WaMu's Killinger: The forgotten goat

(Fortune) -- Kerry Killinger, the forgotten villain of the financial crisis, finally has his appointment to get fitted for goat's horns.

The former Washington Mutual CEO testified Tuesday afternoon before the Senate Permanent Subcommittee on Investigations. Killinger ran the Seattle-based thrift for 18 years until he was forced out just weeks before WaMu was seized by regulators in the biggest U.S. bank failure.

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Killinger complained in testimony Tuesday that the bank was "unfairly" seized. In an apparent bid to cash in on bubbling anti-Wall Street sentiment, he claimed WaMu was done in not by a massive leveraged bet on house prices but by regulators looking out for their buddies at the big banks.

A report issued Tuesday by Sen. Carl Levin, the Michigan Democrat who chairs the investigations panel, offers a reminder that Washington Mutual was a hotbed of shoddy underwriting, mortgage fraud and supercharged pay.

Killinger took home more than $100 million between 2003 and 2008, even as his policies were sowing the seeds for investors in the bank to be wiped out.

Not that you'd know any of this to read popular accounts of the crisis, which understandably tend to focus on a rogues gallery populated by former Lehman Brothers CEO Dick Fuld and onetime Countrywide chief Angelo Mozilo.

Nor would you know there had been problems at WaMu by perusing Killinger's prepared testimony, which is full of indirection, half-truths and nonsense.

For instance, Killinger sees in WaMu's September 2008 seizure a conspiracy protecting the biggest banks -- those who were "too clubby to fail" -- at the expense of all the others.

The FDIC brokered a deal to sell most of WaMu's assets to JPMorgan Chase (JPM, Fortune 500), and officials have said they seized WaMu because depositors were fleeing. That account is certainly plausible, given that Lehman went bankrupt just 10 days earlier. But even if you buy Killinger's clubbiness claim, his attempt to present himself as the great protector of the consumer beggars the imagination.

"In my view, the actions taken by policymakers reflect a vision of a banking industry dominated by large Wall Street banks," Killinger said in his prepared remarks. "I fear that consumers will ultimately pay the price of this vision through less competition, higher fees, and lower interest rates on their deposits."

Of course, WaMu customers are no strangers to higher fees. Years before egregious overdraft fees hit the front page, WaMu was charging its users $28 overdraft fees. The bank reaped around $1 billion on those fees in 2003, according to a 2004 New York Times article.

Overdrafts weren't even WaMu's biggest excess. The firm was a big player in the financial industry's biggest swindle, making loans to people who couldn't afford to pay and then selling the loans off to investors at a profit.

The bank made eight times as much selling a subprime loan into the Wall Street securitization machine as it made selling a conventional fixed-rate loan, according to Levin.

Killinger contends Washington Mutual put on hold a planned expansion of subprime lending once it became clear the housing market was increasingly risky. The expansion plan, passed by the board in 2004, wasn't executed, Killinger said.

Yet as late as the fall of 2006, WaMu was telling Wall Street that it planned to shrink its holdings of plain vanilla loans and markedly expand its home equity and subprime portfolios, in a bid to boost returns.

Killinger told a Merrill Lynch conference in November 2006 that WaMu's strategy was "to target higher-margin products, such as home equity, option ARM's ... and sub-prime," because they "generate superior gain on sale in the secondary market."

Levin asked Killinger to explain the steep decline in the company's issuance of traditional, 30-year, fixed-rate mortgages, and an increase in its issuance of higher-risk loans such as home equity and subprime mortgages.

Levin said that contradicted Killinger's claim that the company didn't "execute" its strategy to expand its high-risk lending businesses.

But Killinger responded that the main reason WaMu's lower-risk loan portfolio was so high to begin with was that a refinancing boom in 2003 made it look unusually large that year.

And while Killinger insists he was bearish on housing by mid-decade, his case is undermined by easy comparisons. For instance, he says his view of the housing market "was more conservative than that of most economic forecasters at the time, including the chairman of the Federal Reserve."

That is, Alan Greenspan, the guy who in 2004 said Americans would benefit from more adjustable-rate mortgages.

Killinger certainly knows how to set the bar low.