WaMu's risky lending led to failure, regulators say

NEW YORK (CNNMoney.com) -- The demise of Washington Mutual, the biggest bank failure in U.S. history, was due largely to a high-risk lending strategy pursued by the company's management, according to a government report released Friday.

The Treasury Department and the Federal Deposit Insurance Corporation also faulted the Office of Trust Supervision (OTS) for failing to adequately curb WaMu's risky activities.

"WaMu failed primarily because of management's pursuit of a high-risk lending strategy that included liberal underwriting standards and inadequate risk controls," according to the report.

Regulators said that strategy, combined with the housing and mortgage market collapse in 2007, resulted in huge losses for WaMu, drove its stock price down and prompted a rush of withdrawals by jittery depositors.

As a result, the OTS closed WaMu and the FDIC arranged for JPMorgan Chase to buy it in a closed bank transaction in September 2008.

While the OTS had raised concerns about WaMu's risky lending practices, the report found that the agency did not act aggressively enough and relied too heavily on WaMu's internal efforts to tighten up lending standards.

"OTS's supervision did not adequately ensure that WaMu corrected those problems early enough to prevent a failure of the institution," the report said.

The report came days after Kerry Killinger, who ran the Seattle-based thrift for 18 years, told lawmakers that WaMu was "unfairly" seized.

In testimony before a Senate committee, Killinger argued that WaMu's failure was not due to the bank's involvement in the housing market. Instead, he claimed that WaMu's seizure was part of a conspiracy protecting the biggest banks -- those who were "too clubby to fail" -- at the expense of all the others.

"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."