVIN. It was too profitable, and it would have gone to 

a competitor. Is that basically the problem? 

Mr. VANASEK. Correct. 

Senator LEVIN. And the other question that is raised, though, by 

this exhibit is whether or not investors who bought these loans 

needed to be notified of the fraud. And if you look at both the bottom of page 3 and the bottom of page 4, it raises the question, since 

there was such a significant amount of it in those particular areas, 

that the investors who bought them might need legally to be notified. 

Mr. VANASEK. If the seller knows there is fraud, I think they are 

compelled to reveal it. 

Senator LEVIN. Now, the fraud problem is not limited to 

Montebello and Downey. Take a look at Exhibit 30,1 if you all 

would. This is a WaMu document called ‘‘Significant Incident Notification.’’ It is dated April 1, 2008, about loans that were issued in 

2007 by another WaMu retail loan office called Westlake Village, 

which is near Los Angeles. 

The first bullet point in Exhibit 30 says, ‘‘Many of the loans had 

several fraud findings such as fabricated asset statements, altered 

statements, income misrepresentation and one altered statement 

that is believed to have been used in two separate loans.’’ 

Third bullet point. ‘‘One Sales Associate admitted that during 

that crunch time some of the Associates’’—some of the associates— 

‘‘would ‘manufacture’ asset statements from previous loan documents and submit them to the [Loan Fulfillment Center]. She said 

the pressure was tremendous from the LFC to get them the docs 

since the loan had already been funded and pressure from the Loan 

Consultants to get the loans funded.’’ 


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1See Exhibit No. 31, which appears in the Appendix on page 546. 

The next bullet says that loan consultants ‘‘did not instruct them 

to falsify documentation and just told them to get the loans funded 

with whatever it took.’’ ‘‘Whatever it took.’’ 

Exhibit 31,1 if you take a look at that. That memo summarizes 

the same investigation. It says that, ‘‘Sales Associates would take 

[asset] statements from other files and cut and paste the current 

borrower’s name and address.’’ 

Mr. Cathcart and Mr. Melby, were you informed about this investigation at the Westlake Village office? Did you know about it, Mr. 

Cathcart? 

Mr. CATHCART. I was aware of it based on this correspondence, 

yes. 

Senator LEVIN. You were aware of it at the time? 

Mr. CATHCART. This email is me being informed of this. 

Senator LEVIN. All right. Mr. Melby. 

Mr. MELBY. Yes, the Investigation Group reported to me, so I 

was aware. 

Senator LEVIN. Now, do you know if that loan officer was held 

accountable in any way? Do you have any knowledge of that? 

Mr. MELBY. No, I do not. Senator, my understanding on this, we 

did a lot of investigation reports. It is my opinion—I think that this 

individual was terminated. 

Senator LEVIN. I think, though, that they were offered a job within the bank before they left. I think they left the bank but were 

offered jobs. Do you know if I am wrong on that? 

Mr. MELBY. I am not aware of that. 

Senator LEVIN. OK. Now, banks that find out about high rates 

of fraud affecting their loans and then do not do anything about 

them is emblematic of how banks contributed to the financial crisis, putting short-term profits first, letting deep-seated problems 

responsible for poor loan quality fester, churning out and selling 

billions of dollars of defective-quality loans, and it all helped poison 

our financial system with toxic mortgages. 

I have some additional questions, but we have a 10-minute round 

on this one, so I will turn it back to Dr. Coburn and then come 

back for a third round. 

Senator COBURN. I have one serious question, and you can answer it one of two ways, one inside or one being outside. If you 

were an investor in Washington Mutual and you knew what was 

going on, would you consider that as being a material adverse risk 

factor from Washington Mutual? 

Mr. VANASEK. Yes 

Senator COBURN. Mr. Cathcart. 

Mr. CATHCART. When you say what was going on, I am—— 

Senator COBURN. Well, I am talking about the fraud, from 

Westlake to all these others, the idea that the incentive was paying 

people to get loans done whether they were qualified or not. Nobody knows exactly what percentage of the portfolio of loans they 

were making were in that category, but it was a significant number, everybody would agree. Would you consider that a material adverse condition for Washington Mutual? 


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1See Exhibit No. 34, which appears in the Appendix on page 564. 

Mr. CATHCART. I cannot really comment because it sounds like 

a technical term, and I am not—— 

Senator COBURN. Well, it is a very clear term. It is an SEC requirement that if, in fact, a company has a material adverse effect 

on it, it is required to report it. 

Mr. CATHCART. I probably would have to speak to the auditors 

of the company to define what a significant deficiency was. It 

sounds as if it would be a disclosable event. 

Senator COBURN. Well, think about it if you were a shareholder 

only, would you consider this to be a material adverse impact on 

your ownership? 

Mr. CATHCART. If I were a shareholder in a bank that I became 

aware had big problems of fraud in its origination process, I would 

not want to own the shares of that bank. 

Senator COBURN. That is right. You would want to be notified. 

Mr. CATHCART. Yes. 

Senator COBURN. All right. Mr. Melby. 

Mr. MELBY. I would state it the same way. I would need a clearer 

definition of adverse material misstatement, but as a shareholder, 

obviously very concerning, and I would again, like Mr. Cathcart, 

probably would not own shares of that organization. 

Senator COBURN. Let me ask you a follow-up question, each of 

you, and this probably does not apply to Mr. Vanasek because he 

was not there at the time. Was senior management, upper-level 

management, aware of these problems, in your opinion? 

Mr. CATHCART. Yes, I would say senior management was aware. 

Senator COBURN. Mr. Melby. 

Mr. MELBY. Yes. 

Senator COBURN. All right. Thank you. I have no other questions, 

Mr. Chairman. 

Senator LEVIN. Mr. Melby, take a look, if you would, at Exhibit 

34.1 This is a September 8, 2008, report from the Corporate Credit 

Review group. I think this review is not part of your audit team, 

but a copy of the report was sent to your staff, Debbie DahlAmundson. Is that correct? 

Mr. MELBY. Debbie Dahl-Amundson. 

Senator LEVIN. She is on your staff? 

Mr. MELBY. Yes. 

Senator LEVIN. She was on your staff. Now, this internal investigation found that WaMu loans marked as containing fraudulent 

information were nonetheless being sold to investors. This is a very 

significant issue. 

Page 3, first bullet point. Here is what it says in that first bullet 

point near the top: ‘‘Of the 25 loans tested, 11 reflected a sale date 

after the completion of the investigation which confirmed fraud.’’ It 

goes on to say, ‘‘There is evidence that this control weakness has 

existed for some time.’’ First of all, that is a heck of a way of describing selling securities which contain fraudulent mortgages as a 

control weakness, but we will let that euphemism stand there for 

a moment. The important part is that it existed for some time, this 

failure. 


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1See Exhibit No. 2a, which appears in the Appendix on page 229. 

Eleven of 25 loans tested reflected a sale date after completion 

of the investigation which confirmed fraud. 

Now, this is all serious business, but I have got to tell you, it 

gets doubly serious when you get into this area, after fraud is 

found, nonetheless a security containing that fraudulent mortgage 

is still put on the market. 

Now, the executive summary at the top of this report, which, according to its front page, went to Mr. Rotella and Mr. Schneider, 

as well as to you, Mr. Melby, this page 2 says the following: ‘‘The 

overall system of credit risk management activities and processes 

exhibits weakness and/or has deficiencies related to multiple business activities. Exposure is considerable and immediate corrective 

action is essential in order to limit or avoid considerable losses, 

reputation damage, or financial statement errors. Repeat findings, 

if any, are significant.’’ 

So it looks like to me that there was not sufficient interest at 

WaMu to fix the shoddy lending practices. As long as Wall Street 

had a big enough appetite for junk mortgages, WaMu would just 

dump defective loans into the pool of commerce and just hope that 

they would be diluted and that nobody would notice. 

Again, I do not know if you have a comment on this, but we 

would welcome it. First, Mr. Melby, do you have a comment on 

this? Do you remember receiving this? 

Mr. MELBY. I do. I remember receiving the report, and, again, 

this was written by the Corporate Credit Review group. My only 

reaction would be to the first bullet regarding your comment earlier about the control weaknesses existed for some time. In my 

view, this is the same issue that has been reported not only by 

Risk Mitigation but, again, in our reports as well. 

Senator LEVIN. Mr. Cathcart, do you have any comment on this? 

Mr. CATHCART. Well, this report was obviously written 6 months 

after I left, but I can certainly understand the language. ‘‘Repeat 

findings, if any, are significant’’ is— and ‘‘requires improvement 

rating’’ is really the only tool that this team and risk management 

had to be able to bring senior management’s attention to these 

problems. 

Senator LEVIN. I have a number of questions that I will have to 

withhold asking because of the time issue here. But basically I 

would refer in terms of how this higher-risk lending strategy came 

into existence, Exhibit 2a,1 which is a January 2005 presentation 

to the Finance Committee of the Board of Directors about the higher-risk lending strategy. Page B1.2 says, ‘‘In order to generate more 

sustainable, consistent higher margins within Washington Mutual, 

the 2005 Strategic Plan calls for a shift in our mix of business, increasing our Credit Risk Tolerance while continuing to mitigate our 

Market and Operational Risk positions.’’ It then tasked the Corporate Credit Risk Management ‘‘to develop a framework for execution of the strategy.’’ 

Mr. Vanasek, did you get necessary institutional support to effectively manage the credit risk that is inherent in a higher-risk lending strategy such as that? Did you get institutional support to 

carry out this kind of a higher-risk strategy? 


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1See Exhibit No. 1i, which appears in the Appendix on page 223. 

Mr. VANASEK. I would have to say no, Senator, in the sense that 

we wanted to impose strict limits in terms of the dollar amounts 

of various types of loans being made. We found that to be very difficult to do. So there were continuing issues here about the strategy versus the opinion of the credit risk area. 

Senator LEVIN. Now, on page B1.4 of that Exhibit 2a, there is a 

definition of higher-risk lending. It says it consists of ‘‘Consumer 

Loans to Higher Risk Borrowers,’’ including subprime loans, singlefamily residential, and consumer loans to borrowers ‘‘with low credit scores at origination.’’ In the footnote, it says that means FICO 

scores under 660. 

Did WaMu, not just Long Beach but did WaMu issue loans to 

borrowers with FICO scores under 660? Do you know, Mr. 

Vanasek? 

Mr. VANASEK. Yes, they did, and again, that was a sort of thing 

you wish to limit highly. The only reason to do that would be to 

meet a CRA requirement. There was a debate in the industry, Senator, about what constituted subprime. It used to be that anything 

below 660 was considered—a FICO score of 660 was considered 

subprime, and the industry seemed to adopt the 660 limit. So it 

was, again, evidence of the overall deterioration going on. 

Senator LEVIN. Now, we have put in these exhibits, Exhibit 1i.1

This is based on data on loan originations from WaMu’s Securities 

and Exchange filings from 2004 to 2008. What these numbers show 

is that in 2003, fixed mortgages, the traditional mortgages, make 

up about two-thirds of WaMu’s loan originations, and that percentage shrank every year until 2007, when they accounted for only 

one-quarter of the loans that WaMu originated. Meanwhile, higherrisk mortgages, including Option ARMs, home equity, and subprime loans, increased from one-third of the mortgages in 2003 to 

three-quarters of the mortgages by 2007. 

Do those figures reflect the implementation of the strategy of 

moving to higher-risk loans, would you say? 

Mr. VANASEK. I would say, yes. 

Senator LEVIN. During these years, WaMu cut back on its loan 

originations overall, but while cutting back, it also changed the mix 

from lower- to higher-risk loans, as indicated in that strategy. Is 

that correct? 

Mr. VANASEK. Yes, correct. 

Senator LEVIN. I want to ask just another quick question about 

the Option ARM to both you, Mr. Vanasek and Mr. Cathcart, as 

risk managers. Did you have concerns about the Option ARM? 

Mr. VANASEK. Yes, we had concerns from the standpoint of the 

negative amortization that was accumulating and we had been reassured that in the past, borrowers would negatively amortize during difficult times and then make up for lost payments in the good 

times. But the percentage and the potential percentage for negative 

amortization was very large, and, of course, the attendant payment 

shock was also very large, which was a concern to credit. 

Senator LEVIN. And Mr. Cathcart, did you have concerns? 

Mr. CATHCART. Well, I would say there was a lot of focus and 

concern on disclosure issues. In other words, ensuring that when 


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1See Exhibit No. 37, which appears in the Appendix on page 591. 

2See Exhibit No. 64, which appears in the Appendix on page 750. 

the product was sold, that the customer understood the product, 

and a great deal of focus between the regulators and the bank took 

place on that front. 

As far as the structure of the product itself is concerned, the criteria associated with origination were supposed to be sufficiently 

strong, meaning the borrowers were supposed to be sufficiently 

strong that the negative amortization was not considered to be a 

key issue. Of course, I had concerns about it, because negative amortization is intuitively counter to what standard risk appetite 

would suggest, but I would say the portfolio had performed very 

well, and in retrospect, was overly dependent on the continued appreciation in house prices. 

Senator LEVIN. And when WaMu qualified a borrower for an Option ARM loan, did the bank use the payment that the borrower 

would have to make at a recast or did they use a lower payment? 

Mr. CATHCART. It used the lower rate, Mr. Chairman. 

Senator LEVIN. All right. Would you agree with that, Mr. 

Vanasek? 

Mr. VANASEK. Yes. 

Senator LEVIN. Was there a high risk in doing that? 

Mr. VANASEK. Yes. 

Senator LEVIN. And is it true that, as shown in Exhibit 37,1 page 

7 of that exhibit—at times, 95 percent of WaMu’s Option ARM borrowers were making minimum payments, which led to no or negative amortization? Are you able to find that quickly? 

Mr. VANASEK. Yes, I found it, Mr. Chairman. 

Senator LEVIN. OK. Does that strike you as being accurate? 

Mr. VANASEK. Yes, it does. 

Senator LEVIN. Thank you. Dr. Coburn. 

Senator COBURN. I have one last question for Mr. Cathcart. If 

you will go to Exhibit 64,2 this is the 2007 performance review for 

the Head Risk Manager of the Home Loans Division of WaMu and 

you are listed as one of the reviewers. Many banks try to isolate 

the risk managers from sales pressures. But at WaMu, the first 

performance goal for the Home Loans Risk Manager, which represents 35 percent of the evaluation, is growth. Under growth, it 

is specified, achieve net income, $340 million. Sales targets are laid 

out. Home equity is $18 billion. Subprime is $32 billion. Option 

ARM is $33 billion. Alt A is $10 billion. 

The second performance goal is risk management, which is worth 

only 25 percent of the valuation, and I would remind you this is 

for the Head Risk Manager of the Home Loans Division. Am I 

reading this performance review correctly, that the Home Loans 

Risk Manager was instructed to put achieving net income growth 

targets above risk management, and did you agree with those performance goals? 

Mr. CATHCART. Yes, Senator, you are reading it correctly. No, I 

didn’t. 

Senator COBURN. OK. Was her compensation tied to the results 

of a performance review? 

Mr. CATHCART. Yes, it was. 


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1The prepared statement of Mr. Schneider appears in the Appendix on page 158. 

Senator COBURN. Does it strike you as strange that the performance goals for the head of risk management is small risk management but sales volume and profit? 

Mr. CATHCART. Yes, it does. 

Senator COBURN. All right. Thank you. I have no other questions. 

Senator LEVIN. Thank you. Senator Kaufman. 

Senator KAUFMAN. No questions. 

Senator LEVIN. Are you all set? We thank you all. It has been 

a long panel, but the other ones will be equally long, if that gives 

you any comfort. We are going to try to work here. I am not sure 

whether we will take a break for lunch or not. We will have to kind 

of play that by ear. But you are all excused. Thank you. 

Mr. CATHCART. Thank you, Mr. Chairman. 

Senator LEVIN. We will now move to our second panel of witnesses, David Schneider, former President of Home Loans of Washington Mutual Bank, and David Beck, former Division Head of 

Capital Markets of Washington Mutual Bank. 

First, let me extend our appreciation for both of you being with 

us today. We look forward to your testimony, and as I indicated to 

the previous panel and to all panels, all of the witnesses that testify before this Subcommittee by our rules are required to be 

sworn. So at this time, I would ask you both please to stand and 

to raise your right hand. 

Do you swear that the testimony you are about to give to this 

Subcommittee will be the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Mr. SCHNEIDER. I do. 

Mr. BECK. I do. 

Senator LEVIN. Thank you. We are going to again use the timing 

system, where one minute before the red light comes on, you will 

see lights change from green to yellow. It gives you an opportunity 

to conclude your remarks. Your full written testimony will be printed in the record in its entirety. Please limit your oral testimony to 

no more than 5 minutes. 

Mr. Schneider, please go first, followed by Mr. Beck, and then we 

will proceed to questions. Mr. Schneider. 

TESTIMONY OF DAVID SCHNEIDER,1 FORMER PRESIDENT OF 

HOME LOANS, WASHINGTON MUTUAL BANK 

Mr. SCHNEIDER. Chairman Levin, Dr. Coburn, and Members of 

the Subcommittee, thank you for the opportunity to appear before 

you today. My name is David Schneider. 

Beginning in July 2005, I served as President of Washington 

Mutual’s Home Loan Business, which originated prime mortgage 

loans. In 2006, I was given the additional responsibility for Long 

Beach Mortgage Company, which was WaMu’s subprime lending 

channel. 

Before I arrived at WaMu, its management and Board had adopted a lending strategy for the coming years. I understood that its 

strategy was intended, at least in part, to reduce WaMu’s exposure 

to market risk, that is, its exposure to interest rate changes. WaMu 

planned to do so by shifting the assets it held on its balance sheet 


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away from market risk towards credit risk, for example, by holding 

more adjustable-rate mortgages. This strategy was called a higherrisk lending strategy and would have been implemented through 

the bank’s Asset and Liability Committee. ALCO made decisions on 

which loans to hold and which to sell based on the loans’ risk-return profile and other relevant issues, including the type and geographic location of the loans WaMu already had on its books. 

Although WaMu intended to change its business strategy, market conditions soon caused WaMu to go in another direction. As 

house prices peaked, the economy softened, and credit markets 

tightened, WaMu adopted increasingly conservative credit policies 

and moved away from loan products with greater credit risk. 

WaMu increased documentation requirements, raised minimum 

FICO scores, lowered LTV ratios, and curtailed underwriting exceptions. My team also enhanced WaMu’s fraud detection programs. 

During my time at WaMu, we reduced and then entirely stopped 

making Alt A loans and Option ARM loans. Alt A lending ended 

in 2007. Option ARM loans decreased by more than a half from 

2005 to 2006, and by another third from 2006 to 2007. WaMu 

stopped offering Option ARM loans altogether at the beginning of 

2008. 

When the subprime lending operation at Long Beach was placed 

under my supervision in 2006, I was asked to address the challenges its business presented. During that year, I changed Long 

Beach management twice. As I became more familiar with Long 

Beach Mortgage, I concluded that its lending parameters should be 

tightened, so across various loan products we raised FICO scores, 

lowered LTV ratios, established maximum loan values, increased 

documentation requirements, improved programs to detect and prevent fraud, and in 2007 eliminated stated income lending. As a result, the percentage of approved Long Beach loans that were based 

on full documentation increased every year I oversaw Long Beach, 

and the percentage of loans with combined LTV ratios greater than 

90 percent decreased every year over that same period. 

More broadly, WaMu eliminated many subprime products and 

then stopped originating subprime loans entirely. As a result, 

WaMu’s subprime lending declined by a third from 2005 to 2006 

and by 80 percent from 2006 to 2007. 

When I began my job at Washington Mutual, my goal was to 

evaluate and improve our home lending efforts in all respects. As 

market changes began to change, my team and I worked very hard 

to adapt to the new conditions and at the same time address the 

challenges WaMu faced. During the time I was President of Home 

Loans, we acted to reduce the size and associated risk of the Home 

Loans business. Specifically, we closed its broker and correspondent lending channels. We closed Long Beach Mortgage. We 

eliminated a number of higher-risk loan products and bolstered 

quality controls through tightening credit standards, improving the 

automated underwriting tools, enhancing fraud detection and prevention, and curtailing underwriting exceptions. 

I hope this brief summary has been helpful and I look forward 

to your questions. Thank you. 

Senator LEVIN. Thank you very much, Mr. Schneider. Mr. Beck. 


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1The prepared statement of Mr. Beck appears in the Appendix on page 163. 

TESTIMONY OF DAVID BECK,1 FORMER DIVISION HEAD OF 

CAPITAL MARKETS, WASHINGTON MUTUAL BANK 

Mr. BECK. Chairman Levin, Dr. Coburn, and Members of the 

Subcommittee, my name is David Beck. From April 2003 through 

September 2008, I worked at Washington Mutual Bank. In early 

2005, I received responsibility for the capital markets organization 

in Washington Mutual’s Home Loans Group. In the second half of 

2006, as part of Mr. Schneider’s changes to the management at 

Long Beach Mortgage, I was given responsibility for Long Beach’s 

capital markets organization. I will use these brief remarks to 

highlight a few aspects of WaMu’s capital markets organizations. 

WaMu Capital Corp. acted as an underwriter of securitization 

transactions generally involving Washington Mutual Mortgage Securities Corp or WaMu Asset Acceptance Corp. Generally, one of 

these two entities would sell loans into a securitization trust in exchange for securities backed by the loans in question, and WaMu 

Capital Corp. would then underwrite the securities consistent with 

industry standards. 

As an underwriter, WaMu Capital Corp. sold mortgage-backed 

securities to a wide variety of institutional investors. The portfolio 

managers making the investment decision for these institutional 

investors typically had long-term hands-on experience creating, 

selling, or buying mortgage-backed securities. In addition, purchasers had extensive information regarding the loans WaMu sold, 

including the data on the performance of similar loans and the conditions in the housing market. 

WaMu also bought and sold home loans. WaMu Capital Corp. negotiated the terms and helped to close the whole loan sales undertaken by whichever WaMu entity owned the loans. Typically, these 

were sales of WaMu-originated loans, although on occasion WaMu 

Capital Corp. did sell loans originated by third parties. 

Washington Mutual Mortgage Securities Corp. also operated a 

bulk loan conduit through which it purchased loans that were then 

pooled into securitization transactions. WaMu Capital Corp. would 

underwrite securitization transactions in the same manner, regardless of whether the loans were originated by WaMu or a third 

party. 

Because WaMu’s capital markets organization was engaged in 

the secondary mortgage market, it had ready access to information 

regarding how the market priced loan products. Therefore my team 

helped determine the initial prices at which WaMu could offer 

loans by beginning with the applicable market prices for private or 

agency-backed mortgage securities and adding the various costs 

WaMu incurred in the origination, sale, and servicing of home 

loans. 

Your invitation asked specifically about the Repurchase and Recovery Team. In general, purchasers of loans can, under certain circumstances, demand that the seller repurchase a loan. While the 

circumstances in which a repurchase may be required are dictated 

by contractual and legal considerations, the repurchase process 

itself usually involves a give-and-take between buyer and seller. 

Buyers often take an expansive view when the seller is obligated 


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1See Exhibit No. 3, which appears in the Appendix on page 278. 

to repurchase a loan and sellers often disagree. Perhaps not surprisingly, these negotiations lead to outcomes that vary from loan 

to loan and transaction to transaction. Occasionally, it is the seller 

that identifies problems with a loan in the first instance and initiates the repurchase process without demand from the buyer. 

Toward the end of 2007, the WaMu group responsible for evaluating and responding to repurchase requests was placed under my 

direction. That group reviewed repurchase requests to determine if 

they presented valid grounds for repurchase of a loan at issue. 

When appropriate, the group also made repurchase demands to 

those financial institutions from which WaMu had acquired loans. 

The group, which came to be called the Repurchase and Recovery 

Team, also created a computer modeling process to identify loans 

which WaMu had sold that might present a repurchase obligation. 

When this process identified loans that presented a repurchase obligation, the repurchase team would affirmatively approach buyers 

to notify them of that conclusion. In this way, WaMu took proactive 

action to address potential repurchase obligations. 

I hope that this very brief introduction has been helpful to the 

Subcommittee and I would be happy to answer any questions that 

you may have. Thank you. 

Senator LEVIN. Thank you very much, Mr. Beck. 

We will have rounds of 10 minutes this time, and we will have 

more than one round. 

Mr. Schneider, the gain on sale numbers for the various kinds 

of loans were based on WaMu’s own data. If you look at Exhibit 

3,1 which is an April 18, 2006, presentation that you put together 

for the WaMu Board of Directors about the high-risk lending strategy, you will see that on page 5 is a chart entitled, ‘‘Shift to High 

Margin Products.’’ On the left of that chart is information about 

the gain on sale which is produced by the higher-risk loans. We 

have enlarged that part of the chart so that you can see it better. 

It shows that WaMu earned about 19 basis points for a fixed loan, 

a traditional loan, while Option ARMs earned 109, home equity 

loans earned 113 basis points, and subprime loans earned 150 

basis points, about eight times more than the fixed loans. 

Is it fair to say that the gain on sale for the subprime loans was 

much higher than fixed loans because the bank was able to charge 

higher fees and interest rates? Is that basically the case? Mr. 

Schneider. 

Mr. SCHNEIDER. Thank you, Senator. If you look at the gain on 

sale, there are a number of factors that would have driven what 

would be the ultimate gain on sale. Fixed tended to have a fairly 

low gain on sale because it was a highly commoditized product that 

generally went to Fannie Mae and Freddie Mac. Subprime tended 

to have a large gain on sale, A, because of the additional credit risk 

that investors would demand from the product, and B, because it 

was probably less competitive than—— 

Senator LEVIN. Does that mean higher interest rates? 

Mr. SCHNEIDER. Yes, sir. 

Senator LEVIN. OK. And Option ARMs? 


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Mr. SCHNEIDER. Option ARMs would have higher gain on sale 

primarily because of the—it has relative to fixed. It had less competition. And most of the interest rate risk remained with the borrower. Therefore, for banks’ balance sheets and investors’ balance 

sheets, it was a more attractive asset to hold. 

Senator LEVIN. So that was a higher interest rate there, as well? 

Mr. SCHNEIDER. No, not necessarily. 

Senator LEVIN. Not on the Option ARMs? 

Mr. SCHNEIDER. No, sir. 

Senator LEVIN. OK. After it was recast, was it a higher interest 

rate then than it was on fixed? 

Mr. SCHNEIDER. It would depend on the rate environment, Mr. 

Chairman. 

Senator LEVIN. OK. Now, there was a big appetite for residential 

mortgages on Wall Street until September 2007, is that true? 

Mr. SCHNEIDER. Yes. It was around the summer of 2007 when 

volume—when securitization started to—— 

Senator LEVIN. Until then, there was a huge appetite, is that fair 

to say, for residential mortgages on Wall Street? 

Mr. SCHNEIDER. I would say the appetite was fairly significant. 

We started to see some diminishing appetite in late 2006 and the 

middle of 2007. 

Senator LEVIN. OK. What are daily rate sheets? 

Mr. SCHNEIDER. Daily rate sheets, Mr. Chairman, would be what 

we would post each day for the price of the mortgages we were offering on that particular day. 

Senator LEVIN. OK. Maybe I should ask Mr. Beck this question. 

So the daily rate sheets were basically put together by the Capital 

Markets Group, and these folks were where, New York or Seattle? 

Mr. BECK. The daily rate sheets were distributed from Seattle. 

The information that went into the rate sheets could have come 

from both New York and Seattle. 

Senator LEVIN. OK. Was Wall Street playing basically the biggest role in setting the prices for the nonconforming loans across 

the country? 

Mr. BECK. For non-agency mortgages, the rate sheets relied on 

the execution from Wall Street, yes. 

Senator LEVIN. So basically, those—— 

Mr. BECK. As opposed to, say, Fannie or Freddie. 

Senator LEVIN. Right. 

Mr. BECK. Yes. 

Senator LEVIN. OK. Mr. Schneider, in your opening statement, 

your written statement, you described Long Beach as having challenges that you were asked to address. What were they? 

Mr. SCHNEIDER. Senator, Mr. Chairman, when I first got to Long 

Beach, I also saw that audit report that Mr. Melby had put together and we took over the next several months, implemented a 

number of steps to improve the way originations were operated. We 

put into place advanced fraud tools. I changed management twice, 

Mr. Chairman, and then over the course of time also eliminated a 

number of exceptions, eliminated some of the high-risk products 

and ultimately decided at the end, in the middle of 2007, that Long 

Beach was an operation that we should shut down. 


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1See Exhibit No. 10, which appears in the Appendix on page 408. 

2See Exhibit No. 13a, which appears in the Appendix on page 418. 

3See Exhibit No. 19, which appears in the Appendix on page 462. 

Senator LEVIN. And the audit that you saw when you first got 

there, that 2006 audit, which is Exhibit 10,1 was the reason, as I 

understand it, that you were asked to take responsibility for Long 

Beach, is that correct? 

Mr. SCHNEIDER. I actually took responsibility for Long Beach at 

the beginning of 2006 and one of the primary drivers was the increase in repurchase demands that Long Beach had experienced, 

and that was the first area that we looked at. 

Senator LEVIN. Then you saw the audit? 

Mr. SCHNEIDER. Correct. 

Senator LEVIN. Then you ordered a crackdown on early payment 

defaults at Long Beach, is that correct? 

Mr. SCHNEIDER. That is correct. 

Senator LEVIN. Then they surged again a year later when you 

wrote Exhibit 13,2 a December 2006 email to your colleagues, 

‘‘Short story is this is not good. . . . we have a large potential risk 

from what appears to be a recent increase in repurchase requests. 

. . . We are all rapidly losing credibility as a management team.’’ 

That is Exhibit 13a. Does that sound familiar? 

Mr. SCHNEIDER. Yes, it does. 

Senator LEVIN. All right. Eight months later, in an August 20, 

2007 audit report—that is Exhibit 19—here is what you said.3 ‘‘Repeat Issue—Underwriting guidelines established to mitigate the 

risk of unsound underwriting decisions are not always followed 

. . . accurate reporting and tracking of exceptions to policy does 

not exist. . . .’’ Do you see that? 

Mr. SCHNEIDER. What page are you on, Mr. Chairman? 

Senator LEVIN. That is on page 3, repeat issue. Do you see that 

at the top? High risk. 

Mr. SCHNEIDER. Yes, I do. 

Senator LEVIN. ‘‘Repeat Issue—Underwriting guidelines established to mitigate the risk of unsound underwriting decisions are 

not always followed. . . .’’ Then it says that is high risk. The next 

one, high risk, ‘‘accurate reporting and tracking of exceptions to 

policy does not exist. . . .’’ So do you see that now? 

Mr. SCHNEIDER. I do. 

Senator LEVIN. All right. So Long Beach was continuing to issue 

poor quality loans, is that fair to say? 

Mr. SCHNEIDER. I think it is fair to say, Mr. Chairman, that the 

underwriting group and the audit group, as well as myself, were 

less than satisfied with the progress being made, which is the reason we ultimately decided to shut down the operation. 

Senator LEVIN. Yes. When did you finally shut it down and 

transfer it to WaMu? 

Mr. SCHNEIDER. It was shut down—when Long Beach was shut 

down, we stopped originating subprime mortgages through brokers, 

which was the business that Long Beach did. I think that was 

third quarter of 2007. 

Senator LEVIN. OK. Now, the vast majority of Long Beach mortgages, your data shows about 95 percent were sold or securitized. 


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1See Exhibit No. 1c, which appears in the Appendix on page 214. 

Exhibit 1c,1 if you will look at it, is based on WaMu data. The Long 

Beach Mortgage annual securitizations increased more than tenfold, from $2.5 billion in the year 2000 to more than $29 billion in 

the year 2006. From 2000 to 2007, Long Beach and WaMu together 

securitized $77 billion in subprime mortgages, producing mortgagebacked securities. Now, those are the securitization numbers. This 

is WaMu’s own summary of its subprime securitizations as of June 

2008. 

So Long Beach and WaMu’s subprime securitizations doubled 

from 2005 to 2006, going from $14 to $29 billion. Long Beach at 

the same time was cutting back on loan originations during 2006, 

which means that WaMu was purchasing subprime loans from 

other lenders and mortgage brokers through its conduit and other 

channels. Is that right so far? Are you with me so far? 

Mr. SCHNEIDER. Yes, Senator. I think if you look at that chart 

up there, that shows securitizations. There were also a number of 

whole loan sales done in 2005. I am not sure of the exact numbers. 

And the other—— 

Senator LEVIN. Those are based on your numbers. Do you have 

any problem with the numbers you see there in terms of 

securitizations? 

Mr. SCHNEIDER. In terms of securitizations, I do not. 

Senator LEVIN. OK. Now, why were so many Long Beach mortgages defaulted? Why were Long Beach securities consistently 

among the worst performing in the marketplace? 

Mr. SCHNEIDER. Senator, I don’t have that market data in front 

of me. 

Senator LEVIN. Well, but you know that they were consistently 

among the worst performing securities in the marketplace. Those 

mortgages which were made part of those securities, you know 

that. 

Mr. SCHNEIDER. If you look at the performance of Long Beach, 

I don’t think any of us were happy with the performance—— 

Senator LEVIN. No, not happy, but they were among the worst 

performing. Why is it true? Why was that true? 

Mr. SCHNEIDER. I think that is primarily true because Long 

Beach tended to originate higher credit risk assets than other 

subprime mortgage originators. 

Senator LEVIN. All right. Now, it stopped issuing the 

securitizations in 2003 while it worked on correcting the problems, 

is that correct? 

Mr. SCHNEIDER. I am sorry. I didn’t hear the question. 

Senator LEVIN. When WaMu discovered that Long Beach was 

issuing a large number of loans that violated its own credit policies, 

it stopped securitizations in 2003 to correct the problems, to give 

it a chance to correct the problems, is that correct? 

Mr. SCHNEIDER. That is my understanding. I wasn’t—— 

Senator LEVIN. Why weren’t securitizations halted in 2005, 2006, 

and 2007 when similar underwriting problems were uncovered? 

That is my question. 

Mr. SCHNEIDER. Senator, I wasn’t there in 2003. I don’t know 

what the—— 


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1See Exhibit No. 1i, which appears in the Appendix on page 223. 

2See Exhibit No. 34, which appears in the Appendix on page 564. 

Senator LEVIN. No, I am saying why wasn’t it stopped in 2005, 

2006, and 2007? 

Mr. SCHNEIDER. I think as we looked at the originations and the 

overall quality coming out, we felt that there was—we were given 

the right disclosures and that if loans proved to be fraudulent or 

have a problem, we would be buying them—we would buy them 

back out. 

Senator LEVIN. Dr. Coburn. 

Senator COBURN. Thank you. 

Would you put up the percentage chart on WaMu project originations and purchases by percentage.1 In fairness to your testimony 

in terms of the declining nature, however, this pie chart represents, 

in fact, the percentages of the originations of WaMu as a percentage. Based on your testimony, what we see is something very different, what actually happened versus what you said, because you 

can see that each year, fixed mortgages go down and non-conforming loans still are increasing, versus your testimony that said 

that was not the case, that when you came on board, things started 

to change. 

So two questions for that. Did things change because you all 

made an active process to change, or was the market souring so 

much that you couldn’t market those loans? 

Mr. SCHNEIDER. If you look at the charts there, those are percentages there and—— 

Senator COBURN. Right. They are percentages. 

Mr. SCHNEIDER [continuing]. The aggregate volumes went down 

significantly. Some of the items I focused on were subprime. I took 

over subprime in 2006. It was 16 percent of the volume at that 

time. By the time we got to 2007, it was 5 percent on a very small 

base. Option ARMs declined from 22 percent to 18 percent during 

the time I was there, and by the time we got to 2008, Option ARMs 

were zero. And then the other ARM product would be more conventional hybrid ARMs, so those would be loans that would be sold to 

Fannie Mae and Freddie Mac. 

Senator COBURN. Would you put up the WaMu origination and 

purchases by loan type, 2003 to 2007. So not only were the percentages declining, but the absolute dollars—— 

Mr. SCHNEIDER. Yes. 

Senator COBURN [continuing]. Were declining. And why was 

that? 

Mr. SCHNEIDER. As we addressed the Home Loans business from 

2005 until 2008, I think there was a general consensus that the 

size of the mortgage business was too large relative to the size of 

the bank. We wanted to help bring that size of the aggregate business down. We closed a number of sites, actually reduced the employment level of Home Loans by probably 50 percent during that 

time. 

Senator COBURN. Mr. Chairman, I would like to add, Washington 

Mutual’s executive summary that was put forth,2 and we will have 

it available as part of our Fannie Mae alliance and Freddie Mac 

business relationship proposal. And I am sorry you don’t have this 


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1See Exhibit No. 4, which appears in the Appendix on page 290. 

in front of you, but one of the things it said is the key to the proposal is it provides significant liquidity for Option ARM originations, with more advantageous credit parameters, competitive Gfees, and preferred access to their balance sheet relative to our current agreement with Fannie. 

Between 2000 and 2008, Washington Mutual sold more than 

$500 billion in loans to Fannie Mae and Freddie Mac. How did that 

affect Washington Mutual’s bottom line? 

Mr. SCHNEIDER. Senator Coburn, I can only really speak to the 

time I was there in 2005 to 2008. We were going through some 

very difficult challenges. I think the home loans business was losing money for most of that time period and we were working aggressively to see if we could help remedy that. 

Senator COBURN. All right. How important was the relationship 

with Freddie Mac in the bank’s decision to Option ARMs? Would 

you have been optioning ARMs if Freddie Mac hadn’t been there? 

Mr. SCHNEIDER. Yes. Washington Mutual, Senator, had originated Option ARMs for years. I think it provided another source 

of liquidity for the company to sell its Option ARMs by having 

Freddie Mac buy them. 

Senator COBURN. OK. So they were sold for years to Freddie 

Mac, right? Had Freddie Mac not been there, would there have 

been a market in the last 2 years that you were—the last 2 years 

before you wound this all down, outside of Freddie Mac? 

Mr. SCHNEIDER. There would have been. 

Senator COBURN. Would it have been as advantageous as the relationship with Freddie Mac? 

Mr. SCHNEIDER. I am not sure of the specific economics. 

Senator COBURN. Can you look at Exhibit 4,1 the presentation, 

‘‘Way2Go! Be Bold!’’ Are you familiar with this PowerPoint presentation? 

Mr. SCHNEIDER. I am. 

Senator COBURN. When and where did you give this presentation? 

Mr. SCHNEIDER. I don’t know the specifics. If I recall correctly, 

this presentation was given a number of times, so I would have 

given it to folks in staff functions. I would have given the presentation to sales and operating functions, as well, so—— 

Senator COBURN. Anybody above you that you would have given 

it to? 

Mr. SCHNEIDER. I might have shown it to Mr. Rotella or Mr. 

Killinger. 

Senator COBURN. What did you intend be bold? 

Mr. SCHNEIDER. This was done in, I think, early 2007. We had 

gone through a very difficult time, and quite honestly, I was just 

trying to help improve the morale of the Home Loans business, 

which was feeling—I think everyone was feeling badly about what 

was happening. 

Senator COBURN. On the second page of the presentation, there 

is a slide of an organizational chart that has the caption, ‘‘We are 

all in sales.’’ Were you ever concerned that heavy emphasis on 

sales with no oversight risk management was problematic? 


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Mr. SCHNEIDER. Senator, this presentation was meant to be 

taken as a holistic view, and what I meant by we were all in sales 

was just my way of saying we all have to serve the customer. We 

all have to help the customer achieve their needs and help them 

in whatever way we can. So that means we all have a part in helping the customer. 

Senator COBURN. OK. In your testimony, you made a point of 

saying that the decision to make Long Beach a subsidiary of WaMu 

was made before you got there. Do you think that it was a mistake 

to bring Long Beach into WaMu? 

Mr. SCHNEIDER. Senator, I don’t know the specifics of why that 

decision was made or—— 

Senator COBURN. No, I didn’t ask you the specifics. I said, do you 

think it was a mistake to bring Long Beach into WaMu? Is that 

yes or no? 

Mr. SCHNEIDER. Yes. I would say no, because it was still a part 

of the holding company, so we had—— 

Senator COBURN. You had all the obligations—— 

Mr. SCHNEIDER [continuing]. All the obligations anyway. 

Senator COBURN. All right. 

Mr. Beck, were you made aware ever during your time at WMCC 

that the loans underlying WaMu Securities were having problems? 

Mr. BECK. I knew that we had underwriting problems, yes. 

Senator COBURN. Who were the most common customers for 

Washington Mutual’s mortgage-backed securities? 

Mr. BECK. Hedge funds, pension funds, insurance companies, corporations. 

Senator COBURN. OK. Do you believe that your customers had a 

full sense of what they were buying when they purchased these securities? 

Mr. BECK. I do. 

Senator COBURN. So you think they were aware of the risk? 

Mr. BECK. I do. 

Senator COBURN. OK. If you had to redo anything relating to 

securitizing mortgages, how would you do it differently? 

Mr. BECK. I would securitize mortgages with more full documentation. I think the underlying documentation was an important 

aspect of the performance of the loans. 

Senator COBURN. All right. Were you aware as you securitized 

these loans of the significant problems in the credit risk side of the 

business in terms of what they were seeing in terms of loan originations? 

Mr. BECK. No, I was not with respect to some of the audit reports 

that were referred to in the first testimonies. 

Senator COBURN. Did it surprise you, that up to 82 percent in 

certain offices were for unqualified, undocumented loans? 

Mr. BECK. Those are high numbers, but as I looked at that document, I did see that those were taken from an adverse sample from 

that loan origination center. So those loans had already been identified as risky. They were either first payment or early payment defaults, and of those first payment and early payment defaults, I 

would expect that there would be a high percentage of problems. 


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1See Exhibit No. 50, which appears in the Appendix on page 670. 

Senator COBURN. OK. You have said under Exhibit 50 that Long 

Beach paper was the ‘‘worst performing paper’’ in 2006.1 How were 

you made aware of these problems? 

Mr. BECK. Just give me a moment to get to that, Dr. Coburn. 

Dr. Coburn, this is an email that I wrote from an investor conference. The Long Beach relative performance was discussed repeatedly with investors at the conference, so I would have been 

made aware of their relative performance, as you say, talking to 

people in the market. 

Senator COBURN. OK. Did you continue selling similar Long 

Beach paper even after making that comment? 

Mr. BECK. Yes, we did. 

Senator COBURN. OK. Did you alter your securitization practices 

based on that knowledge? 

Mr. BECK. I cannot recall that we did, Dr. Coburn. 

Senator COBURN. I asked the other panel, and Mr. Vanasek and 

Mr. Cathcart said investors should know about fraud problems. I 

also asked if they were owners, should they. There is also an SEC 

requirement that requires notification of any material adverse factor. Were you aware of the nature and depth of the problems with 

the significant number of loans that were originated that either did 

not qualify, had false documentation, or had no documentation? 

Mr. BECK. I was not aware of the specific documents that you 

referenced earlier. No, I was not. 

Senator COBURN. So you were seeing the end results of what had 

come through, and you were packaging it and selling it. And after 

you received the information that its performance was poor, did 

you inquire to say why is our paper performing more poorly than 

others? 

Mr. BECK. Yes, we did a couple of things, Dr. Coburn. In the 

course of our securitization before the loans are pooled, there are 

post-closing reviews, many of which you have seen in this documentation that are done by Origination, and their intent is to identify and remove loans from the pool or that will come to me and 

my team that have underwriting defects. 

After we receive the salable loans, an underwriting due diligence 

process is undertaken where a statistically significant sample of 

the loans is taken, both adverse as well as random, to try to identify any further underwriting defects and have those loans removed 

from the pool so that when we come to the process of securitization, 

the loans are all performing, they are current, and loans with underwriting defects should have been removed. 

Now, as you know, and as we have seen, some loans with fraud 

and with underwriting defects do slip through. That happens. And 

it is not a good thing for us ever. We have an operational and 

reputational problem, and we have a big financial problem, as we 

have talked about, in terms of repurchase liability. Each transaction, though, does have a warrant on it, and the investors can 

ask us to repurchase the loans. 

Senator COBURN. All right. So your ability to sell into the future 

is dependent on the quality of the product that you are selling 

today? 


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Mr. BECK. Yes, it is. 

Senator COBURN. OK. I will yield back. 

Senator LEVIN. Thank you. Senator Kaufman. 

Senator KAUFMAN. Mr. Beck, what is a stated income loan? 

Mr. BECK. As Mr. Cathcart said, the borrower does not document 

their income on the application. 

Senator KAUFMAN. And why was that developed? It seems a little 

unusual, doesn’t it? 

Mr. BECK. Stated income loans were developed for customers 

that did not get a W–2, generally, were self-employed. 

Senator KAUFMAN. Mr. Schneider, why was that developed? Why 

did it go beyond that? It clearly went beyond that, right? 

Mr. SCHNEIDER. Yes, it did, Senator. I think what happened in 

the industry is, if you looked at performance of mortgage loans, 

what tended to drive, what was the dominant driver of performance was the FICO score and the LTV. And income was not, at 

least in the older vintages—2005 to 2006—a material driver of performance. I think as we got into 2006 we saw some of those 

changes, and that is where the industry started to tighten standards and require additional documentation. 

Senator KAUFMAN. Can you think of another place you can go 

and get a loan without disclosing your income? 

Mr. SCHNEIDER. The income was disclosed—— 

Senator KAUFMAN. No, excuse me. Where people would just take 

your word. I mean, it just seems such a foreign concept to me that 

you could go into anyone and borrow money and they said, ‘‘What 

is your income? Can you document it?’’ and you say, ‘‘Well, I am 

just going to tell you what it is,’’ and we are off to the races. 

Mr. SCHNEIDER. No, Senator. 

Senator KAUFMAN. OK. What size mortgages were stated income 

loans used for WaMu? 

Mr. SCHNEIDER. I do not recall any specific limit on the size. 

Senator KAUFMAN. So basically any mortgages you sold could be 

stated income loans. 

Mr. SCHNEIDER. Could have been. 

Senator KAUFMAN. When a stated income loan was resold, did 

the prospectus disclose that the loan was made without verification 

of borrower income? 

Mr. BECK. The documentation type is disclosed. 

Senator KAUFMAN. So, in other words, if I picked up a prospectus 

and actually went through the whole thing on the mortgage-backed 

securities, it would say these loans are based on stated income? 

Mr. BECK. That would be in the prospectus supplement, and in 

terms of disclosures, Senator, it is important to recognize that is 

not the limit—the prospectus, that is—of the information that an 

investor would have. They have access to the loan tape which had 

each loan and its risk characteristics on it. As we have talked 

about, they had rating agency feedback, and they knew all the historical performance of the shelf from which we had been selling. So 

they had a significant amount of information beyond the prospectus 

supplement. 

Senator KAUFMAN. Do you have reason to believe that specific 

borrowers were lying about their income in these products, Mr. 

Schneider? 


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Mr. SCHNEIDER. As we looked at the performance of loans and 

saw early payment defaults, we did see instances of where borrowers were lying about their income. 

Senator KAUFMAN. Did everyone in the management at WaMu 

know that, do you think? 

Mr. SCHNEIDER. I cannot speak for everybody. 

Senator KAUFMAN. The top management at WaMu, do you think 

were aware of the fact that there was a problem that some stated 

income was not accurate? 

Mr. SCHNEIDER. I would presume so. 

Senator KAUFMAN. At what point did you kind of get worried 

about this? I mean, stated income, it just seems like so difficult to 

understand. I have a hard time dealing with the stated income concept. But then I have a more difficult time as things go on and 

these things are growing and the more indications you are getting, 

the stated income is not working. Was there any concern expressed 

by top management about this? 

Mr. SCHNEIDER. Senator, I think we were all very concerned 

about it. We tightened credit standards in our subprime space significantly in 2006 when we started to see the challenges, and then 

we tightened credit standards in our prime space, in our Option 

ARM book, and on, frankly, all lending types throughout 2007 as 

we experienced challenges with the performance. 

Senator KAUFMAN. Did you have any reason to believe that 

WaMu’s internal controls were insufficient to deter fraud in these 

products? 

Mr. SCHNEIDER. Senator, I think over the course of the 21⁄2 years 

I was there, I think we made improvements. I do not think we 

were ever fully satisfied that all of the improvements were in place, 

and we continued to work on it. 

Senator KAUFMAN. Mr. Beck, did you inform prospective investors that you were concerned about the internal fraud in the organization? 

Mr. BECK. We informed investors, Senator, of the risk characteristics of the loans, and as I said in my previous testimony, we had 

internal processes in place to remove loans that had identified 

fraud before we sold them. 

Having said that, some fraudulent loans do slip through, some 

loans with underwriting defects, and the investor had the opportunity to put those loans back to us. 

Senator KAUFMAN. Mr. Schneider, did you ever—I think you said 

you decided to stop stated income loans. 

Mr. SCHNEIDER. Correct. 

Senator KAUFMAN. And when did you do that? 

Mr. SCHNEIDER. It would have been late 2006, early 2007. 

Senator KAUFMAN. And why did you do that? 

Mr. SCHNEIDER. We were not satisfied with the performance. 

Senator KAUFMAN. So you just eliminated all of them. You did 

not go back and just eliminate some of them. You just said from 

now on, WaMu will not accept stated income loans. 

Mr. SCHNEIDER. On a prospective basis, yes. 

Senator KAUFMAN. And at that point, what percentage did you 

think of those stated income loans were not accurate? 

Mr. SCHNEIDER. I am not sure. 


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Senator KAUFMAN. But it had to be a preponderance, right, for 

you to totally eliminate stated income loans as opposed to just saying—I mean, if it was 10 percent, you clearly would not eliminate 

all stated income. You would try to put in tighter internal controls 

to identify those 10 percent or 15 percent or 20 percent. I would 

assume it would have to be a big number to just say we are not 

going to do this anymore. 

Mr. SCHNEIDER. Well, our expectations around delinquency were 

low single-digit numbers, so if delinquencies did get to a 10-percent 

number on a particular product, we would probably stop it. That 

was too high for us even at that level. 

Senator KAUFMAN. OK. And you said you closed Long Beach? 

Mr. SCHNEIDER. Yes, sir. 

Senator KAUFMAN. And why did you do that? 

Mr. SCHNEIDER. As we got into 2007, three or four things happened. The subprime market was increasingly challenged. We saw 

signs that home prices were starting to deteriorate. Long Beach, as 

I showed you on the numbers earlier, as a percentage of our business was relatively small, actually very small as a percentage of 

our business, and it simply was not worth the management attention required at that point. 

Senator KAUFMAN. But you have been getting reports—and I 

know you just came in 2005, right? You are getting reports, I mean 

just terrible things are going on down at Long Beach. I mean, 

based on the previous panel and just what you have said, it was 

such a small portion of the business, and there was so much problem with that area, I just wonder why you waited until 2007 to 

close it down? 

Mr. SCHNEIDER. It was a course of around—my initial charge 

was to go in there and see if I can fix it. We tried as hard as we 

could and ultimately decided to shut it down. 

Senator KAUFMAN. OK. How would you characterize WaMu’s relationship with its regulators, OTS especially? 

Mr. SCHNEIDER. We had a positive working relationship with the 

OTS, met with them on a quarterly basis. I probably met with the 

individual regulators monthly. 

Senator KAUFMAN. And Mr. Vanasek and Mr. Cathcart both testified that while the line regulators were diligent, the leadership 

did not support their conclusions. Did you find that, or was that 

something you just did not deal with? 

Mr. SCHNEIDER. Senator, that would not be something I would be 

involved in. 

Senator KAUFMAN. How did WaMu use FICO scores? 

Mr. SCHNEIDER. Senator, FICO scores would be one attribute of 

the loan decision, so we would have FICO score criteria as well as 

LTV, documentation, etc. 

Senator KAUFMAN. And are they a good indicator, in your opinion, of creditworthiness? 

Mr. SCHNEIDER. Yes, they are. 

Senator KAUFMAN. And they are a pretty accurate indicator of 

salability into the after-market, do you think? 

Mr. SCHNEIDER. I think it is the best measurement that is available that gives investors an opportunity to understand one loan 


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versus the other, the characteristics of that borrower’s creditworthiness. 

Senator KAUFMAN. Mr. Beck, is that your opinion, too? 

Mr. BECK. My opinion on FICO is that it is one of many risks 

that are evaluated. LTV is important. Documentation type we have 

talked a lot about; owner occupied/non-owner occupied; geography; 

we talked about California risk. So there are a variety of risks that 

are important in evaluating the expected losses on a loan. 

Senator KAUFMAN. We talked earlier about Mr. Lewis’ book ‘‘The 

Big Short.’’ In that he said that there were loans with borrowers 

who had scores in the 550 range, FICO scores. Did WaMu have 

mortgages that they securitized in the 550 range, would you say? 

Mr. BECK. I cannot recall for sure, but we may have had FICOs 

under 600. And under 600 would be low. 

Senator KAUFMAN. And so would you agree with Michael Lewis 

in his book that those kind of loans were virtually certain to default, 550? 

Mr. BECK. I would agree with Michael Lewis that they had much 

higher expected credit losses than a borrower that has a 750 FICO. 

Senator KAUFMAN. Both Mr. Cathcart and Mr. Vanasek said that 

in order for 550 to even survive, you would have to have kind of 

hands-on management day to day with the borrower. Did that go 

on, to either one of your knowledge, at WaMu? 

Mr. SCHNEIDER. Yes, Senator. For our subprime servicing, we put 

them in a higher-risk servicing protocol, which meant we called 

them earlier and more often and worked more closely with those 

borrowers. 

Senator KAUFMAN. What is the concept of a skinny file? Are you 

familiar with the term ‘‘skinny file’’ with regard to FICO? 

Mr. SCHNEIDER. I am not, Senator. 

Senator KAUFMAN. OK. That is the policy that said that a skinny 

file is a good file. In fact, there is a quote from the Seattle Times 

article, WaMu employee recalled the big saying was that a skinny 

file was a good file. What is a skinny file and why is a skinny file 

a good file? But you did not have any indication of that, Mr. 

Schneider. Mr. Beck, a skinny file, you have no knowledge of that? 

Did you feel any pressure from Wall Street in terms of generating more mortgage-backed securities in addition to the fact it was 

profitable, clearly, but did you get a feeling that this was something that was very competitive and something you should be into? 

Mr. SCHNEIDER. Senator, that was not a driver of our activities. 

I mean, if you look at the results of the mortgage business at 

Washington Mutual for the time I was there, we did nothing but 

lower volume and systematically shut down the business. 

Senator KAUFMAN. How would you characterize, just off the top 

of your head—I mean, it sounds to me that we heard a whole 

bunch of horror stories this morning, and this book is full of horror 

stories. I admit a lot of them happened before you came. When you 

showed up at WaMu and you took a look at what was going on— 

you were assigned to look after Long Beach and the rest of that. 

What went through your mind? Was it like, Wow, this is really a 

challenge, or this is a serious challenge? I mean, what were you 

thinking? How unusual did you find the situation there. It sounds 

very unusual to me. 


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1See Exhibit No. 50, which appears in the Appendix on page 670. 

2See Exhibit No. 58, which appears in the Appendix on page 698. 

3See Exhibit No. 22a, which appears in the Appendix on page 509. 

Mr. SCHNEIDER. Senator, it was a very big challenge. I spent a 

lot of time trying to make Long Beach as successful as possible. I 

tried management changes. We changed products. So it was a significant challenge. 

Senator KAUFMAN. Great. Thank you very much. 

Senator LEVIN. Thanks, Senator Kaufman. 

First on the numbers of originations and securitizations, you testified that the Option ARM lending decreased by more than 50 percent from 2005 to 2006. What you, of course, leave out is that your 

Option ARM lending in 2006 was still significantly higher than it 

was in 2003. And you also do not mention that the major reduction 

that you will see in originations occurred on your fixed traditional 

loans. That is what caused the major drop from 2003. From that 

point on, there was a slightly different story with different mortgages, but the major drop which you and others from WaMu refer 

to came in the fixed, 30-year loans, and that drop took place when 

you decided to engage in a higher-risk strategy. So you got less 

origination and purchases of your traditional loans, your lower-risk 

loans, and you instead engaged, starting in 2004, in this higherrisk strategy, and we saw what the outcome of it was. 

But in terms of Option ARMs—and we will put this in the record—according to your SEC filings, Option ARMs were $30.1 billion in 2003, went up to $67 billion in 2004, went up to $63 billion 

from the 2003 level in 2005, and still was above the 2003 level in 

2006. Fixed loans went from $263 billion in 2003, dramatically 

down in 2004 to $77 billion, then $78 billion, then $47 billion. So 

the real explanation here for this shift that you make big reference 

to has to do with the dropping of the fixed loans, securitizations 

and originations. The increase in the Option ARMs was pretty 

steady through 2006. Although it dropped, as you point out, from 

2005 to 2006, still it was above the 2003 level. 

I want to talk to you about Exhibit 50, Mr. Beck.1 This is a November 2006 memo that has been made reference to about Long 

Beach paper being among the worst performing paper in the market. This was in November 2006. And then the Comptroller of the 

Currency, the OCC, did an analysis on the highest rates of foreclosure in 2008, and this is in Exhibit 58,2 and it showed Long 

Beach being in the top ten in nine out of ten metro areas. 

Were you aware of these findings of the OCC? 

Mr. BECK. No, I was not. 

Senator LEVIN. Should you have been made aware of them? 

Mr. BECK. Mr. Chairman, I am not familiar at all with this document. This is from the OCC? 

Senator LEVIN. Yes. I am asking, should you have been aware of 

the OCC findings, given your position, should—— 

Mr. BECK. I was not aware of this particular report—— 

Senator LEVIN. No, I am not talking about the report. I am saying should you have been familiar with their findings. That is all. 

Mr. BECK. I cannot say. 

Senator LEVIN. Take a look at Exhibit 22a now,3 if you would. 

This is a November 2005 internal WaMu memo called ‘‘So. CA 


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1See Exhibits No. 22b and 23b, which appear in the Appendix on pages 497 and 511. 

[Southern California] Emerging Markets Targeted Loan Review Results.’’ It describes a year-long internal investigation into suspected 

fraud affecting loans issued from your two processing centers, 

Montebello and Downey. You heard in the prior panel that it laid 

out an extensive level of loan fraud. Forty-two percent of the loans 

reviewed contained suspect activity or fraud, virtually all of it attributable to some sort of employee malfeasance. And then in Exhibits 22b and 23b,1 there is additional detail about the investigation, including the percentage of loans containing fraudulent information at the Montebello office at 83 percent, the percentage in the 

Downey office 58 percent. 

Now, were you aware at the time of those findings? 

Mr. BECK. No, I was not. I am not copied on this. 

Senator LEVIN. Should you have been? 

Mr. BECK. I was aware that there was fraud, as I said earlier, 

and I was aware that certain loans had underwriting defects. And 

as part of the post-closing review that Origination was conducting, 

I understood that loans with identified fraud or underwriting defects would have been removed from the pool of loans that I was 

going to be securitizing. 

Senator LEVIN. You thought they were going to be removed? 

Mr. BECK. Yes, that is what I believed. 

Senator LEVIN. And did you check to see if that was true? 

Mr. BECK. What we did subsequent to that, Mr. Chairman, is to 

do a due diligence review separate and distinct by the underwriter, 

WCC, or—— 

Senator LEVIN. Did you check to see whether they were removed 

before you put those securities on the market? 

Mr. BECK. No, I did not. 

Senator LEVIN. Purchasers of these securities are relying on you 

as an underwriter to provide truthful information. You had evidence of the fraud. You knew of it. You had heard of it. And yet 

you did not check to see whether or not that the fraud-tainted 

mortgages were removed from the security. Wasn’t that your job or 

part of your job? 

Mr. BECK. I understood that there was fraud. 

Senator LEVIN. Shouldn’t you have checked to make sure that 

the fraudulent, tainted mortgages were not part of those securities 

before you peddled them? Isn’t that part of your job? 

Mr. BECK. No, it is not. The important aspect of this—and I take 

your point—it is important to not sell loans that are defective. 

However, the post-closing review is conducted by the origination 

channel, conducted by Credit in the origination channel. 

Senator LEVIN. Who is that specifically? 

Mr. BECK. The post-closing review would be conducted by the Operations Department within the origination channel with the help 

of Credit. 

Senator LEVIN. Give me the names of the people in charge. 

Mr. BECK. Well, I would point you to the prior panel, ultimately. 

Senator LEVIN. All right. So it was their job to check to make 

sure that the mortgages that they and you knew were tainted were 

not part of securities. 


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1See Exhibit No. 24, which appears in the Appendix on page 515. 

Mr. BECK. Yes, that the process in place was removing loans that 

were defective. 

Senator LEVIN. And it was not your job, it was their job, the previous panel’s job? 

Mr. BECK. I had a separate responsibility to conduct underwriters’ due diligence, which we did. 

Senator LEVIN. All right. And you never asked to see if they were 

removed? 

Mr. BECK. I did not. 

Senator LEVIN. Mr. Schneider, take a look at Exhibit 24,1 if you 

would. Fraud problems resurfacing with a gusto in early 2008. This 

is an April 4 memo from the WaMu Corporate Fraud Investigation 

and Audit Section. It says that one of the mortgage insurers refused to insure any more loans issued by the loan officer from the 

Montebello loan office. That was the same loan officer who was investigated in 2005. It describes the earlier 2005 investigation, and 

states that virtually no actions were taken in response to it. It says 

that another review of loans issued by the Montebello office in 

2007—and this is what is now reported in this April 2008 audit— 

found that 62 percent contained fraudulent information. 

Were you aware of this audit? 

Mr. SCHNEIDER. Yes, I was, Mr. Chairman. 

Senator LEVIN. All right. What did you do? 

Mr. SCHNEIDER. This audit was actually conducted by the Legal 

and HR group. I was aware of it, but they were conducting it. 

Whenever I found out about cases of fraud, I asked that an investigation happen. We had no interest in fraud, no interest in our 

originators perpetrating the fraud. 

Senator LEVIN. Yet it continued to happen year after year after 

year, and you are selling the securities that those fraudulent mortgages are included in. Now, what action did you insist upon? You 

are out there selling these securities. 

Mr. SCHNEIDER. In the cases where we found fraud in loans, we 

would buy those loans back. 

Senator LEVIN. It is not where you found it. It is where people 

complained about it. But when you saw that audit, in April, you 

saw the continuation of fraud year after year, it said the 2005 

fraud continued, it said in 2007 the fraud continued. You are out 

there selling securities. Do you not have a responsibility to take 

steps to make sure that fraud ends so you are not just looking back 

after someone finds out after the security is sold, but that you take 

actions to prevent those securities from being sold? Isn’t that your 

responsibility? 

Mr. SCHNEIDER. It is my responsibility to handle fraud. 

Senator LEVIN. And what actions did you take when this April 

4, 2008, memo came to your attention? 

Mr. SCHNEIDER. We terminated the people who admitted to committing that fraud. 

Senator LEVIN. Did you offer them jobs? 

Mr. SCHNEIDER. No, I did not. 

Senator LEVIN. Did the company offer them jobs? 

Mr. SCHNEIDER. To the people we terminated? 


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Senator LEVIN. Yes. 

Mr. SCHNEIDER. We did not. 

Senator LEVIN. OK. And did you go after the securities that included the fraudulent mortgages to notify the people that there 

may be fraud in those securities? Did you take that initiative? 

Mr. SCHNEIDER. That initiative was taken by the Legal Department, which was best able to address the situation. 

Senator LEVIN. Do you know that they took the initiative to notify people, or are you saying it would have been taken by them? 

Mr. SCHNEIDER. It was my understanding they were going to 

look at it and make the determination. 

Senator LEVIN. As to whether or as to—— 

Mr. SCHNEIDER. Whatever determination was appropriate. 

Senator LEVIN. Did you find out whether they did it? 

Mr. SCHNEIDER. I did not. 

Senator LEVIN. You are out there selling these securities. You 

know there is fraud in some of these securities. You say it is your 

job to make sure that does not happen. You say, well, the Legal 

Department was presumably going to take action, and you never 

follow up to ask the Legal Department whether they took action. 

I don’t get it. 

Mr. SCHNEIDER. I expected that they would do what they—— 

Senator LEVIN. But you did not ask to see if they did it. 

Mr. SCHNEIDER. I did not, Mr. Chairman. 

Senator LEVIN. Take a look, if you would, Mr. Schneider, on page 

7 of this Exhibit 24. It says there that WaMu has no record of action taken for performance issues with certain loan officers. Right 

in the middle it says Walker and Kusulas, and they are two WaMu 

agents. WaMu had ‘‘no record of action taken for performance 

issues’’ with those two offices that are named there. What that is 

referring to is what is summarized on the previous page, the prior 

referrals to the Corporate Fraud Investigations Office led to eight 

separate investigations from 2004 to 2007, two cases each year, 

with the loan officers from the Montebello office listed as persons 

related to the case. Now, that is what is on page 6. You will see 

the term ‘‘prior referrals,’’ about the fourth paragraph. Do you see 

that? 

Mr. SCHNEIDER. Yes, I do. 

Senator LEVIN. It led to eight separate investigations in that 4- 

year period, two cases each year with those two people. No one 

interviewed one of the people involved until January 2008, by the 

way. 

And then it says that WaMu—and I am now going back to page 

7—WaMu had no record of action taken for performance issues 

with those loan officers. Now, I do not know how a bank can possibly operate with credibility with this kind of problem, this kind 

of fraud in its midst. But instead of getting disciplined or fired for 

fraudulent loans coming out of the offices, those top loan officers 

from Montebello and Downey during the same period that they 

were being investigated—that is 2004 to 2007—were rewarded 

each year with an invitation to the President’s Club, which is 

WaMu’s highest honor, including all-expenses-paid trips to places 

like Hawaii and the Bahamas. You were, I think, very much inVerDate Nov 24 2008 08:28 Nov 29, 2010 Jkt 057319 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 P:\DOCS\57319.TXT SAFFAIRS PsN: PAT

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1See Exhibit No. 22a, which appears in the Appendix on page 496. 

2See Exhibit No. 62, which appears in the Appendix on page 727. 

3See Exhibit No. 30, which appears in the Appendix on page 544. 

volved in the President’s Club, which made sure those all-expensepaid trips were made. 

How does that happen? You have loan officers under investigation year after year after year. Instead of being disciplined or fired, 

they are given rewarding trips to Hawaii and the Bahamas. How 

does that happen? 

Mr. SCHNEIDER. Mr. Chairman, in cases of fraud where there is 

an investigation, I ask the HR group and the Legal group to do the 

fraud investigations. If they came back with a recommendation to 

terminate or punish an employee, then I would have taken that 

recommendation. 

Senator LEVIN. Were you aware of the fact those investigations 

were going on in every one of those years? 

Mr. SCHNEIDER. I was not. 

Senator LEVIN. Should you have been? 

Mr. SCHNEIDER. It depended on how big people thought it was. 

Senator LEVIN. Wasn’t there a recommendation in 2005 to take 

action against those officers? 

Mr. SCHNEIDER. That 2005 report, which I see here, was something I was not familiar with. I do not know what the specific recommendations were. That was right at the beginning of the time 

I joined the company. 

Senator LEVIN. Back in 2005, this is what was recommended. Exhibit 22a at the bottom.1 This memorandum outlines a few of the 

most egregious activities identified based on targeted reviews with 

particular documentation of specific areas of failure to follow policy. 

‘‘Based on the consistent and pervasive pattern of activity among 

these employees, we are recommending firm action be taken to address these particular willful behaviors on the part of the employees named.’’ 

Well, that firm action was paid trips to Hawaii and the Bahamas. That is what the action was. Are you troubled by that? Do 

you think the bank should be troubled by that? 

Mr. SCHNEIDER. I think anytime—— 

Senator LEVIN. Do you think your investors should be troubled 

by that? Should your stockholders, should anybody be troubled by 

that except us? 

Mr. SCHNEIDER. Mr. Chairman, anytime there is fraud, we took 

it very seriously. 

Senator LEVIN. No, when there was fraud, what you do is reward 

the folks that are being investigated with trips. That is the action, 

year after year, to the President’s Club. And then you say in this 

Exhibit 62,2 by the way, you hope to see all these folks—not specifically these folks, but you hope to find the employees, the top sales 

people of WaMu, hope to see them all in Hawaii, David Schneider. 

Take a look, if you would, Mr. Schneider, at Exhibit 30.3 It is an 

internal WaMu document called a ‘‘Significant Incident Notification’’ dated April 1, 2008. Now, this is Westlake Village, so that is 

near Los Angeles. These were loans that were issued in 2007, but 

the report is dated April 1, 2008. 


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1See Exhibit No. 31, which appears in the Appendix on page 546. 

2See Exhibit No. 28, which appears in the Appendix on page 537. 

First bullet point: ‘‘Many of the loans had several fraud findings 

such as fabricated asset statements, altered statements, income 

misrepresentation and one altered statement that is believed to 

have been used in two separate loans.’’ 

The third bullet point: ‘‘One Sales Associate admitted that during 

that crunch time some of the Associates’’—now, we are talking here 

about Westlake Village—‘‘would ‘manufacture asset’ statements 

from previous loan documents and submit them to the LFC.’’ And 

this associate ‘‘said the pressure was tremendous from the LFC to 

get them the documents since the loan had already funded and 

pressure from the Loan Consultants to get the loans funded.’’ 

Take a look at Exhibit 31.1 This is a memo summarizing the 

same April 2008 investigation. Page 2 of Exhibit 31. ‘‘Sales Associates would take [asset] statements from other files and cut and 

paste the current borrower’s name and address.’’ 

Now, were you informed, Mr. Schneider, about the investigation 

of the Westlake Village office? 

Mr. SCHNEIDER. I was, Mr. Chairman. 

Senator LEVIN. I am not sure. You said, I was or I wasn’t? 

Mr. SCHNEIDER. I was. 

Senator LEVIN. Were you aware that WaMu employees were cutting corners, engaging in fraud to churn out a high volume of 

loans? 

Mr. SCHNEIDER. Mr. Chairman, when that happened, we took it 

very seriously. In no way did I think that fraud shouldn’t be treated with the utmost seriousness, and I think ultimately some of our 

sales associates were terminated for their behavior that violated 

our code of conduct. 

Senator LEVIN. The two guys that were terminated told us they 

were offered jobs. But my question is, what did you do at the time? 

Did you get back into those securities and make sure that the people who bought them were notified? 

Mr. SCHNEIDER. I don’t know specifically what was done, Mr. 

Chairman. 

Senator LEVIN. Did you find out at the time? Did you ask? 

Mr. SCHNEIDER. I don’t recall asking. 

Senator LEVIN. Take a look at Exhibit 28.2 These are minutes 

dated December 12, 2006, from the Market Risk Committee, 

WaMu. Page 4. 

Near the bottom, ‘‘delinquency behavior was flagged in October 

[2006] for further review and analysis when recent securitization 

deals appeared to have more severe delinquency behavior than experienced in past deals. The primary factors contributing to increased delinquency appear to be caused by process issues including the sale and securitization of delinquent loans’’—sale and 

securitization of delinquent loans—‘‘loans not underwritten to 

standards, lower credit quality loans and seller services reporting 

false delinquent payment status.’’ What did you do about it? 

Mr. SCHNEIDER. Mr. Chairman, I was not a member of the Market Risk Committee, so I have not seen this document before today. 


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Senator LEVIN. You never saw the document at that time? Does 

it trouble you now that this was the first time you have seen this 

document? 

Mr. SCHNEIDER. I think I saw it yesterday in preparation. 

Senator LEVIN. Yesterday, you saw it for the first time? 

Mr. SCHNEIDER. Yes, sir. 

Senator LEVIN. What was your reaction? 

Mr. SCHNEIDER. That it should not happen. 

Senator LEVIN. Should not happen. These are securities that 

happened on your watch. 

Mr. Beck, they are on your watch, too. Were you aware of these 

documents? 

Mr. BECK. I am. 

Senator LEVIN. Were you then? 

Mr. BECK. I was aware of this at the time. I do recall this, and 

we bought the securities—we bought the loans back—— 

Senator LEVIN. That were brought to your attention? So you 

went out and looked for them? 

Mr. BECK. Yes, we did. 

Senator LEVIN. Did what? 

Mr. BECK. We bought the loans back that we sold—— 

Senator LEVIN. Did you go out and look for them after you found 

out about it? When you read these documents—— 

Mr. BECK. Yes. 

Senator LEVIN [continuing]. That fraudulent mortgages had been 

securitized—— 

Mr. BECK. This document says that we sold loans that were delinquent and that is never right. That is never what we represent, 

and—— 

Senator LEVIN. And what did you do? At the time you saw this, 

right? 

Mr. BECK. Right. We bought the loans back. 

Senator LEVIN. Yes, I know. Did you go out and look for them? 

Did you initiate the recovery of—— 

Mr. BECK. Yes. Tom Lehmann worked for me, the person that is 

making this report, and—— 

Senator LEVIN. You told him at the time, go and find every single 

one of these loans, and on all these other documents, as well, now, 

where you found all these fraudulent loans—— 

Mr. BECK. I am talking about this specific question right—— 

Senator LEVIN. How about the previous question? 

Mr. BECK [continuing]. Because I remember this—— 

Senator LEVIN. How about the previous documents? 

Mr. BECK. When we—so when we identified—— 

Senator LEVIN. When you saw these documents—we have talked 

three or four documents here. 

Mr. BECK. Yes. 

Senator LEVIN. When you saw these documents, you are saying, 

in every case, you told your people, go and find every single security that incorporated these fraudulent loans. We are going to buy 

them back. Is that what you—— 

Mr. BECK. That is not what I said. No. I said I remember and 

recall this specific event because we did go out—because we 

securitized loans that were delinquent, which we represent that we 


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won’t do and we shouldn’t do, and these were loans purchased from 

third parties and the loan servicing tape that we got from them 

was incorrect. It was wrong. And when we found that out, we went 

and purchased these loans back. 

Senator LEVIN. You notified everybody? 

Mr. BECK. Yes, I believe we did. I believe we made a filing on 

this particular issue. 

Senator LEVIN. Now, what about the earlier ones where the 

fraud was identified in those offices? Did you go back and identify 

what securities incorporated those mortgages that were fraudulent 

from those offices? 

Mr. BECK. I am not certain, Mr. Chairman, that the loans from 

that analysis ever got into a securitization in the first place. 

Senator LEVIN. Did you check out when you saw the audits? 

Mr. BECK. I never saw the audits. 

Senator LEVIN. You never saw the two audits that we have 

talked about here today? 

Mr. BECK. No. 

Senator LEVIN. Should you have seen them? 

Mr. BECK. I don’t know the answer to that. I didn’t see the audits. What I relied on was that Origination’s post-closing review 

would remove defective loans before they were put in the warehouse to sell—— 

Senator LEVIN. And did you ever check that out and see if it was 

done? 

Mr. BECK. No, I did not. 

Senator LEVIN. Senator Kaufman, I have more, but I want to 

just—— 

Senator KAUFMAN. I just have one question. I see this November 

17, 2005, report found 42 percent of the loans contained suspect activity or fraud. Did you go and buy those back, do you know? 

Mr. BECK. I don’t know that those loans were sold. 

Senator KAUFMAN. OK. Thank you. 

Senator LEVIN. Did you check? 

Mr. BECK. I did not. I wasn’t copied on the report. 

[Pause.] 

Senator LEVIN. Now, in general, Mr. Beck, were you aware of the 

2005 and the 2008 investigations that we have been discussing? Is 

your answer, no, you were not aware of them at the time? 

Mr. BECK. I was not. 

Senator LEVIN. Did you supervise the program that was set up 

to investigate any complaint about your securities and your loans? 

Was there a seven-step program that Long Beach had set up? Do 

you remember that? 

Mr. BECK. Yes, I do. 

Senator LEVIN. And that was to affirmatively investigate a complaint about the loans, is that correct? 

Mr. BECK. Yes. That was set up at the end of 2006, beginning 

of 2007—— 

Senator LEVIN. You supervised that program, right? 

Mr. BECK. Yes. 

Senator LEVIN. And did you set up a similar program for WaMu’s 

loans? 


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1See Exhibit 34, which appears in the Appendix on page 564. 

Mr. BECK. That program was designed for Long Beach. We 

didn’t—— 

Senator LEVIN. My question is, did you set up a similar program 

for WaMu’s loans? 

Mr. BECK. The Repurchase and Recovery Team also looked at requests for repurchase for WaMu loans, but the seven-step process 

that you are referring to was used with Long Beach—— 

Senator LEVIN. Does that mean—— 

Mr. BECK [continuing]. As best I can recall. 

Senator LEVIN. You had all this evidence that there was fraud 

in various offices of WaMu. Why was that not set up for WaMu’s 

loans? 

Mr. BECK. We had a significantly higher level of repurchase requests from Long Beach and—— 

Senator LEVIN. Take a look, if you would, at Exhibit 34.1 Now, 

Exhibit 34 is a report from WaMu’s corporate credit review group 

and it found that WaMu’s loans marked as containing fraudulent 

information was nonetheless sold to investors. If you will take a 

look at page 3, in the first bullet point—— 

Here is what it says. ‘‘The controls that are intended to prevent 

the sale of loans that have been confirmed by Risk Mitigation to 

contain misrepresentations or fraud are not currently effective.’’ So 

the controls are not effective. ‘‘There is not a systematic process to 

prevent a loan in the Risk Mitigation Inventory and/or confirmed 

to contain suspicious activity from being sold to an investor. The 

coding of the user to defined risk mitigation field in Fidelity does 

not directly affect the salability of the loans.’’ 

‘‘A review was completed of a sample of the 25 loans . . .’’—this 

is a sample of 25 loans closed in 2008—‘‘with the appropriate coding in the Risk Mitigation field. . . . Of the 25 loans tested, 11 reflected a sale date after the completion of the investigation which 

confirmed fraud. There is evidence that this control weakness has 

existed for some time.’’ 

Do you recall this report and that finding, Mr. Beck? 

Mr. BECK. I do not. 

Senator LEVIN. Should you have seen this report? 

Mr. BECK. Yes. 

Senator LEVIN. Were you aware that for some time, WaMu had 

been selling loans to investors even after the loans had been 

marked as containing fraudulent information? 

Mr. BECK. No. 

Senator LEVIN. Well, now you were head of the Capital Markets 

Group, right, at that time? 

Mr. BECK. That is correct. 

Senator LEVIN. Is there any way that you should not have been 

informed about this? 

Mr. BECK. I would expect that I would be informed of this, yes. 

Senator LEVIN. I mean, this is damning stuff. You are working 

for a bank which according to a 25-loans test had almost half reflecting a sale after an investigation has confirmed fraud, and this 

review says that failure has existed for some time, that control 

weakness has existed for some time. 


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1See Exhibit 40b, which appears in the Appendix on page 632. 

Now take a look at Exhibit 40b,1 if you would. Senator Kaufman, 

any time you want to jump in here, please do. 

Exhibit 40b. Now, this one is going to take some difficult following because it is an email chain, so we have to start at the first 

email, which is on page 4—it is at the end—and work back up to 

page 1. But take a look on page 4. You will see there on February 

14, 2007, Michael Liu writes to Mr. Elson. Mr. Elson is the Senior 

Vice President for Portfolio Management, and here is the subject, 

‘‘Option ARM MTA’’—which is the Monthly Treasury Average— 

‘‘Option ARM MTA and Option ARM MTA Delinquency.’’ Notice 

that, delinquency. So now we have an Option ARM MTA, which is 

an Option ARM that has an interest rate adjusting to the monthly 

Treasury average, is that right? 

Mr. BECK. That is right. 

Senator LEVIN. And the email points out some information— 

FICO scores, loan-to-value ratios about the delinquent non-conforming Option ARMs. Do you see where it says that? It says some 

information there about FICO scores and about—— 

Mr. BECK. Some points for Option ARM—— 

Senator LEVIN [continuing]. Loan-to-value ratios. Do you see that 

there? 

Mr. BECK. I do. 

Senator LEVIN. OK. Now, a few minutes later, still on February 

14, working ourselves now to page 3, you will see that Elson forwards this email to somebody whose name, I believe, is Youyi 

Chen. Do you know who that person is? 

Mr. BECK. I do. 

Senator LEVIN. Is that a man or a woman? 

Mr. BECK. It is a man. 

Senator LEVIN. A man. So Mr. Chen is being sent this email, 

subject, Option ARM Delinquency. It says, ‘‘Youyi—attached is a 

description of the Option ARMs that were delinquent in the 2006 

[fourth quarter]. You can see that it is very much a function of 

FICOs and Low Document loans. We are in the process of updating 

the . . . matrix. . . . Your comments are appreciated.’’ 

So now go up that page and you will see shortly thereafter, a 

couple hours thereafter, there is a letter or an email sent from— 

and you said Mr. Chen, is that correct? Did you say it was a male 

or a female? I am sorry. 

Mr. BECK. It is a male. 

Senator LEVIN. A male. From Mr. Chen to you, February 14, subject, Option ARM Delinquency. ‘‘This answers partially Mr. Schneider’s questions.. . .’’ Apparently Mr. Schneider had asked some 

questions on the breakdown of the Option ARM delinquencies. ‘‘The 

details . . . show Low fico, low document, and newer vintages are 

where most of the delinquency comes from, not a surprise.’’ 

Now, the next email if you keep going up is from you, the same 

day. You are forwarding that email on Option ARM delinquencies 

to Mr. Schneider and to Cheryl Feltgen, who is the Head Risk 

Manager in the Home Loans Division, and here is what you wrote. 

What you wrote is at the top of the page. ‘‘Please review. The performance of newly minted option arm loans is causing us problems. 


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1See Exhibit 40b, which appears in the Appendix on page 632. 

Cheryl can validate but my view is our alt a (high margin) option 

arm is not performing well. We should address selling first quarter’’—that is 2007, that is the quarter you are in—‘‘as soon as we 

can before we loose the opp[ortuni]ty.’’ 

So in response to the delinquency assessment on Option ARMs 

in your portfolio, you want to sell the newly originated Option 

ARMs, ‘‘newly minted,’’ in your words, as soon as you can, right? 

Are you with me so far? 

Mr. BECK. Yes, I am. 

Senator LEVIN. That is what you want to do. 

Now, later that day—so we are still working up this chain of 

emails—later that day, same subject, Option ARM Delinquencies. 

This is from you to David Schneider. It is now Sunday, February 

18, 2007. You are still—I am sorry, this is from Schneider. I made 

a mistake. This is from David Schneider to you and it says, 

‘‘Cheryl, your thoughts?’’ A copy goes to you and to Cheryl Feltgen. 

Now Mr. Schneider is saying, ‘‘Cheryl, your thoughts?’’ Do you remember this, Mr. Beck? 

Mr. BECK. Yes, I do recall this. 

Senator LEVIN. Mr. Schneider, do you remember this? 

Mr. SCHNEIDER. I do. 

Senator LEVIN. OK. Now, later that day—we are still on Exhibit 

40b 1—Ms. Feltgen replies, subject still Option ARM Delinquency, 

‘‘The results described below’’—and I am reading now from her 

email—‘‘are similar to what my team has been observing. California Option ARMs, large loan size ($1 to $2.5 million) have been 

the fastest increasing delinquency rates in the [single-family residential] portfolio.. . . There is a meltdown in the subprime market 

which is creating a flight to quality.’’ 

‘‘I was talking to Robert Williams just after his return from the 

Asia trip where he and Alan Magleby talked to potential investors 

for upcoming covered bond deals backed by our mortgages. There 

is still strong interest around the world in USA residential mortgages. Gain on sale margins for Option ARMs are attractive. This 

seems to me to be a great time to sell as many Option ARMs as 

we possibly can. Kerry Killinger was certainly encouraging us to 

think seriously about it at the MBR,’’ which is the Monthly Business Review, ‘‘last week. What can I do to help? David, would your 

team like any help on determining the impact of selling certain 

groupings of Option ARMs on overall delinquencies?’’ 

That is refreshing, someone who is making clear what is really 

going on. Ms. Feltgen describes, a ‘‘meltdown’’ in the subprime 

market, a ‘‘flight to quality.’’ Who is going to buy Option ARMs 

which are going to be delinquent? Well, she has talked to WaMu 

executives who have just been to Asia, talked to investors who are 

interested in bonds backed by WaMu mortgages and she writes, 

‘‘there is still strong interest around the world in USA residential 

mortgages.’’ In other words, we can still sell our Option ARMs 

some places. And so she writes, ‘‘This seems to me to be a great 

time to sell as many Option ARMs as we possibly can.’’ 

Mr. Beck, you had said pretty much the same thing, sell the Option ARMs, ‘‘as soon as we can before we lose the opportunity.’’ The 


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1See Exhibit 41, which appears in the Appendix on page 636. 

idea is to sell as many of these delinquency-prone loans as possible 

to investors before their performance gets worse and WaMu gets 

stuck with them. 

The only way that can happen is because you guys at WaMu 

knew something that potential investors didn’t, and that is that 

these loans were likely to go delinquent. Now, here is what happened. 

Mr. Schneider, you reply late that Sunday evening. The subject 

again, Option ARM Delinquencies. And here is what you suggest 

in this email. You say, ‘‘DB’’—and that is Mr. Beck, I assume— 

‘‘and CF’’—Ms. Feltgen—you ask Mr. Beck to ‘‘select the potential 

sample portfolios’’ and ‘‘coordinate with finance on buy/sell analysis,’’ and then you ask Ms. Feltgen to run credit scenarios. 

Now we are going to the first page of this Exhibit 40b. Now it 

is Tuesday, February 20. Everything is in motion. Mr. Beck, you 

send an email early in the morning, 7:17 a.m. Subject, Re Option 

ARM Delinquency to Ms. Feltgen and to Mr. Schneider, making a 

plan to supply loan-level detail and coordinate with finance. 

Now, in the final email of the chain, which is at the top of page 

1 there, the subject line now reads, ‘‘Urgent need to get some work 

done in next couple days.’’ That is added above Option ARM Delinquency. Ms. Feltgen directs her staff to start analyzing the Option 

ARM loans in the portfolio. She wrote, ‘‘We are contemplating selling a larger portion of our Option ARMs than we have in the recent 

past. . . . this could be a way to address California concentration, 

rising delinquencies, falling house prices in California with a favorable arbitrage given that the market seems not to be yet discounting a lot for those factors.’’ And she asks for ‘‘input on portions,’’ her words, ‘‘of the Option ARM portfolio that we should be 

considering selling.’’ 

Now turn to Exhibit 41,1 if you would. So far, both of you remember everything I have read, do you? 

Mr. SCHNEIDER. I do. 

Senator LEVIN. Mr. Beck. 

Mr. BECK. Yes. 

Senator LEVIN. OK. Now, turn to Exhibit 41. This is another 

email chain, the same day, February 20. Mr. Shaw sends to Ms. 

Feltgen an analysis of the key characteristics of loans in the WaMu 

portfolio that contributed to rising delinquency rates. Shaw to 

Feltgen and a few others, subject, Urgent need to get some work 

done in next couple of days on Option ARM Delinquencies. ‘‘Cheryl, 

I reviewed the HFI’’—the hold for investment—‘‘prime loan characteristics that contributed to the rising 60+ delinquency rates between January 2006 and January 2007. The results of this analysis 

show that seven combined factors contain $8.3 billion of [hold for 

investment] Option ARM balances which experienced above-average increases in the 60+ delinquency rate during the last 12 

months.’’ This is an ‘‘821% increase, or 10 times faster than the average increase of 79%.’’ 

‘‘I recommend that we select loans with some or all of these characteristics to develop a [hold for sale] pool,’’—shift them, in other 

words, from holding on to them to selling them. Then he lists the 


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1See Exhibit 41, which appears in the Appendix on page 636. 

2See Exhibit 42b, which appears in the Appendix on page 638. 

3See Exhibit 43, which appears in the Appendix on page 641. 

factors that went into this change. He lists eight specific factors, 

one being Option ARM loans; two, recent vintages, 2004 to 2007; 

three, in California; four, in New York, New Jersey, Connecticut; 

jumbo loans; and specific FICO scores. And then he wrote, ‘‘I recommend we select loans with some or all of these characteristics 

to develop a [hold for sale] pool.’’ 

So he presented a recipe for selecting Option ARM loans—those 

most likely to go delinquent—so they could be put up for sale before they actually went delinquent and got stuck on WaMu’s books 

or discounted. Is that right? Is that a fair reading of that, Mr. 

Beck? 

Mr. BECK. Mr. Shaw is laying out the risks as he sees them in 

the pool—— 

Senator LEVIN. He is laying out—— 

Mr. BECK [continuing]. And the risk factors that are going to contribute to delinquencies. 

Senator LEVIN. Yes. 

Mr. BECK. Yes. 

Senator LEVIN. OK. Now, that day, Ms. Feltgen emails the recipe 

on to you, Mr. Beck. This is the top of that Exhibit 41.1 The subject 

is, ‘‘Some thoughts on targeted population for potential Option 

ARM MTA loan sale.’’ She writes, ‘‘it might be helpful insight to 

see . . . the components of the portfolio that have been the largest 

contributors to delinquency in recent times.’’ The whole focus here 

is delinquency, delinquency, delinquency. 

Now take a look at 42b.2 This chain of emails starts 5 days later, 

on February 25, 2007. The first email is from you, Mr. Beck, to 

yourself and to Mr. Schneider and Mr. Rotella, and here is what 

you wrote. ‘‘David and I spoke today. He’s instructed me to take 

actions to sell all marketable Option ARMs that we intend to transfer to portfolio in the first quarter 2007. That amounts to roughly 

3B [$3 billion] of Option ARMs available for sale. I would like to 

get these loans into [hold for sale] immediately so that I can sell 

as many as possible in the first quarter.’’ Sounds urgent. Mr. Beck, 

is the David you are referring to there, Mr. Schneider? 

Mr. BECK. Yes. 

Senator LEVIN. OK. Mr. Schneider, do you recall giving that instruction to Mr. Beck? 

Mr. SCHNEIDER. Mr. Chairman, I recall a decision being made in 

ALCO to sell more Option ARMs and provide more liquidity and 

capital for the company. 

Senator LEVIN. Yes. Do you remember giving that direction? 

Mr. SCHNEIDER. Yes, I do. 

Senator LEVIN. OK. Now, about 2 weeks after this email, the 

Market Risk Committee gives approval to move up to $3 billion in 

Option ARMs out of the investment portfolio and into the sale portfolio, is that correct? 

Mr. SCHNEIDER. That is correct. 

Senator LEVIN. And Exhibit 43 is the March 9, 2007, minutes of 

the Market Risk Committee reflecting the unanimous approval to 

transfer.3 Now, how many of the $3 billion in Option ARMs that 


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1See Exhibit 1g, which appears in the Appendix on page 221. 

were authorized for sale by the Market Risk Committee were, in 

fact, sold? Do you know? 

Mr. SCHNEIDER. I don’t know, Mr. Chairman. 

Senator LEVIN. Do you know, Mr. Beck? 

Mr. BECK. I don’t recall precisely—— 

Senator LEVIN. How about approximately? 

Mr. BECK. Half. 

Senator LEVIN. Was it about a billion-and-a-half? 

Mr. BECK. Half. 

Senator LEVIN. It was about half. So we will say about a billionand-a-half of the $3 billion. Do you know which were sold and 

which weren’t? 

Mr. BECK. No. 

Senator LEVIN. OK. Now, the reason that Option ARM loans 

were selected is because they were most likely to go delinquent. 

The market was not yet aware of it. Did you notify investors when 

you securitized Option ARM loans into the RMBSes that the delinquency rates for several WaMu securities had gone up—were expected to go up? Did you notify the investors? 

Mr. BECK. Mr. Chairman, the market was keenly aware. 

Senator LEVIN. Do you know whether investors were notified? 

Mr. BECK. Investors were notified of the risk characteristics of 

the loans. 

Senator LEVIN. Were they notified that there was a billion-anda-half dollars in loans that were selected because they were Option 

ARMs and that it was your expectation that Option ARMs were 

going to go delinquent in greater numbers? Were they notified specifically of your findings? 

Mr. BECK. No. 

Senator LEVIN. Now, those Option ARMs, at least the ones that 

are called WMALT 2007, OA3—that is Exhibit 1g,1 if you will take 

a look at it—they show the delinquency rates for many, or a number of WaMu securities. That ARM, which is where you put these 

delinquency-prone Option ARMs—and by the way, Option ARMs 

are supposed to be prime—but these delinquency-prone Option 

ARMs now—you won’t be able to see that. You will have to look 

in your book. That is Exhibit 1g. They now have a delinquency rate 

of more than 50 percent, which means more than half of the underlying loans are now delinquent. More than a quarter of the underlying mortgages are in foreclosure. 

Mr. Beck, purchasers of securities were relying on you as an underwriter to provide complete and truthful information. Is that correct? 

Mr. BECK. Yes, they are. 

Senator LEVIN. Complete and truthful information? 

Mr. BECK. Yes. 

Senator LEVIN. Did the investors know everything that you knew 

about these expected high delinquencies? 

Mr. BECK. Mr. Chairman, the risk characteristics that Mr. 

Shaw—— 

Senator LEVIN. No. Were they notified? I am asking you a specific question. You had an expectation that Option ARMs in your 


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inventory were going to have a high delinquency rate. You based 

that on an assessment that you made. You did a study. Were the 

investors notified that WaMu did its own analysis to identify Option ARMs that had a propensity to go delinquent? 

Mr. BECK. Mr. Chairman, I am not even sure that the loans that 

Mr. Shaw identified got into the sale transaction. 

Senator LEVIN. Do you know whether they did or didn’t? 

Mr. BECK. I do not. 

Senator LEVIN. Should you? 

Mr. BECK. I am not sure whether the loans that Mr. Shaw identified—— 

Senator LEVIN. Should you know? Should you have known? Look, 

you are being told that your Option ARMs have a real high propensity for delinquency. You write emails back and forth—high delinquency, fear of delinquency. You identify those Option ARMs. First 

you identify the risks. Three billion dollars is authorized; a billion 

and a half of Option ARMs from that inventory are sold. You have 

done a study. You know the propensity. You have an obligation to 

tell your purchasers as an underwriter complete and truthful information. 

Did your investors know of your high delinquency expectation? 

Do you know? 

Mr. BECK. Mr. Chairman, it is important when I answer this 

question to understand that, as you pointed out, this is the beginning of 2007. The subprime market is pretty much shut down, and 

delinquencies are rising very fast in that space and in the prime 

space. And as Mr. Cathcart pointed out in the earlier testimony, 

because we cannot sell loans, they are coming back onto the balance sheet and using up capital, and delinquencies are rising, so 

our loan loss reserves are going up. 

So one alternative to help raise capital would be to sell loans 

from our Option ARM portfolio. 

Senator LEVIN. Look, Mr. Beck, those emails talk about delinquencies, delinquencies, delinquencies. You identified the delinquencies as coming from your Option ARMs. My question is a very 

specific question. You knew all this. They were identified. Did you 

notify people that were buying your securities that you had done 

a study of delinquencies in your Option ARMs? That is my question. Do you know? 

Mr. BECK. We did not—they do not have these emails. What they 

do have is a prospectus supplement that has all the risks, relevant 

risks, including what Mr. Shaw would have put in there. The 

FICOs, the geographies, the LTVs—all that information would 

have been in the prospectus supplement. 

Senator LEVIN. You are saying that the prospectus notified your 

investors that you had done a study of high—— 

Mr. BECK. No, Mr. Chairman, I am not saying that. 

Senator LEVIN. And that you had determined that the first quarter’s Option ARMs had a high risk of delinquency. And you are telling us you did not notify the investors of that study. You are telling 

us that you do not even know whether or not those Option ARMs 

ended up in the securities, whether that $3 billion included those. 

And that was your responsibility to make sure that the securities 

which went out to the investors were following notice to the invesVerDate Nov 24 2008 08:28 Nov 29, 2010 Jkt 057319 PO 00000 Frm 00092 Fmt 6633 Sfmt 6633 P:\DOCS\57319.TXT SAFFAIRS PsN: PAT

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tors of everything that they needed to know in order that the information be complete and truthful. That is what your testimony is 

under oath. 

Mr. BECK. It is a very real possibility that the loans that went 

out were better quality than Mr. Shaw laid out. 

Senator LEVIN. And you do not—— 

Mr. BECK. A very real possibility. 

Senator LEVIN. And there is a very good possibility that they 

were exactly the quality that he laid out? Is that right? 

Mr. BECK. That is right. 

Senator LEVIN. OK. And you do not know, and apparently you 

do not care, and the trouble is you should have cared because there 

is an obligation to make sure that your investors know, and they 

did not know what you knew, critical information that you knew. 

That is the problem. 

Senator Kaufman, do you want to—— 

Senator KAUFMAN. Yes, I just want to see if I got this straight. 

On this list it shows that some of the high FICO loans are the very 

ones that have the highest delinquency rates. Is that right, the 

memo from Robert Shaw on February 20, Exhibit 41? So telling 

him that there was a high FICO really would be deceptive when 

you knew those were the units that were having the high delinquency rate, correct? 

Mr. BECK. Senator, could you repeat the question, please? 

Senator KAUFMAN. If you look at Exhibit 41 where Shaw lists options, he lists a bunch—he says that the FICO—increasing delinquencies among FICOs of 700 to 739 was an 1,197-percent increase, FICOs of 780 plus a 1,484-percent increase; FICOs of 620 

to 659, an 820-percent increase. So someone looking at the portfolio, the high FICOs were really the ones that were having an incredible increase in their delinquency rates. Is that fair? 

Mr. SCHNEIDER. Senator, they had a high increase in actual 

rates, but the actual rate was 0.4 percent, which means four out 

of 1,000. 

Senator KAUFMAN. Yes, but it was—well, why is the—for the 7– 

2—4.2 billion? 

Mr. SCHNEIDER. That is the aggregate size of that pool. That is 

not the amount that is delinquent. 

Senator KAUFMAN. And what percentage of that would be delinquent? 

Mr. SCHNEIDER. That is 0.4 percent of the amount. 

Senator KAUFMAN. OK. Let me ask you one other question while 

we are on that. On the earlier memo, it showed there were FICO 

rates from 510 to 540. 

Mr. SCHNEIDER. What document are you on, Senator? 

Senator KAUFMAN. That is on the February 14, 2007—maybe I 

have this wrong, from Michael Liu to Richard Ellison. He lists the 

attached spread sheet with a total Option ARMs, it says $105 million in non-accrual between FICO 501 to 540. 

Mr. SCHNEIDER. Senator, which document? 


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1See Exhibit 40b, which appears in the Appendix on page 632. 

Senator KAUFMAN. The page that ends 135, Exhibit 40b.1 The 

last page. 

Mr. SCHNEIDER. Yes, Senator. Once a loan goes into non-accrual, 

goes delinquent, its credit score gets impacted very significantly, so 

that would not be a surprise, nor would it be indicative of what the 

loan was originated at. 

Senator KAUFMAN. So you mean after it goes delinquent, then 

the FICO score for the person that borrowed it drops, and this 

shows their FICO score after the delinquency, not at the time they 

apply for the loan. 

Mr. SCHNEIDER. That is correct. 

Senator KAUFMAN. OK. Thank you. 

Senator LEVIN. I think I just have one additional question. When 

you said that investors were told of the characteristics of loans, 

they were told of all the characteristics of loans. Did they know, 

were they informed that loans with those or some of those characteristics had a greater propensity towards delinquency in WaMu’s 

analysis? Were they told that? 

Mr. BECK. They were not told of the WaMu analysis. 

Senator LEVIN. So they may have been given a long list of characteristics of loans, but they were not informed that loans with 

those or some of those characteristics, according to a WaMu analysis, had a greater propensity towards delinquency. Is that correct? 

Mr. BECK. Yes. 

Senator LEVIN. OK. Do you have anything else? 

Senator KAUFMAN. Yes. Mr. Beck, you said that at this point 

most people knew that the subprime mortgage market was in pretty bad shape. What was the psychology of the people buying mortgage-backed securities at that point if they knew that this was a 

pretty bad situation? Which I think by then they did. 

Mr. BECK. They did, but they did not know how bad it was ultimately going to get, and so at that point in time, they were demanding wider margins for the securities that they bought, but had 

not stopped buying them yet. 

Senator KAUFMAN. OK. Thank you. 

Senator LEVIN. You made reference to the subprime market 

going down. Option ARMs are prime. They are not subprime, right? 

They are supposed to be prime mortgages. Isn’t that correct? 

Mr. BECK. Yes. 

Senator LEVIN. Thank you both. You are excused. We appreciate 

your being here. 

We will go to our third panel. Does our reporter need a break? 

I was hoping you would say yes. I will not ask our media whether 

they need a break or not. 

We are going to take a 10-minute break. We are going to resume 

at 2:30 p.m. 

[Recess.] 

Senator LEVIN. We will come back into session now, and we will 

call our final panel of witnesses for the hearing: Stephen Rotella, 

the former President and Chief Operating Officer of Washington 

Mutual Bank; and Kerry Killinger, the former President, CEO, and 

Chairman of the Board of Washington Mutual. We appreciate both 


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1The prepared statement of Mr. Rotella appears in the Appendix on page 169. 

of you being with us this afternoon and look forward to your testimony. As you have no doubt heard, we have a rule, Rule VI, that 

requires all witnesses who testify before our Subcommittee to be 

sworn, and at this time, I would ask you both to please stand and 

raise your right hand. 

Do you swear that the testimony you are about to give to this 

Subcommittee will be the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Mr. ROTELLA. I do. 

Mr. KILLINGER. I do. 

Senator LEVIN. The timing system will be the same that I believe 

you heard, but it means that a minute before the red light comes 

on, you will see the lights change from green to yellow. That will 

give you an opportunity to conclude. Your written testimony will be 

made part of the record in its entirety. We would ask that you try 

to limit your oral testimony to no more than 5 minutes, and, Mr. 

Rotella, I think we are going to have you go first, followed by Mr. 

Killinger. 

TESTIMONY OF STEPHEN J. ROTELLA,1 FORMER PRESIDENT 

AND CHIEF OPERATING OFFICER, WASHINGTON MUTUAL 

BANK 

Mr. ROTELLA. Thank you. Chairman Levin, Ranking Member 

Coburn, and distinguished Subcommittee Members, thank you for 

inviting me to testify and for sharing these remarks with you. This 

is my first public statement since the FDIC seized Washington Mutual in September 2008, so I want to be clear about the key factors 

that led to an elevated level of risk at WaMu during the financial 

crisis, risks that were created over many years prior to my arrival 

at WaMu in 2005. 

I also want to summarize how the team that I was a part of recognized those risks and made solid progress in proactively reducing 

them. In particular, I want to be very clear on the topic of highrisk lending, this Subcommittee’s focus today. High-risk mortgage 

lending in WaMu’s case, primarily Option ARMs and subprime 

loans through Long Beach Mortgage, a subsidiary of WaMu, were 

expanded and accelerated at explosive rates starting in the early 

2000s, prior to my hiring in 2005. 

In 2004 alone, the year before I joined, Option ARMs were up 

124 product, and subprime lending was up 52 percent. As the facts 

in my written statement to this Subcommittee show, those extraordinary rates ceased after 2005, and we then reduced total high-risk 

mortgage volume substantially every year after that. 

Total high-risk lending was not expanded and did not accelerate 

after 2005, as some have reported. The facts show the opposite. 

I provide my statement to you from my vantage point as a 30- 

year veteran in financial services, from nearly 18 years at JP Morgan Chase, and as WaMu’s chief operating officer for 31⁄2 years. When I joined WaMu in 2005, the company had over $340 billion 

in assets. As a nationally chartered thrift, WaMu had already developed a high concentration of mortgage risk relative to more diversified banks. And as I noted, the company had been accelerating 


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its growth in higher-risk mortgage products and, in addition, it had 

serious operating deficiencies, particularly in mortgage lending. 

WaMu’s concentration risk was particularly acute because nearly 

60 percent of its mortgage loans were from California and Florida, 

which had experienced large and unsustainable home price increases. What happened at WaMu was principally the combined effect of those risks developed over almost two decades, which would 

be magnified and stressed by the extreme market conditions of late 

2007 and 2008. 

The team that I was a part of worked very hard to adjust to a 

rapidly changing environment and addressed those risks. As public 

data shows, we reduced the absolute size of WaMu’s mortgage business, including new production, total high-risk lending, and its 

portfolio every year after 2005 and by a substantial amount in aggregate. We made progress in diversifying the company and had 

plans to do more, but there simply was not enough time to complete the enormous transformational change needed in a $340 billion thrift given the collapse of the housing market roughly 2 years 

after we started. 

In fairness to all concerned, few experts, including the Chairman 

of the Federal Reserve Board and the Secretary of the Treasury, 

anticipated what occurred in the housing market and the economy 

as a whole. Now, I would like to provide you with a bit more detail 

about WaMu. 

Prior to 2005, when I joined the company, WaMu had been growing its mortgage business at an accelerating rate. By 2003, it was 

the No. 2 mortgage lender with a market share of over 11 percent, 

and its subprime volume had been growing by nearly 50 percent 

every year from 2001 forward until 2005. WaMu’s stated strategy 

was similar to many firms with large mortgage units during the 

pre-crisis economy. With the benefit of hindsight, that strategy was 

ill advised. 

As the financial crisis conclusively established, credit risk was 

mispriced for a declining housing market. In 2003 and 2004, the 

company’s mortgage business experienced very serious risk management and operating missteps. A management shake-up ensued, 

and it was around this time that a new executive team began to 

take shape, including my hiring in 2005. That team believed that 

with enough time and effort, WaMu could resolve its issues and 

take its place among the country’s finest financial institutions. I 

and others recognized that due to WaMu’s combination of risks, 

changes needed to be made. As the market softened, we began to 

migrate the company away from its mortgage legacy. By the end 

of 2005, we were making solid progress, and by the time of the seizure, WaMu’s market share in mortgages had been cut by nearly 

two-thirds, from over 11 percent to about 4 percent, and we had 

shut down Long Beach and Option ARM lending. 

Far from accelerating or expanding, as some large competitors 

did during this time, we were slowing and contracting faster than 

the market as a whole. Looking back now, of course, I would have 

tried to move even faster than we did in the areas where I had direct control. Unfortunately, after the capital markets stopped operating in the third quarter of 2007, we were unable to execute on 

aspects of our strategy. 


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1The prepared statement of Mr. Killinger appears in the Appendix on page 179. 

Subsequently, the decline in the housing market accelerated, and 

it was not long before the financial crisis was in full swing. We continued our efforts as the team raised capital, and, in fact, the day 

the company was seized, our primary regulator, the OTS, determined that WaMu was well capitalized. All of us wanted the opportunity to finish what we had started in 2005. 

I thank you for inviting me here today, and I look forward for 

your questions. 

Senator LEVIN. Thank you very much, Mr. Rotella. Mr. Killinger. 

TESTIMONY OF KERRY K. KILLINGER,1 FORMER PRESIDENT, 

CHIEF EXECUTIVE OFFICER, AND CHAIRMAN OF THE 

BOARD, WASHINGTON MUTUAL BANK 

Mr. KILLINGER. Thank you very much, Mr. Chairman and Members of the Subcommittee. I very much appreciate the opportunity 

to contribute to your investigation of the financial crisis. In addition to my oral testimony, I have submitted extensive written testimony. 

I was an employee of Washington Mutual for more than 30 years 

and was honored to be its chief executive officer for 18 of those 

years. And thanks to the efforts of tens of thousands of our employees, the bank enjoyed many successes over most of that tenure as 

CEO. However, the financial crisis and the seizure of the bank in 

September 2008 were devastating to the company, its customers, 

employees, investors, and communities. And as CEO, I accept responsibility for all of our performance and am deeply saddened by 

and sorry for what happened. 

Now, beginning in 2005, 2 years before the financial crisis hit, 

I was publicly and repeatedly warning of the risks of a potential 

housing downturn. And we did not just talk about it, but instead 

we did some things about it. 

Unlike most of our competitors, we aggressively reduced our residential first mortgage originations by 74 percent, and we cut our 

home loan staffing in half between 2003 and 2007. Our market 

shares of prime and subprime loan originations declined by 50 percent over this period. 

We also deferred plans to grow many of our loan portfolios and 

instead returned capital to shareholders through share repurchases 

and cash dividends. We sold 30 percent of our loan servicing portfolio. We reduced and then eliminated broker and correspondent 

lending. We cut subprime and Option ARM originations dramatically in 2006 and 2007 and eliminated those products in 2008. 

Now, with the benefit of hindsight, had we known that housing 

price declines of 40 percent or more would occur in key markets 

served by the company, we would have taken even more draconian 

measures. 

Washington Mutual was a Main Street bank dedicated to serving 

everyday consumers. Most of our activities centered on providing 

checking, savings, investment, and credit card services to millions 

of customers. Our residential lending was a declining part of the 

company’s business since 2003 and contributed only 13 percent of 


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our company’s revenues by 2007, and it was focused predominantly 

on prime borrowers. 

The company offered a full range of fixed- and adjustable-rate 

products, and its portfolios performed well over many years, with 

loss rates significantly below 1 percent per year. Approximately 90 

percent of the company’s residential first loan portfolio had a loanto-value at origination of 80 percent or less. 

Now, higher-risk residential products, like home equity, Option 

ARM, subprime loans, were not new or exotic, but had been successfully offered to customers for many years. Now, we entered the 

subprime business with our purchase of Long Beach Mortgage in 

1999 to better serve an underserved market. This was a small and 

declining part of our business since 2005. However, due to growing 

concerns over the housing market and third-party mortgage brokers, as well as our own operating issues, we greatly reduced 

subprime originations in 2006 and shut down the business in 2007. 

We had well-defined and clear policies of fair dealing with customers, and our responsible lending principles were praised by 

community groups. Our regulator consistently assigned us the 

highest CRA rating of outstanding, and employees were expected 

to practice our core values, and violations led to reprimands and 

terminations. And this is why I am particularly angry when I read 

that any customer might have been sold an inappropriate product. 

Now, enterprise risk management was a vital activity for the 

company. In fact, I created a centralized enterprise risk management group in 2002 and well over 1,300 people were involved in 

that activity by 2007. The chief enterprise risk officer was placed 

on the executive committee and reported to the board that the 

group was adequately staffed and functioned effectively on a quarterly basis. 

Finally, Washington Mutual should not have been seized and 

sold for a bargain price, but should have been allowed to work its 

way through the financial crisis. The company suffered from rising 

loan losses, but we were working our way through the crisis by reducing operating costs, raising over $10 billion of additional capital, 

and setting aside substantial loan loss reserves. 

When I left the bank in early September 2008, capital greatly exceeded regulatory requirements for a well-capitalized bank, deposits were stable, sources of liquidity appeared adequate, and our primary regulator, the OTS, had not directed us to seek additional 

outside capital nor find a merger partner. 

So it was with shock and great sadness when I read of the seizure and bargain sale of the company in late September 2008. I believe it was unfair that the company was not given the benefits extended to and actions taken on behalf of other financial institutions. Within days of its seizure, the FDIC insurance limit was 

raised to $250,000. The FDIC guaranteed bank debt. The Treasury 

Department announced favorable treatment of tax losses. The Federal Reserve purchased assets and injected massive liquidity into 

the system. And the TARP program added hundreds of billions of 

new capital to banks. These measures would have been extraordinarily helpful to Washington Mutual, just as they were to all 

other banks. 


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1See Exhibit 1i, which appears in the Appendix on page 223. 

2See Exhibit 1c, which appears in the Appendix on page 214. 

3See Exhibit 1b, which appears in the Appendix on page 213. 

And the unfair treatment of the company did not begin with its 

unnecessary seizure. In July 2008, the company was excluded from 

the ‘‘Do Not Short’’ list, which protected many Wall Street banks 

from abusive short selling. The company was similarly excluded 

from the hundreds of meetings and telephone calls between Wall 

Street executives and policy leaders that ultimately determined the 

winners and losers in this financial crisis. For those that were part 

of the inner circle and were too clubby to fail, the benefits were obvious. For those of us outside of the club, the penalty was severe. 

Now, I have some other suggestions for regulatory reform in my 

written statement that I would be happy to discuss further, but 

thank you, and I look forward to answering your questions. And I 

do request, Mr. Chairman, that my complete statement and any 

documents referenced in it through this morning be placed into the 

written record. 

Senator LEVIN. It will be placed in the record, as will all the 

opening statements. We will try a 20-minute first round here. 

First on the numbers. Mr. Killinger, in your opening statement 

you said that from 2003 to 2007, WaMu reduced its residential first 

mortgage originations, reduced its market share, and that may be 

accurate, but it is misleading in what it leaves out. 

You made a major shift in your strategy and you reduced your 

fixed-loan origination in 2003 by almost $200 billion. So most of the 

reduction in the mortgage business that you were engaged in came 

through the reduction in the fixed-loan 30-year mortgages that we 

see on that chart, Exhibit 1i.1

Then if you look at Chart 1c, Exhibit 1c in your book,2 you will 

see that the securitization of your subprime home loans continued 

to climb right through 2006. 

Now, you have said, I believe, that you reduced significantly the 

origination of these subprime loans, but is it not true that those 

numbers on Exhibit 1b 3 are accurate, that in terms of securitizing 

you continued to securitize your subprime home loans right 

through 2006? Is that accurate? 

Mr. KILLINGER. Thank you, Mr. Chairman. You raise an excellent point, and—— 

Senator LEVIN. Are my numbers accurate? 

Mr. KILLINGER. And I appreciate having the opportunity to make 

a clarification for the benefit of the Committee. 

Regarding the first chart, my data was correct that we had a 74- 

percent reduction in our origination from 2003 to 2007. Your point 

is correct that a significant part of that reduction was the decline 

in fixed-rate mortgage originations. However, that does not reflect 

a change in strategy or policy. That reflected low interest rates 

that were prevailing in 2002 and 2003 that led to massive 

refinancings in the United States. And since I had been at the organization so many years, I can just back you up a couple of years 

prior to that—— 

Senator LEVIN. I just wanted to—— 


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Mr. KILLINGER [continuing]. And products like the Option ARM 

would have been a very large percent of the total just 2 years before that. 

Senator LEVIN. I just wanted to go over the numbers—— 

Mr. KILLINGER. Part of what we are seeing here—— 

Senator LEVIN. Excuse me for interrupting because we do not 

have that much time, but I just wanted to go into the numbers. 

The major reason for the reduction was the reduction in the fixedrate number. Is that correct, whatever its cause? 

Mr. KILLINGER. Yes, that is right. I just wanted to be sure that 

we understood the primary cause was that the refinancing boom 

from 2002 and 2003 subsided in the other period. 

Senator LEVIN. Now, you also changed your strategy. What year 

was that? 

Mr. KILLINGER. First, we had an adjustment in our strategy that 

started in about 2004 to gradually increase the amount of home equity, subprime, commercial real estate, and multi-family loans that 

we would hold on the balance sheet. We had that long-term strategy, but as I mentioned in my opening comments, we quickly determined that the housing market was increasing in its risk, and we 

put most of those strategies for expansion on hold. In fact, our 

subprime portfolio that we held in our portfolio actually declined 

from the time that we had that strategy versus the strategy which 

had that increasing in size. 

Senator LEVIN. In 2003, your subprime amount, according to 

your filings with the SEC, was $20 billion. It went up in 2004 to 

$31 billion. It went up in 2005 to $34 billion, leveled back to $30 

billion in 2006. That is your subprime, so it went actually up 

through 2005 and stayed high through 2006. Your fixed mortgage 

loans in 2003 were $263 billion. It drastically dropped in 2004 and 

2005, to $77 and $78 billion, respectively. Your Option ARMs 

jumped from 2003 when they were $30 billion up to more than double in 2004, and in 2005 they also doubled what they were in 2003. 

So in terms of the direction you have dramatically increased your 

Option ARMs from 2003 to 2005. Even in 2006, they were more 

than they were in 2003. You dramatically dropped your fixed 

amount, and your subprime again almost doubled, not quite, from 

2003 to 2005. Now, those are your SEC filings, and we will let 

them speak for themselves. 

Mr. Rotella, in your testimony you said that you did not design 

the strategy that was designed by the board, which was a higherrisk strategy. On page 4 and 5 of your testimony for the record, you 

said that prior to the time you joined WaMu in 2005, the board of 

directors had established a 5-year strategic plan. This plan called 

for additional growth in the mortgage lending business with a particular emphasis on higher-margin and higher-risk products. That 

is your statement. Is that correct? That is what you found when 

you got there? 

Mr. ROTELLA. Yes, Mr. Chairman. 

Senator LEVIN. All right. Now, you also then said that the bank 

strategy, with the benefit of hindsight, was ill advised. You did not 

design the strategy that the Board had approved. But here is something else you said that I want to ask you about, that due to the 

state of the company’s operations, which were weaker than you had 


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1See Exhibit 8b, which appears in the Appendix on page 389. 

anticipated before you joined WaMu, that you realized that changes 

to the strategy needed to be implemented. What did you mean by 

the company’s operations were weaker than you had anticipated? 

Mr. ROTELLA. Mr. Chairman, when I was hired in 2005, the 

Chief Operating Officer position was a brand new position at 

WaMu. Part of the reason for that position being created were substantial problems that had come up in the mortgage business prior 

to my arrival. As I mentioned in my oral statement, in 2003 and 

2004, there were some substantial issues in market risk management. Mr. Vanasek earlier mentioned a systems project that had 

to be written off. 

And I just add at the end of my comment on this, the company 

bought a number of mortgage companies over the course of about 

2000 through 2005. There were 12 mortgage origination systems 

when I joined. There were a number of servicing systems. The operation needed a lot of work. 

Senator LEVIN. OK. During the prior panels, we went through a 

number of documents and audit reports describing problems with 

Long Beach. If you will take a look at Exhibit 8b,1 please, page 3. 

This is a joint report in 2004 by the FDIC and the State of Washington after a visit to WaMu in 2003. And here is what it said 

about Long Beach. 

‘‘40% . . . of the loans reviewed were considered unacceptable 

due to one or more critical errors. This raised concerns over [Long 

Beach’s] ability to meet the representations and warranty’s made 

to facilitate sales of loan securitizations, and management halted 

securitization activity. A separate credit review report . . . disclosed that [Long Beach’s] credit management and portfolio oversight practices were unsatisfactory. . . . Approximately 4,000 of 

the 13,000 loans in the warehouse had been reviewed. . . . of 

these, approximately 950 were deemed saleable.’’ That is 950 of the 

4,000. ‘‘800 were deemed unsaleable, and the remainder contained 

deficiencies requiring remediation prior to sale.’’ 

Do you remember those problems at Long Beach in 2003, Mr. 

Killinger? 

Mr. KILLINGER. Yes. 

Senator LEVIN. And then you halted the securitizations until the 

problems were cleared up. But they began again in 2004. But by 

2005, the problems started erupting again with a surge of early 

payment defaults. WaMu ended up repurchasing almost $1 billion 

in loans, suffered a $100 million loss. Why didn’t you halt the 

securitizations in 2005 when those problems again appeared? 

Mr. KILLINGER. Well, again, Senator, we entered Long Beach 

Mortgage, as you know, back in 1999 to help better serve that community. When we—it was a relatively very small—part of our business, and when they first encountered some of the securitization 

problems or some of the loan quality, we sent a team in to work 

on that. We believed that they had made substantial progress with 

that. 

And then they started to increase the originations again because 

we felt that the operational issues were under control. And then we 

started to see some additional evidences of difficulties there. The 


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1See Exhibit 11, which appears in the Appendix on page 414. 

2See Exhibit 12, which appears in the Appendix on page 415. 

3See Exhibit 19, which appears in the Appendix on page 462. 

actions that we took were to change out managements, to go in and 

do some organizational redesign to get to a point where we felt 

comfortable that we could proceed with doing both the whole loan 

sales and the securitizations that the company did. 

Senator LEVIN. Let us talk about those years where you got comfortable. Mr. Rotella, take a look at Exhibit 11,1 if you would. This 

is an email chain from April 2006 between you and Mr. Killinger. 

You describe the situation at Long Beach. This is April 2006. 

‘‘The major weak point was the review of Long Beach. . . . delinquencies are up 140% and foreclosures close to 70%. . . . First payment defaults are way up and the 2005 vintage is way up relative 

to previous years. It is ugly.’’ Then you cite a number of factors for 

why the problems should be solved. 

Five months later, you sent Mr. Killinger another email about 

Long Beach, which we have marked Exhibit 12,2 if you want to 

look at that. In this email chain from September 2006, you wrote 

Mr. Killinger the following. ‘‘Long Beach is terrible, . . . Repurchases, [early payment defaults], manual underwriting, very weak 

servicing/collection practices, and a weak staff.’’ You said that you 

were addressing the problems. 

But the problems didn’t get addressed. A year later, now August 

20, 2007, and the audit of Long Beach loan origination and underwriting. This is Exhibit 19.3 If you look at page 3 of Exhibit 19, 

here is what it says. It is basically the same old problems. ‘‘Repeat 

Issue,’’ so this is a repeat issue, ‘‘Underwriting guidelines established to mitigate the risk of unsound underwriting decisions are 

not always followed. . . . accurate reporting and tracking of exceptions to policy does not exist. . . .’’ 

So that takes us up to August 20, 2007. So now let me ask you, 

Mr. Rotella, why did these problems exist year after year? What is 

the explanation for that? 

Mr. ROTELLA. Mr. Chairman, just by way of background, when 

I was with JP Morgan Chase, I ran a small subprime business, relative to Long Beach. When I joined in 2005, my initial focus was 

on the main home loans business. I shortly became very concerned 

about Long Beach around the middle of 2005. We have heard a 

couple of times, management was relieved of their duties. That was 

my recommendation and responsibility. At the end of 2005, the 

folks that were running Long Beach were either asked to leave or 

left. I transferred that business at the beginning of 2006 into the 

main Home Loans Unit under a group of people who were better 

equipped to run it and we went about a process to try to improve 

that company. 

In addition, while we were doing that, we did bring the volume 

in Long Beach down substantially every quarter starting in the 

first quarter of 2006. As we went through that process, it became 

increasingly clear, as I have indicated in here, that the problems 

in Long Beach were deep and the only way we could address those 

were to continue to cut back volume and ultimately shut it down. 

So from my perspective as the Chief Operating Officer, taking 

out management, restructuring the business, bringing down volVerDate Nov 24 2008 08:28 Nov 29, 2010 Jkt 057319 PO 00000 Frm 00102 Fmt 6633 Sfmt 6633 P:\DOCS\57319.TXT SAFFAIRS PsN: PAT

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1See Exhibit 79, which appears in the Appendix on page 793. 

2See Exhibit 23b, which appears in the Appendix on page 511. 

3See Exhibit 24, which appears in the Appendix on page 515. 

ume, and ultimately shutting it down was a proactive number of 

steps. 

Senator LEVIN. August 2007, if you will look at Exhibit 79,1 page 

2. Now we are in August 2007—here is what you write. ‘‘[Home 

loans] (the original prime only)—was the worst managed business 

I had seen in my career.’’ This isn’t just Long Beach. ‘‘That is, until 

we got below the hood of Long Beach.’’ Even before you got to Long 

Beach, you said that home loans, which was part of WaMu, was 

the worst managed business that you had seen in your career. So 

what were the problems with the home loans management? 

Mr. ROTELLA. Mr. Chairman, there was a reason I was hired 

after 18 years of experience at JP Morgan Chase. As I said earlier, 

the company, and this was well known in the industry, in the mortgage business, had experienced significant problems in 2003 and 

2004. The problems in the main home loans group, which is where 

I focused a lot of my initial attention, were several. 

The first I would mention is the management team did not have 

a great deal of experience in running a mortgage company that 

size. I went through a process, along with David Schneider, who 

joined later in the year, of repopulating most of the senior jobs in 

that business. 

Second, the technology in the business was antiquated, and as I 

said earlier, there were literally 12 different production systems as 

a result of many acquisitions. There were manual processes in the 

business, and relative to what I had seen at my previous employer, 

the company had many shortcomings as it related to processing, 

closing, and servicing loans. 

Senator LEVIN. Now, I think you were here earlier this morning 

when we went through with prior panels the 2005 internal WaMu 

investigation of the two Southern California loan offices, Montebello and Downey. It found extensive rates of fraud affecting their 

loans, rates of 83 percent and 58 percent. That was all on Exhibit 

23b,2 if you want to refer to that. 

We have also reviewed a memorandum, which is Exhibit 24,3

which was prepared in 2008 after the frauds and evidence of it resurfaced. It found that virtually no actions had been taken following the 2005 investigation, and after reviewing the loans by 

Montebello in 2007 found that 62 percent contained fraudulent information. 

So year after year after year, we have a couple parts of your company that are apparently engaged in seriously fraudulent loans 

with misinformation that is pervasive. So starting in 2005, why 

weren’t any actions taken after that first 2005 review? 

Mr. ROTELLA. In the particular case of the 2005 review, I was not 

aware of that at the time. I was aware of the 2008 review that you 

referenced earlier that came through one of our mortgage insurers. 

And I would simply say, Senator, as president of the company with 

40,000 employees, first of all, all fraud is bad and any instance of 

fraud that was brought to my attention would be turned over to internal audit and/or legal to do a separate review. And if they came 


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1See Exhibit 21, which appears in the Appendix on page 477. 

2See Exhibit 33, which appears in the Appendix on page 553. 

back and told me that there indeed was fraud, believe me, significant action would be taken. 

Senator LEVIN. Well, somebody didn’t tell you about it. Is that 

what you are saying? You didn’t know—— 

Mr. ROTELLA. I am not aware of the 2005 situation, at the time. 

Senator LEVIN. Somebody didn’t tell you about it? 

Mr. ROTELLA. No, sir. 

Senator LEVIN. These are very serious allegations. These are 

high fraud rates. Now, who should have told you about it? 

Mr. ROTELLA. That would normally come from the business or 

from the audit or legal department. 

Senator LEVIN. And the first you heard of that was when? 

Mr. ROTELLA. I became aware of this particular situation when 

it was brought to my attention in 2008—— 

Senator LEVIN. That is the first—— 

Mr. ROTELLA [continuing]. As was referenced in your documents 

from later in the binder. 

Senator LEVIN. Now, in 2007, we had a review. This is Exhibit 

21.1 This went to you, also. This was now a problem that corporate 

credit review did. High risk: ‘‘Ineffectiveness of fraud detection 

tools,’’ and ‘‘Weak credit risk infrastructure impacting credit quality.’’ They looked at 187 loans they were reviewing. Of the 187 files 

that were looked at, of those 132 that were sampled were identified 

with ‘‘red flags that were not addressed by the business unit.’’ 

Eighty had stated income loans that were identified as being unreasonable. Eighty-seven ‘‘exceeded program parameters.’’ And 133 

had ‘‘credit evaluation or loan decision errors present.’’ 

And this was sent to you, according to the cover sheet here, Mr. 

Rotella, Exhibit 21. Do you remember this one? 

Mr. ROTELLA. I do. 

Senator LEVIN. Well, you said you had found out about it in 2008 

for the first time. This is 2007. 

Mr. ROTELLA. Senator, this report labeled ‘‘Wholesale Specialty 

Lending’’ is about the subprime business. By August 2007, we had 

shut that business down. This audit report is reflective of the actions that I took, which were to relieve management of their duties, 

take the volume down, and ultimately shut this business down by 

the time this was issued. 

Senator LEVIN. But you said you first became aware of fraud in 

2008 and this shows significant fraud in 2007. 

Mr. ROTELLA. I was referring to the two California retail offices 

from Montebello and Downey when I mentioned 2008. 

Senator LEVIN. If you take a look now at Exhibit 33.2 This is a 

report by Radian Guaranty, which insured some of WaMu’s mortgages. They reviewed a number of 2007 loans to evaluate the underwriting and compliance with their guidance. They found so 

many problems that it rated WaMu’s loan files unacceptable, if you 

will look at page 2 on Exhibit 33. 

Now, just one of the loan examples. I am picking one from page 

5, but there are many. This is a $484,000 loan given to a sign designer. That is somebody who designs signs, who claimed to be 


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1See Exhibit 30, which appears in the Appendix on page 544. 

2See Exhibit 31, which appears in the Appendix on page 546. 

making $34,000 a month in income. And this is what the report 

said. ‘‘Borrower’s stated monthly income of $34,000 does not appear 

reasonable. . . .’’ It noted another problem. The loan file appraised 

the house at $575,000, but another report said the probable value 

was $321,000, an amount less than the loan. That is just one of the 

loans that Radian found unacceptable and uninsurable. 

Were either of you aware of the Radian report? Mr. Rotella, were 

you aware of it? 

Mr. ROTELLA. No, sir. 

Senator LEVIN. Were you aware of it, Mr. Killinger? 

Mr. KILLINGER. No. 

Senator LEVIN. Now, look at Exhibit 30.1 We have discussed this 

before. This is a Significant Incident Notification. It related to early 

payment defaults at the Westlake Village Home Loan Center, and 

it said that, in this report, Exhibit 30, it said that ‘‘One Sales Associate admitted that during that crunch time some of the Associates’’—some of the associates—‘‘would ‘manufacture’ asset statements from previous loan documents and submit them to the [loan 

processing center]. She said the pressure was tremendous from the 

[loan processing center] to get them the documents, since the loan 

had already funded and pressure from the Loan Consultants to get 

the loans funded. All the Sales Associates stated that’’—the loan officers—‘‘did not instruct them to falsify documentation and just told 

them to get the loans funded with whatever it took.’’ 

Exhibit 31,2 an internal investigative report about the same incident, says that ‘‘Sales Associates would take [asset] statements 

from other files and cut and paste the current borrower’s name and 

address.’’ 

Were you aware, first, Mr. Rotella, that WaMu employees were 

cutting corners and even engaging in fraud to meet volume demands? 

Mr. ROTELLA. No, sir. 

Senator LEVIN. Were you aware, Mr. Killinger? 

Mr. KILLINGER. No, sir. That is an absolute violation of the code 

of conduct of the company. 

Senator LEVIN. I am sure it is, but were you aware of it? That 

is my question. That investigative report, Exhibit 31, were you 

aware of that investigative report? 

Mr. KILLINGER. In regarding Westlake, I believe it was prior to 

this particular report, I had someone give me a call and a tip that 

there might have been an issue at that office. I immediately forwarded that information to our internal audit, who did an investigation on that, and I turned it over to them for that investigation. 

Senator LEVIN. In terms of that specific exhibit, though, were you 

aware of that? Had you seen that? 

Mr. KILLINGER. I do not recall this specific exhibit. 

Senator LEVIN. Thank you. Senator Kaufman. 

Senator KAUFMAN. Mr. Killinger, you seem to have some opinions about why WaMu was seized. Why do you think WaMu was 

seized? I know it was after you were gone? 


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Mr. KILLINGER. As I mentioned in my comments, I think Washington Mutual was very well positioned with its capital and operating plan to work itself through this financial crisis and I think 

it was making excellent progress on that. And I think that it was 

seized, in my opinion, in an unnecessary manner. Clearly, there 

was a lot of pressure on the financial system and regulators and 

policy leaders at that point in time in the wake of the collapse of 

Lehman. However, I just don’t think the company was treated in 

the same equal-handed, fair manner that all other financial institutions were. 

And it is very much like oxygen—I will use an analogy of oxygen. 

None of us can live if oxygen is choked off for a brief period of time, 

and liquidity is that equivalent in financial services. Liquidity did 

start to become tight, not just for Washington Mutual, but for the 

entire industry for a brief period of time. But policy leaders elected 

to open up those tubes of oxygen for most banks and gave them a 

huge amount of benefits and Washington Mutual inexplicably, in 

my opinion, was not allowed to have the benefits of having that oxygen come to them for that brief period of time. 

And now, in hindsight, we can see for those that were able to get 

through that brief period and start to get back on the mend that 

the financial position is just extraordinarily different today than it 

was 12 months ago, and I believe Washington Mutual could have 

and should have been able to be one of those surviving banks. 

Senator KAUFMAN. Why was Washington Mutual specifically? I 

mean, is it just bad luck? 

Mr. KILLINGER. Well, I think there is just an element of timing. 

Senator KAUFMAN. I mean, why was it Washington Mutual? The 

others were given the oxygen. You were not. Why was that, do you 

think? 

Mr. KILLINGER. Well, obviously, I have had a chance to think 

about this for an extended period of time after having been away 

and it just doesn’t look fair to me. And I think that the company 

was not treated fairly earlier in the year when it was excluded on 

that ‘‘do not short’’ list. By removing the target from the backs of 

other banks, it put the target on the back of Washington Mutual. 

I don’t think Washington Mutual was treated fairly when the hundreds of telephone calls and meetings took place between Wall 

Street executives and policy leaders to decide the fate of how things 

would work. Washington Mutual was excluded from those meetings. 

And then I think it is just inexplicable that Washington Mutual 

gets quickly seized, and then within a matter of just a few days, 

all of these other measures that gave their lifeblood to the rest of 

the industry took place. And I just think those are unfair things 

and I wanted to speak about that on behalf of all of my fellow and 

past employees and investors who I think were harmed as a result 

of that. 

Senator KAUFMAN. I mean, do you think Wall Street banks were 

given preference by the regulators? 

Mr. KILLINGER. Well, in hindsight, you look at the position we 

were in and we made a decision to overnight, instantly, give Wall 

Street banks access to becoming bank holding companies and access to the Federal Reserve for liquidity. We very quickly passed 


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the various legislation that increased the FDIC insurance limit to 

$250,000 and had the FDIC guarantee bank debt. That would have 

been huge for Washington Mutual. They injected the TARP money 

across the board. There were many banks, particularly Wall Street 

banks, that liquidity was a major issue for them and they were 

saved by this. 

Senator KAUFMAN. What was your relationship with the regulators before this? Did you have a good relationship with the regulators? 

Mr. KILLINGER. We worked very closely with our regulators. I 

think we had frequent meetings with the OTS. As I indicated in 

my comments, at the time I left, which was in early September 

2008, we had not been directed to raise any additional capital. We 

had not been directed to seek a merger partner. So it is almost incomprehensible to me that 2 weeks later, the company—or 3 weeks 

later, that the company is seized. 

Senator KAUFMAN. Did you ever meet during 2008 with Mr. 

Paulson or Mr. Bernanke? 

Mr. KILLINGER. I met with Mr. Bernanke on a couple of occasions 

because I was a member of the Thrift Industry Advisory Council, 

which meets actually three times a year with the Federal Reserve. 

I did not meet personally with Mr. Paulson. I did talk to Mr. 

Paulson on the phone. 

Senator KAUFMAN. OK. Let me ask you some other questions. 

Stated income loans is kind of an unusual thing for me. I am kind 

of new at this. What is a stated income loan? 

Mr. KILLINGER. Well, as I think we heard this morning, stated 

income loans are loans in which information is put on an application where a customer tells us what their income is and then it is 

not verified. 

Senator KAUFMAN. And how did it develop? 

Mr. KILLINGER. Again, that product or that feature has been 

around for many years. I think what we are all dealing with is the 

housing crisis, or the housing boom grew and as competition grew, 

the use of limited documentation and no documentation kind of 

loans certainly expanded. And as we were commenting earlier, as 

we became more concerned that the housing market had increased 

in risk, I think that is one of the elements we all started to take 

a look at. So in our case, we started to cut back on our originations. 

We eliminated some of the product offerings. We tightened underwriting. As I heard from David Schneider earlier this morning, at 

one point, we also decided that limited documentation loans were 

not appropriate. 

Senator KAUFMAN. And what size mortgages were stated income 

loans used for at WaMu? 

Mr. KILLINGER. Again, I don’t have direct knowledge. What I 

heard this morning is that most loan categories could be done with 

that. 

Senator KAUFMAN. And when a stated income loan was resold, 

did the bank disclose that a loan was made without verification of 

borrower income? Do you know? 

Mr. KILLINGER. I have no knowledge about what was put in disclosures or anything in our securitizations. That was done by our 

Capital Corp. and I was simply just not involved in any of those. 


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Senator KAUFMAN. OK. Do you think people were actually lying 

about their income on these stated income loans? 

Mr. KILLINGER. Well, clearly, it is speculation because I just don’t 

know. I am certainly very disappointed to think about my customers lying to me because that is fraud and it shouldn’t happen. 

But I think an objective look at things is that there must have 

been situations where people did not tell the truth on their applications. 

Senator KAUFMAN. Mr. Rotella, would you be surprised if people 

were lying on these stated income loans? 

Mr. ROTELLA. Senator, I believe given the expansion of stated income lending in the marketplace in general, it would be naive to 

think that there weren’t some who didn’t. 

Senator KAUFMAN. Do you have reason to believe that WaMu’s 

internal controls are sufficient to deter fraud in these kind of products? 

Mr. ROTELLA. Well, as I said earlier, Senator, all fraud is bad 

and there is fraud in all financial products. I have seen that 

throughout my career. As I said, related to WaMu’s operating 

weaknesses, there were certain tools, at least when I got there and 

even at the end, we were trying to implement to help us identify 

fraud. There are automated tools and various techniques you can 

use. WaMu was behind the curve when I joined and we were making strides to get better at it, but by no means were we perfect. 

Senator KAUFMAN. Why did you decide to stop stated income 

loans, either one of you? Mr. Killinger, why did you stop doing 

them? 

Mr. KILLINGER. Well, again, market conditions changed very dramatically with housing prices coming down and there are a number 

of things that we changed. As you heard this morning, we tightened underwriting. We changed loan products. We ceased offering 

some of the subprime products. We ceased offering Option ARMs. 

We started to go back to more documentation on the loans. And 

there were just a number of things that became more appropriate 

because the housing conditions changed so dramatically. 

Senator KAUFMAN. So it was just right then when you really 

found out how bad stated loans were? 

Mr. KILLINGER. Well, I think, again, these are evolutionary processes and as it became more evident to us that the housing downturn was going to be greater than we initially thought, we took incrementally more actions. 

Look at it, as I mentioned in my comments, 2 years ago, we were 

one of the first in our peer group to be out there saying we are worried about housing. We are going to reduce what we are doing. Do 

you know how tough it is—well, of course you do—to be the only 

major player laying off thousands of employees and having to think 

about their families and what they are doing—— 

Senator KAUFMAN. But you can understand that people would be 

concerned that when this thing went down, kind of the old thing 

from Watergate, what did you know and when did you know it, because these were being packaged up into mortgage-backed securities. So it is really kind of relevant, I think, to figure out when did 

these things happen. If, in fact, stated loans were bad, people knew 

they were bad, and then just went ahead and packaged them up 


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into mortgage-backed securities, you are passing it along to someone else and there is fraud involved in that. So I am not just talking about WaMu, but you can—I mean, I am not missing something here, am I, here? 

Mr. KILLINGER. No. All I can talk about is what we did and— 

Senator KAUFMAN. Yes. 

Mr. KILLINGER. When I got concerned, we started pulling back 

our operations. We reduced these originations. We cut our market 

shares. We started to go in these directions. I didn’t know there 

was going to be a 40 percent decline in housing prices. 

Senator KAUFMAN. Right. 

Mr. KILLINGER. Even in the middle part of 2007, Secretary 

Paulson was saying, I think this housing thing is contained and it 

is not really going to impact the overall economy and lead us into 

a recession. Chairman Bernanke was saying something similar 

about the containment of the subprime issues. So it really wasn’t 

until that second half of 2007 when it became pretty obvious to us 

that things were going to be pretty difficult and we needed to pull 

in our horns even more. 

Senator KAUFMAN. But all these registered security deals, you 

had to sign them as a CEO, right? 

Mr. KILLINGER. No, sir. 

Senator KAUFMAN. You did not? 

Mr. KILLINGER. No. 

Senator KAUFMAN. Who did sign them, do you know? 

Mr. KILLINGER. Again, I was not directly involved in any of our 

securitizations or those securities, so—— 

Senator KAUFMAN. Let me ask you about FICO, because we 

talked about that earlier. WaMu used FICO scores, right? 

Mr. KILLINGER. Yes. 

Senator KAUFMAN. And are they a good indicator of creditworthiness? 

Mr. KILLINGER. Well, historically, the two best indicators of a 

loan performance was loan-to-value ratio and FICO score, and 

those did a pretty good job of predicting how a loan would perform. 

There were other factors, such as the amount of income that somebody had and their ability to cover the debt. There were indicators 

about full documentation, limited documentation, adjustable rate, 

fixed rate, conforming, non-conforming, a lot of things that also impacted. But the two most important were loan-to-value and FICO. 

What changed in this cycle is this whole thing about housing 

prices declining by 40 percent or more. As you heard, I think, this 

morning, all of a sudden, people faced with being underwater in 

their mortgages, and guess what, even if they had a decent FICO, 

their propensity to become delinquent was much greater. 

Senator KAUFMAN. So you don’t think any of this had to do with 

kind of an explosion that mortgage-backed securities were great, 

people were making a lot of money on them, people that originated 

them making money on them, brokers were making money on 

folks, and Wall Street was making money on it, and that is what 

caused the explosion in mortgage-backed securities and that is part 

of the problem? It was just the fact that the housing market finally 

stopped? 


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1See Exhibit 3, which appears in the Appendix on page 278. 

Mr. KILLINGER. Well, I think they are different topics and certainly somewhat interrelated. I made a comment in my written testimony that there is no simple or single cause of what went on—— 

Senator KAUFMAN. No, I am just saying that was part. I am not 

saying there is any one single cause. 

Mr. KILLINGER. Yes. 

Senator KAUFMAN. I am just saying that was part of it. I think 

that at least the literature keeps saying that as this thing grew 

and got more and more profitable, people kind of reached out a little bit further and stretched things a little more. Where maybe 

something like stated loans may be OK for a while, people just 

started taking and using it as a tool in order to get into more mortgage-backed securities so they could feed this gigantic machine that 

was so incredibly profitable to everybody involved. 

Mr. KILLINGER. Well, there is no question that there was a tremendous growth of capital coming in from Wall Street and interest 

in this business and the GSEs—— 

Senator KAUFMAN. Right. 

Mr. KILLINGER [continuing]. And that increasingly put pressure, 

competitive pressures on everybody to adjust loan terms. 

Senator KAUFMAN. But doesn’t at that point the compensation 

also help, the fact that you were—you set the compensation, right? 

You were part of the process that set the compensation for the 

folks out there generating the loans, right? 

Mr. KILLINGER. Yes, we did, although I will tell you that people 

have—mortgage representatives have been paid on commission—— 

Senator KAUFMAN. The commission, but we had—— 

Mr. KILLINGER [continuing]. For many years. 

Senator KAUFMAN. We had a chart up here that showed that 

there was much more of a commission on the higher-risk, higherreturn products than there were on the lower-risk, lower-return 

products, right? 1

Mr. KILLINGER. Yes, although, again, I am not intimately familiar because those were done within the business unit, but I also 

know those change each year and so you have got to look at what 

was it in each year and not necessarily just to one point in time. 

Senator KAUFMAN. OK. Do you know if the FICO scores in some 

of these, 550, I mean, do you know what the range was of Washington Mutual FICO scores? 

Mr. KILLINGER. Well, again, I don’t have all the intimate knowledge, but I do know, because I followed what the bulk of the FICO 

scores were for our portfolios, and, for example, our Option ARM 

portfolio had an average FICO score slightly above 700. Our home 

equity was slightly above 730. And our other—prime residential, I 

think, was about 718 or so in that range. And I think in the case 

of Long Beach or the subprime portfolio we held in portfolio, it was 

somewhere in the mid-600s. 

Senator KAUFMAN. Now, you understand the problem with using 

averages, right? 

Mr. KILLINGER. I know it. 

Senator KAUFMAN. The barbell effect—— 


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Mr. KILLINGER [continuing]. An absolute barbell, but I don’t have 

the barbell numbers in front of me. 

Senator KAUFMAN. Right. Yes. 

Mr. KILLINGER. That is the best I could give you. 

Senator KAUFMAN. But you do understand that using averages, 

that is what the rating agencies did, and clearly there were folks 

out there—I don’t know, was Washington Mutual one of them that 

was using a barbell kind of distribution? 

Mr. KILLINGER. No. We had cells, matrices that show every FICO 

at every band and also against the loan-to-value against every one 

of those FICOs. I just don’t have that detail. 

Senator KAUFMAN. Some of the information that some of the 

loans were being sold were clearly questionable, is that your feeling 

that everything that you sold while you were CEO of Washington 

Mutual, the vast majority of it was loans that weren’t—you didn’t 

know were delinquent? No one knew they were delinquent? No one 

knew there were any problems with them? Is that fair to say? 

Mr. KILLINGER. I believe—yes. Clearly, our policy and what I believe is that at the time when certain loans were sold—all of our 

loans were sold—that we felt that would be appropriate for the customer. We had put out responsible lending principles, in fact, that 

require us to make that proactive look. Is this an appropriate product for the customer, and given the times, do we think it is reasonable? That changed when the housing market changed. That is why 

we pulled back and stopped originating Option ARMs and did the 

same on certain subprime products, because given what happened 

to the housing market, those products were no longer appropriate. 

But at the times when they were part of our arsenal, we thought 

that they would be appropriate. 

Senator KAUFMAN. What do you think, Mr. Rotella? Is the vast 

majority of products you were selling through mortgage-backed securities were safe for customers? There wasn’t any fraud involved. 

There were no loans ready to be delinquent, anything like that that 

you know of? 

Mr. ROTELLA. Senator, the company again was a massive mortgage lender. 

Senator KAUFMAN. Sure. 

Mr. ROTELLA. As I said earlier, prior to my arrival it was No. 2 

in the industry, and it peaked at about $420 billion in originations 

in 2003. So the amount of product either put into portfolio or sold 

was significant. So in any business doing that amount of volume 

over a number of years, particularly given some of the weaknesses 

in the operating infrastructure, you are going to have loans that 

will get into the securitization process that probably should not 

have. 

Our policies, my policies when I was at JP Morgan Chase for 18 

years and CEO of their mortgage company, you would not do that. 

And if you knew about it, you would stop it, and—— 

Senator KAUFMAN. You must have been alarmed when you read 

about these Long Beach memos and the things that Chairman 

Levin is talking about where people were cutting and pasting and 

things like that were going on at a time when it was pretty clear 

that the explosion—not only the new explosion in new houses being 

sold, but the explosion of mortgage-backed securities, this great 


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sucking sound as we brought all these things into it, you had to 

be concerned that people were beginning to bend the rules, especially with the compensation. I mean, you are a smart man. As you 

said, you have loads of experience in this business. You just look 

at these things, and you say this business is so big, I do not know 

what is going on. This is a business that is exploding. It is exploding in a very competitive time. People’s compensation was based on 

doing well, and doing well meant selling as many risky things as 

you could. 

I mean, you had to at least have a feeling that there was something going on here that was a little scary. 

Mr. ROTELLA. Senator, Chairman Levin repeated a couple of 

colorful comments I made in some emails about my views of the 

business. As I said in my opening statement, this business was on 

an explosive growth path when I joined. It was on an explosive 

growth path with a very weak infrastructure. 

Senator KAUFMAN. Exactly. 

Mr. ROTELLA. I was brought in there to fix that, and I worked 

night and day to do that, brought in the people to do that, and we 

made a lot of strides. 

Senator KAUFMAN. Yes. 

Mr. ROTELLA. We also brought that business down significantly. 

So if I was not concerned, I would not have taken some of the actions I did to bring in new management, to bring in new technology, to restructure the business, and to take volume down, and 

ultimately shut down the subprime business totally, as well as Option ARMs. 

Senator KAUFMAN. And also shut down Long Beach, right? 

Mr. ROTELLA. I did recommend the shutting down of Long Beach. 

Senator KAUFMAN. Good. Let me ask you, Mr. Killinger, just a 

final question I have. With all that going on, you get a report from 

Mr. Vanasek and Mr. Cathcart; they are worried about an impending crisis due to lax standards and poor internal controls as early 

as 2004. When they came and talked about that, didn’t it kind of 

send chills—I mean, you made Washington Mutual what it is 

today. The idea that your two risk officers one right after another 

coming in in 2004 and saying, we have got a real big problem 

here—kind of go through what went through your head between 

2004 and 2005 and 2006. 

Mr. KILLINGER. This is relating to the subprime business? 

Senator KAUFMAN. Yes, the whole thing that they were just concerned about lax standards, poor reports from Long Beach, all the 

things that were coming into your office—you are the CEO—and 

your two top risk guys are saying we have a real serious problem 

here. And, obviously, you hired Mr. Rotella because you were concerned about this. 

Mr. KILLINGER. Absolutely. So, again, let me put it very quickly 

into perspective. 

First, Long Beach mortgage was a very small part of our operation, maybe 3 percent of our employees, and it was just a small 

part of what we were doing. So when reports arose that there were 

some problems there, the first time I actually instructed our general counsel to go in and work on getting things cleaned up in 


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1See Exhibit 39, which appears in the Appendix on page 628. 

2See Exhibit 11, which appears in the Appendix on page 414. 

terms of the represenatives and warranties and getting it straightened up, and they thought they were making some progress. 

Then I had a brief period where it looked like things were going 

along OK. Then we started to get some reports about that we are 

seeing some more problems. So we decided to change out management, saying, go ahead, I want a new opportunity to get in here. 

And it was also obvious, again, overall that the company had expanded to a size that it was appropriate—in 2004, we made a decision to bring in a president and chief operating officer to be able 

to be hands-on and be on top of these things because, frankly more 

and more of my time was being pulled away from all the things 

and travel you have to do as a CEO. And we thought that would 

be a very good structure. And I think that was the right thing to 

do, and I think that it was not only bringing Mr. Rotella in. He in 

turn brought in a lot of talent in the mortgage space where we 

needed the most talent, including—you saw David Schneider and 

David Beck, and just a whole host of other people that came in behind it. 

So our response to these ongoing problems was to try to fix it, 

change out management, try to work as hard as we could, but then 

also understanding that the market was getting progressively more 

difficult, and that kind of tipped us at one point of saying, I think 

we are making some progress here, but the market has gotten 

tough enough, let us just plain close that business down. 

Senator KAUFMAN. Thank you. 

Senator LEVIN. Thank you, Senator. Dr. Coburn. 

Senator COBURN. Mr. Killinger, I want to refer you to Exhibit 

39,1 where, on April 3, 2007, you said, ‘‘I think we better be well 

prepared to defend the Option ARM portfolio.’’ If you will go to Exhibit 39, that is in a statement that you made. 

Mr. KILLINGER. OK. Yes. 

Senator COBURN. What I would like to know, did you believe at 

that time that Option ARMs were likely to cause widespread problems and this would force WaMu to defend its actions? 

Mr. KILLINGER. No. 

Senator COBURN. What was the basis for that statement? 

Mr. KILLINGER. The statement was I was passing on to some executives a letter that I received from somebody outside of the organization who had an opinion about Option ARMs, and part of why 

I was passing it on is to the folks to think through both what does 

this mean in terms of what investor interest might be and how we 

might need to explain about Option ARMs to the investors in our 

company, and also to take a look, again, if market conditions are 

changing and, if they are, is there anything else that we should 

consider doing in our Option ARM portfolio. 

Senator COBURN. Exhibit 11,2 you said, in April 2006, ‘‘We may 

want to continue to sell most of the Long Beach originations until 

everyone gets comfortable with credit.’’ Why do you think anyone 

would have wanted to buy what you were selling if the Long Beach 

product was bad? 


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1See Exhibit 50, which appears in the Appendix on page 670. 

2See Exhibit 78a, which appears in the Appendix on page 790. 

Mr. KILLINGER. Well, again, Long Beach’s business model was to 

originate and sell its products ever since we bought them, so that 

was their sole business model, was to originate and either sell its 

loans or into securitizations. We were in the process of changing 

that business to move it under the bank so that we had more flexibility to potentially retain some of the loans that we would originate, and we just started to do some of that process. But I wanted 

to be assured that before we expanded our volumes and took more 

into portfolio and changed what we were doing, that we felt very 

comfortable about credit, processes, and all those kinds of things. 

Senator COBURN. In Exhibit 50,1 Mr. Beck said to you, in November 2006, that Long Beach Mortgage Computer paper is ‘‘among 

the worst performing paper in the market in 2006.’’ Did you see in 

April what Mr. Beck found to be true in November, namely, that 

LBMC paper was going to tank? 

Mr. KILLINGER. No, I do not recall this. 

Senator COBURN. So you were not aware of his statement that 

it was the worst in the market? 

Mr. KILLINGER. I do not see what you are referring to—— 

Senator COBURN. Mr. Beck said in Exhibit 50, in November 2006, 

that Long Beach Mortgage Corporation paper is among the worst 

performing paper in the market. 

Mr. KILLINGER. OK. I just do not recall seeing this memo. 

Senator COBURN. Who is the memo addressed to in front of you? 

Mr. KILLINGER. The one I am seeing is David Schneider and Arlene Hyde. 

Senator COBURN. So you were unaware of their assessment of 

your paper. 

Mr. KILLINGER. Again, I just do not recall the specifics of this at 

all. 

Senator COBURN. OK. Exhibit 78a,2 in this email exchange from 

March 10, 2005, with Jim Vanasek, you wrote, ‘‘I have never seen 

such a high risk housing market as market after market thinks 

they are unique and for whatever reason are not likely to experience price decline. This typically signifies a bubble.’’ 

Is it accurate to say that you saw a bubble in housing prices as 

early as March 2005? 

Mr. KILLINGER. Yes. 

Senator COBURN. Did you see a bubble in housing prices before 

March 2005? 

Mr. KILLINGER. I do not recall my exact timing. I do remember 

making public comments beginning in the middle part of 2005. I 

remember talking to the board from time to time about that there 

was growing risk because housing prices are growing faster than 

the rate of inflation. But also at the same time, I can remember 

everybody arguing of why that is going to be OK and it is unlikely 

to be a significant downturn in housing. 

We were kind of the front edge of trying to assess that there was 

a concern here. 

Senator COBURN. Well, that follows into my second question because in January 2005 is when you pushed forward a high-risk 


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1See Exhibit 90, which appears in the Appendix on page 920. 

lending strategy for board approval. Only 2 months earlier, if you 

saw that prices would decline in the near future, why would you 

be pushing through a high-risk strategy on a market that you 

thought was a bubble? 

Mr. KILLINGER. Well, Senator, we approved a new strategic plan 

in actually that summer of 2004, and this is not the whole plan. 

Remember, this is a small part of our business. But part of that 

plan was increasing the subprime portfolio that we had in our portfolio over a period of time. But I also was very careful to say that 

is going to be subject to market conditions and we will be opportunistic. And the reality is we did not execute on that. We ended up 

shrinking that portfolio that we held, rather than growing it. 

Senator COBURN. Yes, and this chart actually shows that. 

Mr. KILLINGER. No. What shows is what we held in portfolio, and 

the facts—— 

Senator COBURN. The loan originations also show it. 

Mr. KILLINGER. Yes, our originations declined and our market 

share of subprime originations declined from—first of all, we were 

only 6 percent, and we cut it to about 3 percent, and that market 

share was about half of what we had in the overall market. But 

in terms of what we held in portfolio, the portfolio shrank, and we 

had plans to grow it. 

Senator COBURN. Between 2004 and 2005, at the time you shifted towards this high-risk strategy, at the same time you switched 

from doing business with Fannie Mae to doing more business with 

Freddie Mac. Is that simply a coincidence? Or was there a business 

advantage to moving to Freddie Mac from Fannie Mae? 

Mr. KILLINGER. I do not have the personal details of the pros and 

cons of doing business with each of them. Those contracts were negotiated actually in the Home Loans group, and I think Mr. Rotella 

might have been involved there. So I cannot recall why one was 

picked over the other, but we always tried to have them in a good 

competitive position. 

Senator COBURN. I would like to enter into the record the Washington Mutual document Fannie Mae alliance and Freddie Mac 

business relationship proposal from May 2005.1 Here is what your 

executive summary says. The key to the Freddie proposal is it provides significant liquidity for our Option ARM originations with 

more advantageous credit parameters, competitive G-fees and preferred access to the balance sheet relative to our current agreement 

with Fannie. So it was an economically driven position. 

Mr. KILLINGER. Yes, that sounds like a better deal, and not just 

Option ARMs, but I think I also heard better guarantee fees in 

that explanation. 

Senator COBURN. All right. I have one final question for you, Mr. 

Killinger. At one time towards the end, before the FDIC came in 

on your business, were you in negotiations to sell this business? 

Mr. KILLINGER. In the spring of 2008, we determined that the 

housing market was continuing to soften and that we needed to either raise new capital or seek a merger partner. And the board 

went through a very thorough review of alternatives at that time, 

and we considered both the potential sale, then we looked at the 


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1See Exhibit 2a, which appears in the Appendix on page 229. 

2See Mr. Rotella’s prepared statement which appears in the Appendix on pge 169. 

equity infusion that we could get, and we ultimately made a decision to take in $7.2 billion in an equity infusion. And that is what 

the board elected to do. 

Senator COBURN. And how were you going to do that? 

Mr. KILLINGER. We did it. How? 

Senator COBURN. So how did you accomplish that $7.2 billion equity infusion? 

Mr. KILLINGER. It was a combination, as I recall, of a convertible 

preferred that basically most of it would convert into a common 

once we got the additional shares approved by shareholders, and 

there were certain warrants attached to that, and it was led by a 

private equity—a number of large institutional investors. 

Senator COBURN. So you actually sold that equity and those warrants and that convertible preferred? 

Mr. KILLINGER. There was a private placement offering of those. 

Senator COBURN. But it was sold. 

Mr. KILLINGER. Yes. 

Senator COBURN. And who represented the other side of that 

transaction? Who was the broker-dealer or the underwriter? Who 

was the lead placement firm? 

Mr. KILLINGER. The lead placement for us would have been Goldman Sachs and Lehman Brothers, I believe. 

Senator COBURN. OK. All right. 

Mr. Rotella, under Exhibit 2a,1 and in your testimony 2 you mentioned that Washington Mutual had adopted the high-risk lending 

strategy before you arrived. That is on page 4 of Exhibit 2. You 

said, ‘‘I did not design this strategy’’ on page 5 of your testimony. 

Did you mean to imply some distance between yourself and this 

strategy? 

Mr. ROTELLA. Senator, as I said in my opening statement, shortly after arriving at Washington Mutual and having been an observer from JP Morgan Chase, I was aware of the fact that the 

company had an extreme concentration in real estate loans as a 

thrift. It had a concentration in Florida and in California, 60 percent of its mortgage assets. As I said earlier, it was going through 

explosive growth, particularly in higher-risk lending, and the operating infrastructure was quite weak. That combined with the view 

that the housing market was softening led a group of us to begin 

a process of diversifying the company and de-emphasizing the 

mortgage business, which over time we hoped would lead us to a 

company that was concentrated less in real estate and had other 

asset classes. 

Senator COBURN. So in your testimony, on the one hand you say 

that you were simply carrying out the chairman and CEO’s strategies as far as the high-risk category; but on the other hand, you 

are saying it was your decision to decrease the high-risk lending. 

Which is it? 

Mr. ROTELLA. Senator, no, I am not saying it was my decision, 

but I and others believed that the company needed to diversify 

itself and move away from its mortgage legacy. That was a discussion amongst a number of executives and ultimately up to the 


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CEO, and we made a firm decision to take some of the proactive 

steps that I have mentioned in the mortgage business and also 

begin to diversify some of our other businesses. 

Senator COBURN. What was going on at Long Beach other than 

what we have discussed here today that required the whole management structure to be changed, in your view? 

Mr. ROTELLA. When I joined WaMu in 2005, a big organization, 

I moved from the east coast to the west coast and was getting familiar with the company, my first focus was in the main home 

loans business, which did not have a leader at the time. It was reporting up to the same person who was running both our commercial mortgage and our subprime business. I took that business over 

and ran it myself until I hired somebody, and as I instituted a series of business reviews in the company, I became increasingly concerned at a couple of things in Long Beach. One, the growth path 

was just incredibly rapid, and, two, I could not get transparency 

into what was happening in the business, which always worries an 

executive. 

Over the course of that second half of the year, I became increasingly concerned, and ultimately towards the end of the year, there 

was this fairly significant repurchase blow-up that has been discussed earlier in the day. I made a recommendation at that point 

to move forward on making management changes based on the 

combination of those factors. 

Senator COBURN. All right. One last question, if I could. How dependent, in your view, was Washington Mutual on its relationship 

with Fannie Mae and Freddie Mac? 

Mr. ROTELLA. Well, like all big mortgage lenders, Senator, 

Fannie Mae and Freddie Mac were important, and I would not call 

it dependent, but there was a substantial amount of production 

that was sold off to either Fannie or Freddie. After I got there, it 

was switched over to Freddie Mac. So depending on what level of 

dependency you would like to characterize it as, any mortgage 

lender that is in the mortgage business, given the government advantages and the duopoly that Fannie and Freddie had, needed to 

do business with them. It would be very difficult to be a mortgage 

player without them. 

Senator COBURN. All right. Thank you. 

Mr. Killinger, one last question. At any time prior to the closure 

by the FDIC, did you have conversations with a major financial 

firm in New York about the sale of your business to them? 

Mr. KILLINGER. As I commented previously—— 

Senator COBURN. I am asking the question again specifically to 

give you a chance to answer that question. Did you have conversations with principals of financial firms in New York City about the 

sale of WaMu or the capture of WaMu by a larger financial institution? 

Mr. KILLINGER. Yes, and as I said earlier, that was in the spring, 

in that March-April period when the board considered all strategic 

alternatives between raising capital as well as—— 

Senator COBURN. And that was Goldman Sachs and Lehman? 

Mr. KILLINGER. They were the investment bankers working with 

us. 


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1 Exhibit 89 is a Sealed Exhibit and is retained in the files of the Subcommittee. 

2See Exhibit 6b, which appears in the Appendix on page 342 

Senator COBURN. Were there others that you had conversations 

with? 

Mr. KILLINGER. Well, they were representing us. 

Senator COBURN. Who did they have conversations with in terms 

of the sale of the business, not raising additional capital but the 

sale of the business? 

Mr. KILLINGER. There were, I will say, a handful of potential interested parties. We put out a net that was broad, both domestically and internationally, to see if anyone would be a potential 

partner at that time, and the investment bankers talked to a number of them, and then there were a couple of parties that we talked 

on a more private basis. 

Senator COBURN. Would you be so kind as to give the Subcommittee the names of those individuals? 

Mr. KILLINGER. I am not sure that has been publicly disclosed. 

I am not sure what my rights are. 

Senator COBURN. Well, your company is gone, and for us to get 

to the bottom of this, we need to know every detail. So you can 

refuse to answer, and then we will work on that. But the fact is 

that information is going to come out, and good lawyers do not ask 

questions they do not already know the answers to. So I think it 

would probably be beneficial—and I am not a lawyer, by the way— 

for you to give us that information. You do not have to do it publicly, but you can give it to the Subcommittee. 

Mr. KILLINGER. OK.It is Exhibit 89.1

Senator COBURN. All right. Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Coburn. 

Let me go back to your strategy. You say you adopted this shift 

to high-risk strategy in 2004 and 2005. Is that correct? But that 

it was not implemented, you did not execute it. 

Mr. KILLINGER. Not all elements. 

Senator LEVIN. Well, you surely executed your focus on high-risk 

products. Take a look at Exhibit 6b.2 Take a look at that exhibit, 

called ‘‘Home Loans—2007 Strategy Team Goals, Updated 11/12/ 

07.’’ Your goal is ‘‘GROWTH, 45%; Drive Nonprime expansion initiative . . . Support market share Increases for nonprime product.’’ 

Key to success: ‘‘Focus by all channels on targeting higher-margin 

products.’’ That is higher-risk products. 

Mr. KILLINGER. OK. I am sorry. I am behind Tab 6. 

Senator LEVIN. You sure tried to execute that new strategy for 

at least a year, year and a half. 

Mr. KILLINGER. And, Senator, we did execute elements of it. 

Senator LEVIN. Well, let us just focus here on higher-margin 

products. You want to focus all channels on targeting higher-margin products, drive non-prime expansion initiative. That is your 

goal. 

Mr. KILLINGER. I am trying to catch up here. 

Senator LEVIN. Updated 11/12/07, by the way. Do you see that, 

‘‘Updated 11/12/07’’? 


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1See Exhibit 6d, which appears in the Appendix on page 357. 

Mr. KILLINGER. OK. I am seeing this, yes. OK. So this is the target for the Home Loans group that we are looking at, not the company. 

Senator LEVIN. Right. Drive non-prime expansion. 

Mr. KILLINGER. Yes. 

Senator LEVIN. OK. 

Mr. KILLINGER. If I could, again—because I am setting the—with 

the board setting the strategy for the overall company, it really 

needs to be in the context, when we talked about diversifying the 

company, that included having a strategy for entering the credit 

card business, and we subsequently did the Providian acquisition, 

which was a significant part. 

It also had a material reduction in interest rate risk. That is why 

we sold so many mortgage servicing rights. And we also had, even 

in the Home Loans area, that this would be a lesser part of our 

overall business, and that the primary growth of the business 

would be in our retail banking stores, and that is where we are 

going to open up significant numbers of retail banking stores. 

So the overall context of the company is still a shrinkage of the 

home lending business, but within the home lending business that 

we would have more of a focus on some of these other products. 

Senator LEVIN. Some of the other products being high-risk products. 

Mr. KILLINGER. Like subprime, but which we did not execute on. 

Senator LEVIN. Well, you executed on a bunch of high-risk products. You have Option ARMs, subprime, home equity. You executed 

on them. 

Mr. KILLINGER. We did execute on expanding our portfolio in 

home equity. We did not expand the portfolio of Option ARMs. Option ARMs actually declined in the size of those portfolios. 

Senator LEVIN. It was still larger than it was in 2003, so you had 

a significant amount of Option ARMs even as late as 2006. But this 

is a 2007 document talking about channeling—focus ‘‘all channels 

on targeting higher-margin products.’’ Those are higher-risk products. That is November 2007. 

Here is what you said, June 6, 2006, in your report:1 ‘‘Finally, 

our Home Loans group should complete its repositioning’’—that is 

the repositioning that you had decided on in 2004 and 2005, to 

focus more on high risk. June 6, 2006, ‘‘Our Home Loan group 

should complete its repositioning within the next 12 months’’—so 

that is June 2006 to June 2007—‘‘and will be in a position to profitably grow its market share of Option ARM, home equity, subprime, 

and Alt A loans.’’ 

Mr. KILLINGER. That was the plan. We just did not execute it because of changing market conditions. 

Senator LEVIN. I know, but on June 6, 2006, you are still planning on executing it. This was a plan that you shifted to in 2004 

and 2005. So you did execute this for about a year, a year and a 

half. 

Mr. KILLINGER. We started down that direction, but much less 

than what we had planned, and as housing became more challenging, we moved even further away from that plan. 


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1See Exhibit 1i, which appears in the Appendix on page 223. 

Senator LEVIN. I understand, but I do not think you ought to get 

away with the statement you did not execute it. You did execute 

on it for about a year, a year and a half. You tried to execute it 

until the market changed. 

Mr. KILLINGER. OK. 

Senator LEVIN. Now, here is a pie chart we have here which 

shows the percentage of your inventory which is high risk compared to the low risk.1 Just take a look at 2003 in blue. In blue, 

the majority low-risk, 30-year loans, fixed loans. 2004, look at the 

dramatic shift. The red is your high risk, and as a part of your inventory, starting in 2004 going through 2005, 2006, 2007, the blue, 

which is your traditional 30-year, typically fixed loans, become no 

more than a quarter of your inventory. The high-risk part of the 

inventory goes from about a third in 2003 to three-quarters in 

2007. So you may have shrunk your total inventory, but as a percentage of your inventory, you are still focused on high-risk products. Is that accurate? 

Mr. KILLINGER. No, sir. 

Senator LEVIN. OK. Then tell me where that is wrong. 

Mr. KILLINGER. But this is a chart not of inventory, it is a chart 

of mortgage origination. 

Senator LEVIN. I should have said that. Is that accurate in terms 

of your originations and your purchases by percentage? 

Mr. KILLINGER. I believe it is. 

Senator LEVIN. OK. That is fine. I stand corrected. In terms of 

originations and your purchases by percentage, two-thirds low-risk, 

fixed mortgages in 2003. Starting in 2004, 2005, 2006, 2007, it become less than a quarter by 2007. And that is the point. You 

changed your strategy. You shrunk the whole pie. That is true. But 

you also started to implement your high-risk strategy, and that is 

clear from your own words which I just read, and when the strategy became frustrated because of the market, you then shrunk the 

whole pie. But you did not shrink the percentage of your originations and purchases that went to the high-risk products. 

Mr. KILLINGER. And, Senator, the one point I want to be crystal 

clear on is that 2002 and 2003 were very unusual years for fixedrate products because the country was going through a massive refinancing boom, and that is where so much of the origination was. 

If I went back to a more normalized time, like 2 years before that, 

you would have seen a balance that was more reflective of 2004 

and 2005 and 2006 than it was of 2003. It is the only point I wanted to make there. 

Senator LEVIN. June 12, 2006, I am going to read this again: ‘‘Finally, our Home Loans group should complete its repositioning 

within the next 12 months’’—that is your strategy, June 2006— 

‘‘and will be in a position to profitably grow its market share of ’’— 

you are trying to grow your market share of high risk in June 

2006. That is your plan. Option ARM, home equity, subprime, Alt 

A loans, that is your plan, right, in June 2006. I know that it 

changed after that, but that was still your strategy. I am just reading your words. 

Mr. KILLINGER. We had the plans—— 


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1See Exhibit 34, which appears in the Appendix on page 564. 

Senator LEVIN. In June 2006, you still had the plan. 

Mr. KILLINGER. If market conditions were satisfactory and we 

could execute profitably on that—— 

Senator LEVIN. That is always true about market conditions, but 

your plan was, ‘‘Our Home Loans group should complete its repositioning within the next 12 months and will be in a position to 

profitably grow its market share of Option ARM, home equity, 

subprime, and Alt A.’’ Those are the high-risk loans. I am just 

reading your own words. 

Now, let us turn to Exhibit 34,1 which is an internal WaMu review by its Risk Mitigation and Mortgage Fraud Group. This is 

September 8, 2008. You are right here on the brink of going out 

of business, but that is not the point here that I am trying to read. 

Take a look at the first finding. This is September 8, 2008. This 

is, I think, a couple weeks before you were taken over. The first 

finding of the review, page 3. I want to get back to all the fraud 

here, because it is one thing to say that you could not know with 

certainty that there was a housing bubble that was going to burst, 

even though you predicted it. The issue is not that you did not 

know when the housing bubble would burst. The problem is what 

did you know about what was going on in your own company in 

terms of how much fraud was going on. That becomes the issue 

that I want to focus on, the level of fraud and what you knew or 

did not know about that. 

Here is what you were told in 2008. This is September 8, 2008. 

‘‘The controls that are intended to prevent the sale of loans that 

have been confirmed by Risk Mitigation to contain misrepresentations or fraud are not currently effective.’’ Now, that should have 

set off some alarm bells. Your fraud controls and misrepresentation 

controls are not effective. And it says, ‘‘There is not a systemic 

process to prevent a loan in the Risk Mitigation Inventory and/or 

confirmed to contain suspicious activity from being sold to an investor.’’ 

And then there is a test of 25 loans; 11 reflect a sale date after 

the completion of the investigation which confirmed fraud. That is 

going on inside your company. You cannot predict with certainty 

the bubble. But this is what is happening inside your company 

when you got that report. 

Maybe I should ask Mr. Rotella as well. You got this report. 

What was your reaction? 

Mr. ROTELLA. Senator, any instance of fraud that I became—— 

Senator LEVIN. I know, but what was your reaction to this document? I know any instance of fraud—I got that. That is the way 

people should react. But now you have a document saying not any 

instance. Look, this is what happened. You do not have any controls for fraud and it is going on. 

Mr. ROTELLA. Senator, there were instances of fraud I was aware 

of over the 31⁄2 years I was at WaMu, and as I said, I authorized—— 

Senator LEVIN. No, I mean controls. 

Mr. ROTELLA. Budgets, people, expenses to put in fraud monitoring tools. 


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1See Exhibit 40b, which appears in the Appendix on page 632. 

Senator LEVIN. Not effective. That is what you were told. 

Mr. ROTELLA. Clearly, this report indicates that in September 

2008, about 3 weeks before the seizure of the institution. 

Senator LEVIN. It says something else. It says that there is ‘‘evidence that this control weakness has existed for some time.’’ A lack 

of controls for fraud, according to this report—this is your own internal report—has existed for some time. What was your reaction 

when you read that? 

Mr. ROTELLA. I don’t recollect exactly what my reaction was, but 

I can tell you that, reading this now, I have the same reaction I 

probably had then. I would not be happy with it and I would authorize people to fix it. 

Senator LEVIN. Mr. Killinger, what was your reaction? 

Mr. KILLINGER. I wasn’t at the company at this time. 

Senator LEVIN. You had already gone. Well, now that you read 

it, what is your reaction? For some time, controls for fraud in your 

company were not effective. What is your reaction when you see it 

now? 

Mr. KILLINGER. Exactly what I just heard from Mr. Rotella. You 

read this. It is very serious and you say, get on it. Where are the 

resources? And get it fixed. 

Senator LEVIN. Now, during a prior panel, we discussed the number of emails that show that a decision was made in early 2007 to 

sell Option ARMs that would normally go into the investment portfolio. And the reason that decision was made is because similar Option ARM loans from the fourth quarter of 2006 were already showing serious delinquencies. It was authorized that $3 billion in Option ARMs would be sold on an urgent basis. You were here, were 

you, both of you, when I went through those documents? 

They were already in the hold-for-investment portfolio, and they 

were reclassified on an urgent basis for sale, clearly because there 

was an assessment made in those emails it is clear these were likely to be delinquent and damn soon. We had better get rid of these 

damn soon. There is a great risk of default. 

Now, when you look at Exhibit 40b,1 if you would, on page 2, one 

of these emails is February 18, 2007, by Cheryl Feltgen, the Chief 

Risk Officer for your Home Loans Division. Here is what she wrote: 

‘‘There is a meltdown in the subprime market which is creating a 

flight to quality. I was talking to Robert Williams just after his return from the Asia trip where he and Alan Magleby talked to potential investors for upcoming covered bond deals backed by our 

mortgages. There is still strong interest around the world in USA 

residential mortgages. Gain on sale margins for Option ARMs are 

attractive. This seems to me to be a great time to sell as many Option ARMs as we possibly can. Kerry Killinger was certainly encouraging us to think seriously about it at the [Monthly Business 

Review] last week. What can I do to help? David, would your team 

like any help on determining the impact of selling certain 

groupings of Option ARMs on overall delinquencies?’’ 

Now, I believe, Mr. Killinger, since you are referred to, that you 

remember that? 


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Mr. KILLINGER. I remember that period of time and being at this, 

we call it MBR or Monthly Business Review, and—— 

Senator LEVIN. Do you remember saying that we should think seriously about getting rid of these Option ARMs? 

Mr. KILLINGER. Not about these Option ARMs. What I do remember is going through a discussion about the benefits of doing 

share repurchase versus growing our balance sheet. 

Senator LEVIN. Do you remember a discussion about delinquencies and that being a reason why you had better get rid of Option ARMs quickly, because they are likely to become delinquent? 

Do you remember those conversations? 

Mr. KILLINGER. I don’t recall the specifics, that the reason was 

around delinquencies or around attractive pricing, that others were 

buying assets at very good prices and we would be better off to redeploy our capital in some other way. 

Senator LEVIN. She says you talked about this subject and that 

delinquencies were—these emails were full of that subject. What 

you are saying is delinquencies may have been part of the conversation? 

Mr. KILLINGER. I just don’t recall because I haven’t seen other 

documentation and I wasn’t, I don’t think, directly included on 

these. 

Senator LEVIN. All right. Did you know that during the first 

quarter of 2007, that WaMu was securitizing Option ARM loans because of their greater likelihood to fail? Did you know that? 

Mr. KILLINGER. I don’t have a recollection of that. 

Senator LEVIN. What did you think when you heard these emails 

today? Did that surprise you? Did that trouble you, that suddenly 

delinquencies hit very hard, and now you have got your staff that 

is saying, we had better get rid of these quick. Did that trouble you 

when you heard it today? 

Mr. KILLINGER. Well, I don’t recall having seen something like 

that before, so it was—it is just something that was new to me—— 

Senator LEVIN. And when you heard it today, when it was new 

to you, what was your reaction? 

Mr. KILLINGER. Well, my reaction on the plus side was that if 

they were talking about—— 

Senator LEVIN. No, just what I read, delinquencies, delinquencies, delinquencies, urgent, urgent, urgent, midnight emails. 

We have got to move quickly on this. When you heard that, what 

was your reaction to it? 

Mr. KILLINGER. Well, when I heard about the urgency, it was 

more around that they need to be in a very timely way to do a 

transaction. I didn’t get it about that it was because there is going 

to be an urgent change in loan performance or something. But 

when we decide to go sell or buy an asset, I know these people have 

to move fairly quickly to identify what they want to sell and buy, 

and there is also a factor of the geographic concentration, because 

we had—it is difficult for us because we kept trying to find ways 

to reduce our concentration in California because we had a natural 

propensity to originate so many loans there. 

Senator LEVIN. Mr. Killinger, that is maybe what you would 

have liked to have heard, but I am asking you what you heard 

today. 


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Mr. KILLINGER. Yes. 

Senator LEVIN. What you heard today was these loans are delinquent. We are having a heavy flood of delinquent loans in the 

fourth quarter. And then the criteria for those loans were laid out. 

And then there was a decision made urgently. We have got to sell 

these loans. We can still sell them. It was significantly based on 

delinquencies. It was the subject of every single email. 

Now, when I read that, you may have wanted to hear that you 

wanted to sell them in order to gain capital, but what I read to you 

was that there was a high rate of delinquencies and we have got 

to move quickly. And my question to you is, when you heard that— 

not what you wanted to hear, what you did hear, I hope, and I read 

them and I am not going to go through them again unless you want 

me to—did that trouble you? Would selling those mortgages for 

that reason trouble you without disclosing that to investors? Would 

that trouble you? 

Mr. KILLINGER. It would trouble me certainly if it didn’t have the 

proper disclosures which we had. 

Senator LEVIN. OK—— 

Mr. KILLINGER. I do want to make one point, to be very careful 

in here. I don’t know if it relates here, but we had a regular program of selling non-performing assets. It was part of our risk mitigation program, where we would take problem assets, pool them 

up, sell them off to investors that were interested in buying those. 

Senator LEVIN. Right, but that is not what I am talking about. 

I am talking about here you had a significant flood of delinquencies 

in that fourth quarter. You were continuing to originate or to buy 

these Option ARMs. You had a study made. That study showed 

that certain specified criteria were the key factors in those delinquencies. A decision was made, you had better dispose of Option 

ARMs clearly following that assessment. You made an assessment. 

Was that assessment disclosed to investors? 

Mr. KILLINGER. I have no idea. 

Senator LEVIN. Should it have been? 

Mr. KILLINGER. Well, it would seem that would be—certainly, 

any security sale that we have should have all the appropriate disclosures. 

Senator LEVIN. Would that be appropriate to disclose that assessment which you made internally relative to the likely delinquency 

of those mortgages? 

Mr. KILLINGER. Well, again, I have—— 

Senator LEVIN. Is that not relevant to a buyer? 

Mr. KILLINGER. Again, I don’t know what the actual sales were 

and I don’t know what the actual disclosures or anything about 

that. So it is very difficult for me to talk in a hypothetical. 

Senator LEVIN. You should have been disturbed by what you 

heard here today, OK? It is very clear, you should have been disturbed by that. I would hope that you would have said, yes, if I had 

known that, I would have been disturbed. That is what I hoped you 

would have said. Instead, you want to wrap it in hypotheticals and 

say, well, it is hypothetical. It is not hypothetical. These are emails, 

one after another, delinquency, delinquency, delinquency, we have 

got to move, we have got to move, urgent, midnight emails, we 

have got to move. I talked to Killinger. He says we have got to 


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move. And now you are saying, well, what, sometimes we sell assets? We are talking about these emails, Mr. Killinger. 

Mr. KILLINGER. What I also heard this morning was that Mr. 

Beck didn’t know if we actually sold these or if we sold—what happened in the transaction, so I am kind of dealing with the transaction. I just don’t know what actually happened. 

Senator LEVIN. Should you have known? Were you aware 

that—— 

Mr. KILLINGER. No, I wasn’t aware of specifics on that. These are 

not the kind of size and transactions that I would normally get involved in. 

Senator LEVIN. You don’t get involved in $3 billion authorizations? 

Mr. KILLINGER. No. Those would be handled within the group. 

Senator LEVIN. Three billion? 

Mr. KILLINGER. Yes, out of a $300 billion—— 

Senator LEVIN. Yes, but $3 billion being sold on an urgent basis, 

we are going to get—we need $3 billion. We have to do it this quarter. In fact, the loans that we are originating right now, we are 

going to sell immediately. That is how urgent it was to move on 

this. 

Mr. Killinger, you are under oath here. It seems to me if you are 

not disturbed by this, you should be, and it is hard for me, frankly, 

to accept that you would not be troubled if you had read then what 

you heard this morning. And you are saying that if you had read 

all those emails back then, you would not have been concerned. Is 

that what you are saying? 

Mr. KILLINGER. I am saying I would be concerned if there was 

anything that was done inappropriate on disclosure, which I don’t 

know. 

Senator LEVIN. No. I am talking about those emails. Would you 

have been concerned then if you had read those emails? Would you 

have inquired, are we selling these things? Are they part of the $3 

billion? Would you have made that inquiry or thought it ought to 

be made? Are we disclosing this to investors? Would you have 

thought—we have made a study of this. We have looked at the reason for these delinquencies. We have a guy who says there are 

eight reasons. Here they are. They are laid out. Then you have 

emails that are saying—and these were late in the evening, early 

morning emails, urgent, urgent, urgent, delinquency. Would that 

have troubled you if you had seen those emails then? 

Mr. KILLINGER. Again, I did not see the emails and I don’t know 

what ended up happening on this—— 

Senator LEVIN. Not ended up. I am saying, before. I am just saying the emails. This is before they were securitized. The decision 

was made to put up to $3 billion of those mortgages into securities. 

Before a decision was picking which ones to put in the securities, 

would you have been troubled by those emails? That is my question. 

Mr. KILLINGER. Well, I am troubled that it was just on the basis 

of performance. 

Senator LEVIN. Just what you heard today, just those emails. 

That is all I am asking you. If you had seen those emails—you 


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1See Exhibit 69a, which appears in the Appendix on page 759. 

have heard them. I have read them. I will read them again to you. 

Would you have been troubled if you had read those emails then? 

Mr. KILLINGER. I would have inquired more. I wanted more information. 

Senator LEVIN. OK. 

Mr. KILLINGER. That is what I want. 

Senator LEVIN. OK. Well, I guess that is progress. 

Take a look, if you would, at Exhibit 69a.1 This is an email from 

you, Mr. Killinger, dated October 12, 2007. This is responding to 

a colleague’s email discussing the hiring of Goldman Sachs or another investment bank to help WaMu consider ways to reduce its 

credit risk or raise new capital. Your senior staffer wrote, ‘‘we always need to worry a little about Goldman because we need them 

more than they need us and the firm is run by traders,’’ presumably meaning they act in their own self-interest and not on behalf 

of their clients. 

And here is your response. ‘‘I don’t trust Goldy on this. They are 

smart, but this is swimming with the sharks. They were shorting 

mortgages big time while they were giving CFC advice,’’ CFC being 

Countrywide Financial Corporation. 

Now, what led you to say that Goldman Sachs was shorting 

mortgages big time while giving advice to Countrywide? 

Mr. KILLINGER. Well, I think this was, again, just a brief comment. I don’t recall having any specific knowledge, but I probably 

read about that or might have heard in general about what they 

were doing at that same time, and I was just trying to make a 

point, probably in a little flippant way, that if we are going to engage an investment bank through here to help us on any of these 

transactions, we need to understand that they may have a conflict 

of interest. 

Senator LEVIN. Was that a common perception at the time, that 

Goldman Sachs was shorting mortgages big time while giving advice to clients? 

Mr. KILLINGER. Well, as I recall, in that time frame, there was 

some speculation in the press about that and I think that was kind 

of one of the points that was going around on Wall Street at that 

time. 

Senator LEVIN. But yet you hired Goldman Sachs in the end to 

help you out, is that correct? 

Mr. KILLINGER. We did use them on the transactions, yes. 

Senator LEVIN. Now, in your statement, Mr. Killinger, you described how the Office of Thrift Supervision was on site at WaMu 

and approved of WaMu’s actions, like the decision to raise additional capital. You have mentioned them a number of times, always 

that they were kind of supporting or approving what you did. What 

you don’t mention in your statement was the Office of Thrift Supervision’s criticisms of WaMu. 

From 2004 to 2008, the Office of Thrift Supervision repeatedly 

leveled serious criticisms of the bank. Here are a couple samples. 

In 2004, ‘‘several of our recent examinations,’’ they wrote, ‘‘concluded that the bank’s single family loan underwriting was less 

than satisfactory due to excessive errors in the underwriting procVerDate Nov 24 2008 08:28 Nov 29, 2010 Jkt 057319 PO 00000 Frm 00126 Fmt 6633 Sfmt 6633 P:\DOCS\57319.TXT SAFFAIRS PsN: PAT

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ess, loan document preparation, and in associated activities.’’ That 

was May 12, 2004. 

In 2005, OTS wrote, ‘‘Underwriting exceptions . . . evidence lack 

of compliance with bank policy. . . . Deficiencies, if left unchecked, 

could erode the credit quality of the portfolio. Our concerns are increased with the risk profile of the portfolio. . . .’’ 

In 2006, ‘‘subprime underwriting practices remain less than satisfactory. Continuing weaknesses in loan underwriting at Long 

Beach.’’ 

In 2007, ‘‘too much emphasis was placed on loan production at 

the expense of loan quality. Subprime underwriting practices remain less than satisfactory. Underwriting exceptions and errors remain above acceptable levels.’’ 

In 2008, ‘‘poor financial performance exacerbated by conditions 

within management’s control, poor underwriting quality, geographic concentrations in problem markets, liberal underwriting 

policy, risk layering.’’ That was presented to the Board of Directors 

July 15, 2008. 

So year after year, you have OTS citing the bank for weak lending practices, and I am wondering, were you aware of those criticisms? 

Mr. KILLINGER. Yes. 

Senator LEVIN. I think, Mr. Killinger, in your opening statement, 

you made reference to Wall Street’s growing appetite for these 

products. Can you expand on that? 

Mr. KILLINGER. I believe we were talking about back in the housing boom period? 

Senator LEVIN. Yes. And you were talking about your high-risk 

products? 

Mr. KILLINGER. Yes. Well, clearly, the money was flooding into 

Wall Street both from international sources and domestic sources 

with a very strong appetite for buying various mortgage-related securities, and I think that very strong pressure to buy certainly had 

an influence on the products that they were willing to buy and ultimately the kind of conditions around those loans. 

Where we saw a particular change, I will say, is in the Option 

ARM, which for many years was a portfolio product and there was 

not a secondary market. What we saw in the mid-2000s is the 

emergence of a secondary market with Wall Street and Fannie Mae 

and Freddie Mac, and that led to a huge surge in brokers originating Option ARMs, and I think that certainly changed the competitive landscape for us. It caused us to lose significant market 

share and, I think, had an impact on the different competitive features of that product. 

So certainly the development of the secondary markets had a 

huge impact on that product. Similarly, it was the primary outlet 

for the origination of subprime loans, so that demand from Wall 

Street had, I think, a big impact on the criteria that were used to 

underwrite subprime loans. 

Senator LEVIN. And would you say that the criteria were looser 

as a result of that demand? 

Mr. KILLINGER. I don’t think there is any question. You heard 

this morning about the layering—we can call it the layering of risk, 

where the loan-to-value ratios might have increased, where there 


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was more of a prevalence of putting second mortgages on top of 

firsts at origination, less documentation of some new products in 

some cases, and very thin pricing because there was so much 

money kind of chasing, wanting to make those loans. 

Senator LEVIN. You say thin—— 

Mr. KILLINGER. Yes, very low margins. 

Senator LEVIN. So there was this huge demand from Wall Street 

which, I think you would agree, contributed to the reduction in the 

criteria—the loosening of the criteria for these products. 

Mr. KILLINGER. I think that is absolutely the case. 

Senator LEVIN. Mr. Rotella, would you agree to that? 

Mr. ROTELLA. I would, Senator. I would also say that there were 

incredible incentives in the environment to leverage during this period. I also believe that there was a general belief that housing 

would not decline and institutions became excessively reliant on 

models that turned out to be wrong. So that drove a lot of Wall 

Street firms to look for yield, and as we have heard during the day, 

the GSEs had a dominant stranglehold on conforming product, and 

because the yields were so low on that product, there were other 

parts of the market that Wall Street and others looked to essentially chase yield. 

Senator LEVIN. I think Mr. Cathcart testified that Option ARM 

home sales depend on housing price appreciation for repayment 

through refinancing and are viable in a healthy market where 

housing prices are constantly on the rise. But when housing prices 

depreciate, Option ARMs become problem assets. Would you agree 

with that, Mr. Rotella? 

Mr. ROTELLA. I would. 

Senator LEVIN. And Mr. Killinger, would you agree with that? 

Mr. KILLINGER. Yes. 

Senator LEVIN. Well, I want to thank you for your testimony. We 

have a situation here where a bank, a mainstream bank and a 

Main Street bank began as a prudent, well-run bank, but it over 

time engaged in some high-risk and shoddy lending practices, early 

payment defaults, fraudulent information, unreasonable income 

statements, negatively amortizing loans. And then at the end, it became just a conveyor belt that dropped into the stream of commerce literally hundreds of billions of dollars of mortgages that 

were substandard and dubious. And it wasn’t the only lender doing 

it. We know that. It was one of many. Together, these toxic mortgages contributed to a financial crisis in 2008. 

So we are now debating financial reform. We sure as heck need 

it. We are going to have three additional hearings in the next 2 

weeks which will look at other aspects. It came up today about the 

question of the regulators. Where do they fall short? The credit rating agencies, where did they fall short? And the investment banks 

and Wall Street directly, what was their involvement? What was 

their role in this assault on our economy? 

We have to do some financial reform in the Senate. I hope that 

we are going to be taking action with respect to stated income 

loans that have no verification of income or assets. I hope we are 

going to take some action relative to negatively amortizing loans 

that hurt borrowers and increase the risk of default to stop that 

practice from occurring. We have to act on these high-risk loans 


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that are the product of financial engineering, that are turned into 

these high-paying AAA mortgage-backed securities. The short-term 

Wall Street profits that have won for too many years over longterm fundamentals have cost this economy dearly. 

We heard a story today which is an in-depth story, which I think 

is a sad story, which cost the State of Washington and Seattle a 

lot of jobs there and around the country. It cost a lot of mortgages 

being foreclosed, and that resulted in a lot of homes lost, and were 

part of the problem that this economy faced that came to a head 

in 2008. 

So we will look at other parts of this in the 2 weeks ahead, but 

in the meantime, we want to thank our witnesses today for coming 

forward. We always appreciate people who are willing to testify, 

even when we have problems with that testimony. So we are grateful to the two of you. 

We will stand adjourned. 

[Whereupon, at 4:31 p.m., the Subcommittee was adjourned.] 


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ph44585 on D330-44585-7600 with DISTILLER57319.199
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ph44585 on D330-44585-7600 with DISTILLER57319.200
319 


ph44585 on D330-44585-7600 with DISTILLER57319.201
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ph44585 on D330-44585-7600 with DISTILLER57319.202
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ph44585 on D330-44585-7600 with DISTILLER57319.203
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ph44585 on D330-44585-7600 with DISTILLER57319.204
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ph44585 on D330-44585-7600 with DISTILLER57319.205
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ph44585 on D330-44585-7600 with DISTILLER57319.206
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ph44585 on D330-44585-7600 with DISTILLER57319.207
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ph44585 on D330-44585-7600 with DISTILLER57319.208
327 


ph44585 on D330-44585-7600 with DISTILLER57319.209
328 


ph44585 on D330-44585-7600 with DISTILLER57319.210
329 


ph44585 on D330-44585-7600 with DISTILLER57319.211
330 


ph44585 on D330-44585-7600 with DISTILLER57319.212
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ph44585 on D330-44585-7600 with DISTILLER57319.213
332 


ph44585 on D330-44585-7600 with DISTILLER57319.214
333 


ph44585 on D330-44585-7600 with DISTILLER57319.215
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ph44585 on D330-44585-7600 with DISTILLER57319.216
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ph44585 on D330-44585-7600 with DISTILLER57319.217
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ph44585 on D330-44585-7600 with DISTILLER57319.218
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ph44585 on D330-44585-7600 with DISTILLER57319.219
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ph44585 on D330-44585-7600 with DISTILLER57319.220
339 


ph44585 on D330-44585-7600 with DISTILLER57319.221
340 


ph44585 on D330-44585-7600 with DISTILLER57319.222
341 


ph44585 on D330-44585-7600 with DISTILLER57319.223
342 


ph44585 on D330-44585-7600 with DISTILLER57319.224
343 


ph44585 on D330-44585-7600 with DISTILLER57319.225
344 


ph44585 on D330-44585-7600 with DISTILLER57319.226
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ph44585 on D330-44585-7600 with DISTILLER57319.227
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ph44585 on D330-44585-7600 with DISTILLER57319.228
347 


ph44585 on D330-44585-7600 with DISTILLER57319.229
348 


ph44585 on D330-44585-7600 with DISTILLER57319.230
349 


ph44585 on D330-44585-7600 with DISTILLER57319.231
350 


ph44585 on D330-44585-7600 with DISTILLER57319.232
351 


ph44585 on D330-44585-7600 with DISTILLER57319.233
352 


ph44585 on D330-44585-7600 with DISTILLER57319.234
353 


ph44585 on D330-44585-7600 with DISTILLER57319.235
354 


ph44585 on D330-44585-7600 with DISTILLER57319.236
355 


ph44585 on D330-44585-7600 with DISTILLER57319.237
356 


ph44585 on D330-44585-7600 with DISTILLER57319.238
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ph44585 on D330-44585-7600 with DISTILLER57319.239
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ph44585 on D330-44585-7600 with DISTILLER57319.240
359 


ph44585 on D330-44585-7600 with DISTILLER57319.241
360 


ph44585 on D330-44585-7600 with DISTILLER57319.242
361 


ph44585 on D330-44585-7600 with DISTILLER57319.243
362 


ph44585 on D330-44585-7600 with DISTILLER57319.244
363 


ph44585 on D330-44585-7600 with DISTILLER57319.245
364 


ph44585 on D330-44585-7600 with DISTILLER57319.246
365 


ph44585 on D330-44585-7600 with DISTILLER57319.247
366 


ph44585 on D330-44585-7600 with DISTILLER57319.248
367 


ph44585 on D330-44585-7600 with DISTILLER57319.249
368 


ph44585 on D330-44585-7600 with DISTILLER57319.250
369 


ph44585 on D330-44585-7600 with DISTILLER57319.251
370 


ph44585 on D330-44585-7600 with DISTILLER57319.252
371 


ph44585 on D330-44585-7600 with DISTILLER57319.253
372 


ph44585 on D330-44585-7600 with DISTILLER57319.254
373 


ph44585 on D330-44585-7600 with DISTILLER57319.255
374 


ph44585 on D330-44585-7600 with DISTILLER57319.256
375 


ph44585 on D330-44585-7600 with DISTILLER57319.257
376 


ph44585 on D330-44585-7600 with DISTILLER57319.258
377 


ph44585 on D330-44585-7600 with DISTILLER57319.259
378 


ph44585 on D330-44585-7600 with DISTILLER57319.260
379 


ph44585 on D330-44585-7600 with DISTILLER57319.261
380 


ph44585 on D330-44585-7600 with DISTILLER57319.262
381 


ph44585 on D330-44585-7600 with DISTILLER57319.263
382 


ph44585 on D330-44585-7600 with DISTILLER57319.264
383 


ph44585 on D330-44585-7600 with DISTILLER57319.265
384 


ph44585 on D330-44585-7600 with DISTILLER57319.266
385 


ph44585 on D330-44585-7600 with DISTILLER57319.267
386 


ph44585 on D330-44585-7600 with DISTILLER57319.268
387 


ph44585 on D330-44585-7600 with DISTILLER57319.269
388 


ph44585 on D330-44585-7600 with DISTILLER57319.270
389 


ph44585 on D330-44585-7600 with DISTILLER57319.271
390 


ph44585 on D330-44585-7600 with DISTILLER57319.272
391 


ph44585 on D330-44585-7600 with DISTILLER57319.273
392 


ph44585 on D330-44585-7600 with DISTILLER57319.274
393 


ph44585 on D330-44585-7600 with DISTILLER57319.275
394 


ph44585 on D330-44585-7600 with DISTILLER57319.276
395 


ph44585 on D330-44585-7600 with DISTILLER57319.277
396 


ph44585 on D330-44585-7600 with DISTILLER57319.278
397 


ph44585 on D330-44585-7600 with DISTILLER57319.279
398 


ph44585 on D330-44585-7600 with DISTILLER57319.280
399 


ph44585 on D330-44585-7600 with DISTILLER57319.281
400 


ph44585 on D330-44585-7600 with DISTILLER57319.282
401 


ph44585 on D330-44585-7600 with DISTILLER57319.283
402 


ph44585 on D330-44585-7600 with DISTILLER57319.284
403 


ph44585 on D330-44585-7600 with DISTILLER57319.285
404 


ph44585 on D330-44585-7600 with DISTILLER57319.286
405 


ph44585 on D330-44585-7600 with DISTILLER57319.287
406 


ph44585 on D330-44585-7600 with DISTILLER57319.288
407 


ph44585 on D330-44585-7600 with DISTILLER57319.289
408 


ph44585 on D330-44585-7600 with DISTILLER57319.290
409 


ph44585 on D330-44585-7600 with DISTILLER57319.291
410 


ph44585 on D330-44585-7600 with DISTILLER57319.292
411 


ph44585 on D330-44585-7600 with DISTILLER57319.293
412 


ph44585 on D330-44585-7600 with DISTILLER57319.294
413 


ph44585 on D330-44585-7600 with DISTILLER57319.295
414 


ph44585 on D330-44585-7600 with DISTILLER57319.296
415 


ph44585 on D330-44585-7600 with DISTILLER57319.297
416 


ph44585 on D330-44585-7600 with DISTILLER57319.298
417 


ph44585 on D330-44585-7600 with DISTILLER57319.299
418 


ph44585 on D330-44585-7600 with DISTILLER57319.300
419 


ph44585 on D330-44585-7600 with DISTILLER57319.301
420 


ph44585 on D330-44585-7600 with DISTILLER57319.302
421 


ph44585 on D330-44585-7600 with DISTILLER57319.303
422 


ph44585 on D330-44585-7600 with DISTILLER57319.304
423 


ph44585 on D330-44585-7600 with DISTILLER57319.305
424 


ph44585 on D330-44585-7600 with DISTILLER57319.306
425 


ph44585 on D330-44585-7600 with DISTILLER57319.307
426 


ph44585 on D330-44585-7600 with DISTILLER57319.308
427 


ph44585 on D330-44585-7600 with DISTILLER57319.309
428 


ph44585 on D330-44585-7600 with DISTILLER57319.310
429 


ph44585 on D330-44585-7600 with DISTILLER57319.311
430 


ph44585 on D330-44585-7600 with DISTILLER57319.312
431 


ph44585 on D330-44585-7600 with DISTILLER57319.313
432 


ph44585 on D330-44585-7600 with DISTILLER57319.314
433 


ph44585 on D330-44585-7600 with DISTILLER57319.315
434 


ph44585 on D330-44585-7600 with DISTILLER57319.316
435 


ph44585 on D330-44585-7600 with DISTILLER57319.317
436 


ph44585 on D330-44585-7600 with DISTILLER57319.318
437 


ph44585 on D330-44585-7600 with DISTILLER57319.319
438 


ph44585 on D330-44585-7600 with DISTILLER57319.320
439 


ph44585 on D330-44585-7600 with DISTILLER57319.321
440 


ph44585 on D330-44585-7600 with DISTILLER57319.322
441 


ph44585 on D330-44585-7600 with DISTILLER57319.323
442 


ph44585 on D330-44585-7600 with DISTILLER57319.324
443 


ph44585 on D330-44585-7600 with DISTILLER57319.325
444 


ph44585 on D330-44585-7600 with DISTILLER57319.326
445 


ph44585 on D330-44585-7600 with DISTILLER57319.327
446 


ph44585 on D330-44585-7600 with DISTILLER57319.328
447 


ph44585 on D330-44585-7600 with DISTILLER57319.329
448 


ph44585 on D330-44585-7600 with DISTILLER57319.330
449 


ph44585 on D330-44585-7600 with DISTILLER57319.331
450 


ph44585 on D330-44585-7600 with DISTILLER57319.332
451 


ph44585 on D330-44585-7600 with DISTILLER57319.333
452 


ph44585 on D330-44585-7600 with DISTILLER57319.334
453 


ph44585 on D330-44585-7600 with DISTILLER57319.335
454 


ph44585 on D330-44585-7600 with DISTILLER57319.336
455 


ph44585 on D330-44585-7600 with DISTILLER57319.337
456 


ph44585 on D330-44585-7600 with DISTILLER57319.338
457 


ph44585 on D330-44585-7600 with DISTILLER57319.339
458 


ph44585 on D330-44585-7600 with DISTILLER57319.340
459 


ph44585 on D330-44585-7600 with DISTILLER57319.341
460 


ph44585 on D330-44585-7600 with DISTILLER57319.342
461 


ph44585 on D330-44585-7600 with DISTILLER57319.343
462 


ph44585 on D330-44585-7600 with DISTILLER57319.344
463 


ph44585 on D330-44585-7600 with DISTILLER57319.345
464 


ph44585 on D330-44585-7600 with DISTILLER57319.346
465 


ph44585 on D330-44585-7600 with DISTILLER57319.347
466 


ph44585 on D330-44585-7600 with DISTILLER57319.348
467 


ph44585 on D330-44585-7600 with DISTILLER57319.349
468 


ph44585 on D330-44585-7600 with DISTILLER57319.350
469 


ph44585 on D330-44585-7600 with DISTILLER57319.351
470 


ph44585 on D330-44585-7600 with DISTILLER57319.352
471 


ph44585 on D330-44585-7600 with DISTILLER57319.353
472 


ph44585 on D330-44585-7600 with DISTILLER57319.354
473 


ph44585 on D330-44585-7600 with DISTILLER57319.355
474 


ph44585 on D330-44585-7600 with DISTILLER57319.356
475 


ph44585 on D330-44585-7600 with DISTILLER57319.357
476 


ph44585 on D330-44585-7600 with DISTILLER57319.358
477 


ph44585 on D330-44585-7600 with DISTILLER57319.359
478 


ph44585 on D330-44585-7600 with DISTILLER57319.360
479 


ph44585 on D330-44585-7600 with DISTILLER57319.361
480 


ph44585 on D330-44585-7600 with DISTILLER57319.362
481 


ph44585 on D330-44585-7600 with DISTILLER57319.363
482 


ph44585 on D330-44585-7600 with DISTILLER57319.364
483 


ph44585 on D330-44585-7600 with DISTILLER57319.365
484 


ph44585 on D330-44585-7600 with DISTILLER57319.366
485 


ph44585 on D330-44585-7600 with DISTILLER57319.367
486 


ph44585 on D330-44585-7600 with DISTILLER57319.368
487 


ph44585 on D330-44585-7600 with DISTILLER57319.369
488 


ph44585 on D330-44585-7600 with DISTILLER57319.370
489 


ph44585 on D330-44585-7600 with DISTILLER57319.371
490 


ph44585 on D330-44585-7600 with DISTILLER57319.372
491 


ph44585 on D330-44585-7600 with DISTILLER57319.373
492 


ph44585 on D330-44585-7600 with DISTILLER57319.374
493 


ph44585 on D330-44585-7600 with DISTILLER57319.375
494 


ph44585 on D330-44585-7600 with DISTILLER57319.376
495 


ph44585 on D330-44585-7600 with DISTILLER57319.377
496 


ph44585 on D330-44585-7600 with DISTILLER57319.378
497 


ph44585 on D330-44585-7600 with DISTILLER57319.379
498 


ph44585 on D330-44585-7600 with DISTILLER57319.380
499 


ph44585 on D330-44585-7600 with DISTILLER57319.381
500 


ph44585 on D330-44585-7600 with DISTILLER57319.382
501 


ph44585 on D330-44585-7600 with DISTILLER57319.383
502 


ph44585 on D330-44585-7600 with DISTILLER57319.384
503 


ph44585 on D330-44585-7600 with DISTILLER57319.385
504 


ph44585 on D330-44585-7600 with DISTILLER57319.386
505 


ph44585 on D330-44585-7600 with DISTILLER57319.387
506 


ph44585 on D330-44585-7600 with DISTILLER57319.388
507 


ph44585 on D330-44585-7600 with DISTILLER57319.389
508 


ph44585 on D330-44585-7600 with DISTILLER57319.390
509 


ph44585 on D330-44585-7600 with DISTILLER57319.391
510 


ph44585 on D330-44585-7600 with DISTILLER57319.392
511 


ph44585 on D330-44585-7600 with DISTILLER57319.393
512 


ph44585 on D330-44585-7600 with DISTILLER57319.394
513 


ph44585 on D330-44585-7600 with DISTILLER57319.395
514 


ph44585 on D330-44585-7600 with DISTILLER57319.396
515 


ph44585 on D330-44585-7600 with DISTILLER57319.397
516 


ph44585 on D330-44585-7600 with DISTILLER57319.398
517 


ph44585 on D330-44585-7600 with DISTILLER57319.399
518 


ph44585 on D330-44585-7600 with DISTILLER57319.400
519 


ph44585 on D330-44585-7600 with DISTILLER57319.401
520 


ph44585 on D330-44585-7600 with DISTILLER57319.402
521 


ph44585 on D330-44585-7600 with DISTILLER57319.403
522 


ph44585 on D330-44585-7600 with DISTILLER57319.404
523 


ph44585 on D330-44585-7600 with DISTILLER57319.405
524 


ph44585 on D330-44585-7600 with DISTILLER57319.406
525 


ph44585 on D330-44585-7600 with DISTILLER57319.407
526 


ph44585 on D330-44585-7600 with DISTILLER57319.408
527 


ph44585 on D330-44585-7600 with DISTILLER57319.409
528 


ph44585 on D330-44585-7600 with DISTILLER57319.410
529 


ph44585 on D330-44585-7600 with DISTILLER57319.411
530 


ph44585 on D330-44585-7600 with DISTILLER57319.412
531 


ph44585 on D330-44585-7600 with DISTILLER57319.413
532 


ph44585 on D330-44585-7600 with DISTILLER57319.414
533 


ph44585 on D330-44585-7600 with DISTILLER57319.415
534 


ph44585 on D330-44585-7600 with DISTILLER57319.416
535 


ph44585 on D330-44585-7600 with DISTILLER57319.417
536 


ph44585 on D330-44585-7600 with DISTILLER57319.418
537 


ph44585 on D330-44585-7600 with DISTILLER57319.419
538 


ph44585 on D330-44585-7600 with DISTILLER57319.420
539 


ph44585 on D330-44585-7600 with DISTILLER57319.421
540 


ph44585 on D330-44585-7600 with DISTILLER57319.422
541 


ph44585 on D330-44585-7600 with DISTILLER57319.423
542 


ph44585 on D330-44585-7600 with DISTILLER57319.424
543 


ph44585 on D330-44585-7600 with DISTILLER57319.425
544 


ph44585 on D330-44585-7600 with DISTILLER57319.426
545 


ph44585 on D330-44585-7600 with DISTILLER57319.427
546 


ph44585 on D330-44585-7600 with DISTILLER57319.428
547 


ph44585 on D330-44585-7600 with DISTILLER57319.429
548 


ph44585 on D330-44585-7600 with DISTILLER57319.430
549 


ph44585 on D330-44585-7600 with DISTILLER57319.431
550 


ph44585 on D330-44585-7600 with DISTILLER57319.432
551 


ph44585 on D330-44585-7600 with DISTILLER57319.433
552 


ph44585 on D330-44585-7600 with DISTILLER57319.434
553 


ph44585 on D330-44585-7600 with DISTILLER57319.435
554 


ph44585 on D330-44585-7600 with DISTILLER57319.436
555 


ph44585 on D330-44585-7600 with DISTILLER57319.437
556 


ph44585 on D330-44585-7600 with DISTILLER57319.438
557 


ph44585 on D330-44585-7600 with DISTILLER57319.439
558 


ph44585 on D330-44585-7600 with DISTILLER57319.440
559 


ph44585 on D330-44585-7600 with DISTILLER57319.441
560 


ph44585 on D330-44585-7600 with DISTILLER57319.442
561 


ph44585 on D330-44585-7600 with DISTILLER57319.443
562 


ph44585 on D330-44585-7600 with DISTILLER57319.444
563 


ph44585 on D330-44585-7600 with DISTILLER57319.445
564 


ph44585 on D330-44585-7600 with DISTILLER57319.446
565 


ph44585 on D330-44585-7600 with DISTILLER57319.447
566 


ph44585 on D330-44585-7600 with DISTILLER57319.448
567 


ph44585 on D330-44585-7600 with DISTILLER57319.449
568 


ph44585 on D330-44585-7600 with DISTILLER57319.450
569 


ph44585 on D330-44585-7600 with DISTILLER57319.451
570 


ph44585 on D330-44585-7600 with DISTILLER57319.452
571 


ph44585 on D330-44585-7600 with DISTILLER57319.453
572 


ph44585 on D330-44585-7600 with DISTILLER57319.454
573 


ph44585 on D330-44585-7600 with DISTILLER57319.455
574 


ph44585 on D330-44585-7600 with DISTILLER57319.456
575 


ph44585 on D330-44585-7600 with DISTILLER57319.457
576 


ph44585 on D330-44585-7600 with DISTILLER57319.458
577 


ph44585 on D330-44585-7600 with DISTILLER57319.459
578 


ph44585 on D330-44585-7600 with DISTILLER57319.460
579 


ph44585 on D330-44585-7600 with DISTILLER57319.461
580 


ph44585 on D330-44585-7600 with DISTILLER57319.462
581 


ph44585 on D330-44585-7600 with DISTILLER57319.463
582 


ph44585 on D330-44585-7600 with DISTILLER57319.464
583 


ph44585 on D330-44585-7600 with DISTILLER57319.465
584 


ph44585 on D330-44585-7600 with DISTILLER57319.466
585 


ph44585 on D330-44585-7600 with DISTILLER57319.467
586 


ph44585 on D330-44585-7600 with DISTILLER57319.468
587 


ph44585 on D330-44585-7600 with DISTILLER57319.469
588 


ph44585 on D330-44585-7600 with DISTILLER57319.470
589 


ph44585 on D330-44585-7600 with DISTILLER57319.471
590 


ph44585 on D330-44585-7600 with DISTILLER57319.472
591 


ph44585 on D330-44585-7600 with DISTILLER57319.473
592 


ph44585 on D330-44585-7600 with DISTILLER57319.474
593 


ph44585 on D330-44585-7600 with DISTILLER57319.475
594 


ph44585 on D330-44585-7600 with DISTILLER57319.476
595 


ph44585 on D330-44585-7600 with DISTILLER57319.477
596 


ph44585 on D330-44585-7600 with DISTILLER57319.478
597 


ph44585 on D330-44585-7600 with DISTILLER57319.479
598 


ph44585 on D330-44585-7600 with DISTILLER57319.480
599 


ph44585 on D330-44585-7600 with DISTILLER57319.481
600 


ph44585 on D330-44585-7600 with DISTILLER57319.482
601 


ph44585 on D330-44585-7600 with DISTILLER57319.483
602 


ph44585 on D330-44585-7600 with DISTILLER57319.484
603 


ph44585 on D330-44585-7600 with DISTILLER57319.485
604 


ph44585 on D330-44585-7600 with DISTILLER57319.486
605 


ph44585 on D330-44585-7600 with DISTILLER57319.487
606 


ph44585 on D330-44585-7600 with DISTILLER57319.488
607 


ph44585 on D330-44585-7600 with DISTILLER57319.489
608 


ph44585 on D330-44585-7600 with DISTILLER57319.490
609 


ph44585 on D330-44585-7600 with DISTILLER57319.491
610 


ph44585 on D330-44585-7600 with DISTILLER57319.492
611 


ph44585 on D330-44585-7600 with DISTILLER57319.493
612 


ph44585 on D330-44585-7600 with DISTILLER57319.494
613 


ph44585 on D330-44585-7600 with DISTILLER57319.495
614 


ph44585 on D330-44585-7600 with DISTILLER57319.496
615 


ph44585 on D330-44585-7600 with DISTILLER57319.497
616 


ph44585 on D330-44585-7600 with DISTILLER57319.498
617 


ph44585 on D330-44585-7600 with DISTILLER57319.499
618 


ph44585 on D330-44585-7600 with DISTILLER57319.500
619 


ph44585 on D330-44585-7600 with DISTILLER57319.501
620 


ph44585 on D330-44585-7600 with DISTILLER57319.502
621 


ph44585 on D330-44585-7600 with DISTILLER57319.503
622 


ph44585 on D330-44585-7600 with DISTILLER57319.504
623 


ph44585 on D330-44585-7600 with DISTILLER57319.505
624 


ph44585 on D330-44585-7600 with DISTILLER57319.506
625 


ph44585 on D330-44585-7600 with DISTILLER57319.507
626 


ph44585 on D330-44585-7600 with DISTILLER57319.508
627 


ph44585 on D330-44585-7600 with DISTILLER57319.509
628 


ph44585 on D330-44585-7600 with DISTILLER57319.510
629 


ph44585 on D330-44585-7600 with DISTILLER57319.511
630 


ph44585 on D330-44585-7600 with DISTILLER57319.512
631 


ph44585 on D330-44585-7600 with DISTILLER57319.513
632 


ph44585 on D330-44585-7600 with DISTILLER57319.514
633 


ph44585 on D330-44585-7600 with DISTILLER57319.515
634 


ph44585 on D330-44585-7600 with DISTILLER57319.516
635 


ph44585 on D330-44585-7600 with DISTILLER57319.517
636 


ph44585 on D330-44585-7600 with DISTILLER57319.518
637 


ph44585 on D330-44585-7600 with DISTILLER57319.519
638 


ph44585 on D330-44585-7600 with DISTILLER57319.520
639 


ph44585 on D330-44585-7600 with DISTILLER57319.521
640 


ph44585 on D330-44585-7600 with DISTILLER57319.522
641 


ph44585 on D330-44585-7600 with DISTILLER57319.523
642 


ph44585 on D330-44585-7600 with DISTILLER57319.524
643 


ph44585 on D330-44585-7600 with DISTILLER57319.525
644 


ph44585 on D330-44585-7600 with DISTILLER57319.526
645 


ph44585 on D330-44585-7600 with DISTILLER57319.527
646 


ph44585 on D330-44585-7600 with DISTILLER57319.528
647 


ph44585 on D330-44585-7600 with DISTILLER57319.529
648 


ph44585 on D330-44585-7600 with DISTILLER57319.530
649 


ph44585 on D330-44585-7600 with DISTILLER57319.531
650 


ph44585 on D330-44585-7600 with DISTILLER57319.532
651 


ph44585 on D330-44585-7600 with DISTILLER57319.533
652 


ph44585 on D330-44585-7600 with DISTILLER57319.534
653 


ph44585 on D330-44585-7600 with DISTILLER57319.535
654 


ph44585 on D330-44585-7600 with DISTILLER57319.536
655 


ph44585 on D330-44585-7600 with DISTILLER57319.537
656 


ph44585 on D330-44585-7600 with DISTILLER57319.538
657 


ph44585 on D330-44585-7600 with DISTILLER57319.539
658 


ph44585 on D330-44585-7600 with DISTILLER57319.540
659 


ph44585 on D330-44585-7600 with DISTILLER57319.541
660 


ph44585 on D330-44585-7600 with DISTILLER57319.542
661 


ph44585 on D330-44585-7600 with DISTILLER57319.543
662 


ph44585 on D330-44585-7600 with DISTILLER57319.544
663 


ph44585 on D330-44585-7600 with DISTILLER57319.545
664 


ph44585 on D330-44585-7600 with DISTILLER57319.546
665 


ph44585 on D330-44585-7600 with DISTILLER57319.547
666 


ph44585 on D330-44585-7600 with DISTILLER57319.548
667 


ph44585 on D330-44585-7600 with DISTILLER57319.549
668 


ph44585 on D330-44585-7600 with DISTILLER57319.550
669 


ph44585 on D330-44585-7600 with DISTILLER57319.551
670 


ph44585 on D330-44585-7600 with DISTILLER57319.552
671 


ph44585 on D330-44585-7600 with DISTILLER57319.553
672 


ph44585 on D330-44585-7600 with DISTILLER57319.554
673 


ph44585 on D330-44585-7600 with DISTILLER57319.555
674 


ph44585 on D330-44585-7600 with DISTILLER57319.556
675 


ph44585 on D330-44585-7600 with DISTILLER57319.557
676 


ph44585 on D330-44585-7600 with DISTILLER57319.558
677 


ph44585 on D330-44585-7600 with DISTILLER57319.559
678 


ph44585 on D330-44585-7600 with DISTILLER57319.560
679 


ph44585 on D330-44585-7600 with DISTILLER57319.561
680 


ph44585 on D330-44585-7600 with DISTILLER57319.562
681 


ph44585 on D330-44585-7600 with DISTILLER57319.563
682 


ph44585 on D330-44585-7600 with DISTILLER57319.564
683 


ph44585 on D330-44585-7600 with DISTILLER57319.565
684 


ph44585 on D330-44585-7600 with DISTILLER57319.566
685 


ph44585 on D330-44585-7600 with DISTILLER57319.567
686 


ph44585 on D330-44585-7600 with DISTILLER57319.568
687 


ph44585 on D330-44585-7600 with DISTILLER57319.569
688 


ph44585 on D330-44585-7600 with DISTILLER57319.570
689 


ph44585 on D330-44585-7600 with DISTILLER57319.571
690 


ph44585 on D330-44585-7600 with DISTILLER57319.572
691 


ph44585 on D330-44585-7600 with DISTILLER57319.573
692 


ph44585 on D330-44585-7600 with DISTILLER57319.574
693 


ph44585 on D330-44585-7600 with DISTILLER57319.575
694 


ph44585 on D330-44585-7600 with DISTILLER57319.576
695 


ph44585 on D330-44585-7600 with DISTILLER57319.577
696 


ph44585 on D330-44585-7600 with DISTILLER57319.578
697 


ph44585 on D330-44585-7600 with DISTILLER57319.579
698 


ph44585 on D330-44585-7600 with DISTILLER57319.580
699 


ph44585 on D330-44585-7600 with DISTILLER57319.581
700 


ph44585 on D330-44585-7600 with DISTILLER57319.582
701 


ph44585 on D330-44585-7600 with DISTILLER57319.583
702 


ph44585 on D330-44585-7600 with DISTILLER57319.584
703 


ph44585 on D330-44585-7600 with DISTILLER57319.585
704 


ph44585 on D330-44585-7600 with DISTILLER57319.586
705 


ph44585 on D330-44585-7600 with DISTILLER57319.587
706 


ph44585 on D330-44585-7600 with DISTILLER57319.588
707 


ph44585 on D330-44585-7600 with DISTILLER57319.589
708 


ph44585 on D330-44585-7600 with DISTILLER57319.590
709 


ph44585 on D330-44585-7600 with DISTILLER57319.591
710 


ph44585 on D330-44585-7600 with DISTILLER57319.592
711 


ph44585 on D330-44585-7600 with DISTILLER57319.593
712 


ph44585 on D330-44585-7600 with DISTILLER57319.594
713 


ph44585 on D330-44585-7600 with DISTILLER57319.595
714 


ph44585 on D330-44585-7600 with DISTILLER57319.596
715 


ph44585 on D330-44585-7600 with DISTILLER57319.597
716 


ph44585 on D330-44585-7600 with DISTILLER57319.598
717 


ph44585 on D330-44585-7600 with DISTILLER57319.599
718 


ph44585 on D330-44585-7600 with DISTILLER57319.600
719 


ph44585 on D330-44585-7600 with DISTILLER57319.601
720 


ph44585 on D330-44585-7600 with DISTILLER57319.602
721 


ph44585 on D330-44585-7600 with DISTILLER57319.603
722 


ph44585 on D330-44585-7600 with DISTILLER57319.604
723 


ph44585 on D330-44585-7600 with DISTILLER57319.605
724 


ph44585 on D330-44585-7600 with DISTILLER57319.606
725 


ph44585 on D330-44585-7600 with DISTILLER57319.607
726 


ph44585 on D330-44585-7600 with DISTILLER57319.608
727 


ph44585 on D330-44585-7600 with DISTILLER57319.609
728 


ph44585 on D330-44585-7600 with DISTILLER57319.610
729 


ph44585 on D330-44585-7600 with DISTILLER57319.611
730 


ph44585 on D330-44585-7600 with DISTILLER57319.612
731 


ph44585 on D330-44585-7600 with DISTILLER57319.613
732 


ph44585 on D330-44585-7600 with DISTILLER57319.614
733 


ph44585 on D330-44585-7600 with DISTILLER57319.615
734 


ph44585 on D330-44585-7600 with DISTILLER57319.616
735 


ph44585 on D330-44585-7600 with DISTILLER57319.617
736 


ph44585 on D330-44585-7600 with DISTILLER57319.618
737 


ph44585 on D330-44585-7600 with DISTILLER57319.619
738 


ph44585 on D330-44585-7600 with DISTILLER57319.620
739 


ph44585 on D330-44585-7600 with DISTILLER57319.621
740 


ph44585 on D330-44585-7600 with DISTILLER57319.622
741 


ph44585 on D330-44585-7600 with DISTILLER57319.623
742 


ph44585 on D330-44585-7600 with DISTILLER57319.624
743 


ph44585 on D330-44585-7600 with DISTILLER57319.625
744 


ph44585 on D330-44585-7600 with DISTILLER57319.626
745 


ph44585 on D330-44585-7600 with DISTILLER57319.627
746 


ph44585 on D330-44585-7600 with DISTILLER57319.628
747 


ph44585 on D330-44585-7600 with DISTILLER57319.629
748 


ph44585 on D330-44585-7600 with DISTILLER57319.630
749 


ph44585 on D330-44585-7600 with DISTILLER57319.631
750 


ph44585 on D330-44585-7600 with DISTILLER57319.632
751 


ph44585 on D330-44585-7600 with DISTILLER57319.633
752 


ph44585 on D330-44585-7600 with DISTILLER57319.634
753 


ph44585 on D330-44585-7600 with DISTILLER57319.635
754 


ph44585 on D330-44585-7600 with DISTILLER57319.636
755 


ph44585 on D330-44585-7600 with DISTILLER57319.637
756 


ph44585 on D330-44585-7600 with DISTILLER57319.638
757 


ph44585 on D330-44585-7600 with DISTILLER57319.639
758 


ph44585 on D330-44585-7600 with DISTILLER57319.640
759 


ph44585 on D330-44585-7600 with DISTILLER57319.641
760 


ph44585 on D330-44585-7600 with DISTILLER57319.642
761 


ph44585 on D330-44585-7600 with DISTILLER57319.643
762 


ph44585 on D330-44585-7600 with DISTILLER57319.644
763 


ph44585 on D330-44585-7600 with DISTILLER57319.645
764 


ph44585 on D330-44585-7600 with DISTILLER57319.646
765 


ph44585 on D330-44585-7600 with DISTILLER57319.647
766 


ph44585 on D330-44585-7600 with DISTILLER57319.648
767 


ph44585 on D330-44585-7600 with DISTILLER57319.649
768 


ph44585 on D330-44585-7600 with DISTILLER57319.650
769 


ph44585 on D330-44585-7600 with DISTILLER57319.651
770 


ph44585 on D330-44585-7600 with DISTILLER57319.652
771 


ph44585 on D330-44585-7600 with DISTILLER57319.653
772 


ph44585 on D330-44585-7600 with DISTILLER57319.654
773 


ph44585 on D330-44585-7600 with DISTILLER57319.655
774 


ph44585 on D330-44585-7600 with DISTILLER57319.656
775 


ph44585 on D330-44585-7600 with DISTILLER57319.657
776 


ph44585 on D330-44585-7600 with DISTILLER57319.658
777 


ph44585 on D330-44585-7600 with DISTILLER57319.659
778 


ph44585 on D330-44585-7600 with DISTILLER57319.660
779 


ph44585 on D330-44585-7600 with DISTILLER57319.661
780 


ph44585 on D330-44585-7600 with DISTILLER57319.662
781 


ph44585 on D330-44585-7600 with DISTILLER57319.663
782 


ph44585 on D330-44585-7600 with DISTILLER57319.664
783 


ph44585 on D330-44585-7600 with DISTILLER57319.665
784 


ph44585 on D330-44585-7600 with DISTILLER57319.666
785 


ph44585 on D330-44585-7600 with DISTILLER57319.667
786 


ph44585 on D330-44585-7600 with DISTILLER57319.668
787 


ph44585 on D330-44585-7600 with DISTILLER57319.669
788 


ph44585 on D330-44585-7600 with DISTILLER57319.670
789 


ph44585 on D330-44585-7600 with DISTILLER57319.671
790 


ph44585 on D330-44585-7600 with DISTILLER57319.672
791 


ph44585 on D330-44585-7600 with DISTILLER57319.673
792 


ph44585 on D330-44585-7600 with DISTILLER57319.674
793 


ph44585 on D330-44585-7600 with DISTILLER57319.675
794 


ph44585 on D330-44585-7600 with DISTILLER57319.676
795 


ph44585 on D330-44585-7600 with DISTILLER57319.677
796 


ph44585 on D330-44585-7600 with DISTILLER57319.678
797 


ph44585 on D330-44585-7600 with DISTILLER57319.679
798 


ph44585 on D330-44585-7600 with DISTILLER57319.680
799 


ph44585 on D330-44585-7600 with DISTILLER57319.681
800 


ph44585 on D330-44585-7600 with DISTILLER57319.682
801 


ph44585 on D330-44585-7600 with DISTILLER57319.683
802 


ph44585 on D330-44585-7600 with DISTILLER57319.684
803 


ph44585 on D330-44585-7600 with DISTILLER57319.685
804 


ph44585 on D330-44585-7600 with DISTILLER57319.686
805 


ph44585 on D330-44585-7600 with DISTILLER57319.687
806 


ph44585 on D330-44585-7600 with DISTILLER57319.688
807 


ph44585 on D330-44585-7600 with DISTILLER57319.689
808 


ph44585 on D330-44585-7600 with DISTILLER57319.690
809 


ph44585 on D330-44585-7600 with DISTILLER57319.691
810 


ph44585 on D330-44585-7600 with DISTILLER57319.692
811 


ph44585 on D330-44585-7600 with DISTILLER57319.693
812 


ph44585 on D330-44585-7600 with DISTILLER57319.694
813 


ph44585 on D330-44585-7600 with DISTILLER57319.695
814 


ph44585 on D330-44585-7600 with DISTILLER57319.696
815 


ph44585 on D330-44585-7600 with DISTILLER57319.697
816 


ph44585 on D330-44585-7600 with DISTILLER57319.698
817 


ph44585 on D330-44585-7600 with DISTILLER57319.699
818 


ph44585 on D330-44585-7600 with DISTILLER57319.700
819 


ph44585 on D330-44585-7600 with DISTILLER57319.701
820 


ph44585 on D330-44585-7600 with DISTILLER57319.702
821 


ph44585 on D330-44585-7600 with DISTILLER57319.703
822 


ph44585 on D330-44585-7600 with DISTILLER57319.704
823 


ph44585 on D330-44585-7600 with DISTILLER57319.705
824 


ph44585 on D330-44585-7600 with DISTILLER57319.706
825 


ph44585 on D330-44585-7600 with DISTILLER57319.707
826 


ph44585 on D330-44585-7600 with DISTILLER57319.708
827 


ph44585 on D330-44585-7600 with DISTILLER57319.709
828 


ph44585 on D330-44585-7600 with DISTILLER57319.710
829 


ph44585 on D330-44585-7600 with DISTILLER57319.711
830 


ph44585 on D330-44585-7600 with DISTILLER57319.712
831 


ph44585 on D330-44585-7600 with DISTILLER57319.713
832 


ph44585 on D330-44585-7600 with DISTILLER57319.714
833 


ph44585 on D330-44585-7600 with DISTILLER57319.715
834 


ph44585 on D330-44585-7600 with DISTILLER57319.716
835 


ph44585 on D330-44585-7600 with DISTILLER57319.717
836 


ph44585 on D330-44585-7600 with DISTILLER57319.718
837 


ph44585 on D330-44585-7600 with DISTILLER57319.719
838 


ph44585 on D330-44585-7600 with DISTILLER57319.720
839 


ph44585 on D330-44585-7600 with DISTILLER57319.721
840 


ph44585 on D330-44585-7600 with DISTILLER57319.722
841 


ph44585 on D330-44585-7600 with DISTILLER57319.723
842 


ph44585 on D330-44585-7600 with DISTILLER57319.724
843 


ph44585 on D330-44585-7600 with DISTILLER57319.725
844 


ph44585 on D330-44585-7600 with DISTILLER57319.726
845 


ph44585 on D330-44585-7600 with DISTILLER57319.727
846 


ph44585 on D330-44585-7600 with DISTILLER57319.728
847 


ph44585 on D330-44585-7600 with DISTILLER57319.729
848 


ph44585 on D330-44585-7600 with DISTILLER57319.730
849 


ph44585 on D330-44585-7600 with DISTILLER57319.731
850 


ph44585 on D330-44585-7600 with DISTILLER57319.732
851 


ph44585 on D330-44585-7600 with DISTILLER57319.733
852 


ph44585 on D330-44585-7600 with DISTILLER57319.734
853 


ph44585 on D330-44585-7600 with DISTILLER57319.735
854 


ph44585 on D330-44585-7600 with DISTILLER57319.736
855 


ph44585 on D330-44585-7600 with DISTILLER57319.737
856 


ph44585 on D330-44585-7600 with DISTILLER57319.738
857 


ph44585 on D330-44585-7600 with DISTILLER57319.739
858 


ph44585 on D330-44585-7600 with DISTILLER57319.740
859 


ph44585 on D330-44585-7600 with DISTILLER57319.741
860 


ph44585 on D330-44585-7600 with DISTILLER57319.742
861 


ph44585 on D330-44585-7600 with DISTILLER57319.743
862 


ph44585 on D330-44585-7600 with DISTILLER57319.744
863 


ph44585 on D330-44585-7600 with DISTILLER57319.745
864 


ph44585 on D330-44585-7600 with DISTILLER57319.746
865 


ph44585 on D330-44585-7600 with DISTILLER57319.747
866 


ph44585 on D330-44585-7600 with DISTILLER57319.748
867 


ph44585 on D330-44585-7600 with DISTILLER57319.749
868 


ph44585 on D330-44585-7600 with DISTILLER57319.750
869 


ph44585 on D330-44585-7600 with DISTILLER57319.751
870 


ph44585 on D330-44585-7600 with DISTILLER57319.752
871 


ph44585 on D330-44585-7600 with DISTILLER57319.753
872 


ph44585 on D330-44585-7600 with DISTILLER57319.754
873 


ph44585 on D330-44585-7600 with DISTILLER57319.755
874 


ph44585 on D330-44585-7600 with DISTILLER57319.756
875 


ph44585 on D330-44585-7600 with DISTILLER57319.757
876 


ph44585 on D330-44585-7600 with DISTILLER57319.758
877 


ph44585 on D330-44585-7600 with DISTILLER57319.759
878 


ph44585 on D330-44585-7600 with DISTILLER57319.760
879 


ph44585 on D330-44585-7600 with DISTILLER57319.761
880 


ph44585 on D330-44585-7600 with DISTILLER57319.762
881 


ph44585 on D330-44585-7600 with DISTILLER57319.763
882 


ph44585 on D330-44585-7600 with DISTILLER57319.764
883 


ph44585 on D330-44585-7600 with DISTILLER57319.765
884 


ph44585 on D330-44585-7600 with DISTILLER57319.766
885 


ph44585 on D330-44585-7600 with DISTILLER57319.767
886 


ph44585 on D330-44585-7600 with DISTILLER57319.768
887 


ph44585 on D330-44585-7600 with DISTILLER57319.769
888 


ph44585 on D330-44585-7600 with DISTILLER57319.770
889 


ph44585 on D330-44585-7600 with DISTILLER57319.771
890 


ph44585 on D330-44585-7600 with DISTILLER57319.772
891 


ph44585 on D330-44585-7600 with DISTILLER57319.773
892 


ph44585 on D330-44585-7600 with DISTILLER57319.774
893 


ph44585 on D330-44585-7600 with DISTILLER57319.775
894 


ph44585 on D330-44585-7600 with DISTILLER57319.776
895 


ph44585 on D330-44585-7600 with DISTILLER57319.777
896 


ph44585 on D330-44585-7600 with DISTILLER57319.778
897 


ph44585 on D330-44585-7600 with DISTILLER57319.779
898 


ph44585 on D330-44585-7600 with DISTILLER57319.780
899 


ph44585 on D330-44585-7600 with DISTILLER57319.781
900 


ph44585 on D330-44585-7600 with DISTILLER57319.782
901 


ph44585 on D330-44585-7600 with DISTILLER57319.783
902 


ph44585 on D330-44585-7600 with DISTILLER57319.784
903 


ph44585 on D330-44585-7600 with DISTILLER57319.785
904 


ph44585 on D330-44585-7600 with DISTILLER57319.786
905 


ph44585 on D330-44585-7600 with DISTILLER57319.787
906 


ph44585 on D330-44585-7600 with DISTILLER57319.788
907 


ph44585 on D330-44585-7600 with DISTILLER57319.789
908 


ph44585 on D330-44585-7600 with DISTILLER57319.790
909 


ph44585 on D330-44585-7600 with DISTILLER57319.791
910 


ph44585 on D330-44585-7600 with DISTILLER57319.792
911 


ph44585 on D330-44585-7600 with DISTILLER57319.793
912 


ph44585 on D330-44585-7600 with DISTILLER57319.794
913 


ph44585 on D330-44585-7600 with DISTILLER57319.795
914 


ph44585 on D330-44585-7600 with DISTILLER57319.796
915 


ph44585 on D330-44585-7600 with DISTILLER57319.797
916 


ph44585 on D330-44585-7600 with DISTILLER57319.798
917 


ph44585 on D330-44585-7600 with DISTILLER57319.799
918 


ph44585 on D330-44585-7600 with DISTILLER57319.800
919 


ph44585 on D330-44585-7600 with DISTILLER57319.801
920 


ph44585 on D330-44585-7600 with DISTILLER57319.802
921 


ph44585 on D330-44585-7600 with DISTILLER57319.803
922 


ph44585 on D330-44585-7600 with DISTILLER57319.804
923 

Æ 


ph44585 on D330-44585-7600 with DISTILLER57319.805