The Next Dominoes

On Sunday, September 7, Washington Mutual’s board ousted Killinger, who had served as CEO for 18 years, and named a New York banker, Alan Fishman, to succeed him. The announcement came two months after the board stripped Killinger of his chairman title and amid vocal shareholder unrest at WaMu’s plunging share price. Many thought the move came too late.

The next day, Fishman flew to Seattle to rally management, according to several former WaMu executives. According to one executive, Fishman came on board with the intent of “evaluating the team and evaluating the strategy.” But he soon learned that WaMu might be past the point of saving itself, according to executives who were there at the time.

In addition, within days the FDIC gave him a deadline: Find a buyer for the ailing bank by September 30, the end of the third quarter, according to a high-level executive familiar with the FDIC’s actions. Fishman and several other WaMu executives quickly flew to New York City to begin trying to sell WaMu.

On September 11, Moody’s issued its rating: It downgraded WaMu’s debt to junk status, rated the company’s financial strength at D+ and issued a negative outlook on the company, citing its asset quality and the potential for future losses. Freilinger, WaMu’s assistant treasurer, fielded the call from Emrick, and had the thankless task of checking the accuracy of Moody’s forthcoming press release. Freilinger’s heart sank. “No bank of our size anywhere in the world survives without an investment grade rating,” he recently said.

The downgrade roared across the country. WaMu customers, reminded once again that their money might not be safe, pulled $600 million out of WaMu that day. “That’s when we thought, ‘Oh, crap, here we go again,’” said one WaMu manager who monitored deposits.

Soon, other rating agencies followed suit, sparking another massive bank run that would ultimately become the reason FDIC officials gave for closing WaMu.

In the next three days, customers pulled another $2.3 billion out of WaMu. On Tuesday, September 16, Fishman, the bank’s new chief executive, flew from New York City to Washington, D.C. He had a morning meeting with OTS Director John Reich, WaMu’s chief regulator, and OTS deputy director Scott Polakoff.

Fishman Meets Bair

Fishman wanted to brief the regulators on WaMu’s efforts to find a buyer and to give an update on the bank’s liquidity position, according to people familiar with the meetings. By then, WaMu’s regulators were watching the bank more closely than they ever had before, and were receiving deposit reports daily—sometimes several times a day. That day, customers pulled out another $2.4 billion.

At the meeting, Fishman said he had approached Wells Fargo, JPMorgan Chase and Citigroup, according to several high-level WaMu executives. All three banks declined comment for this story.

“We’d been talking to a number of banks, some had kind of fallen off the plate and some were still plausible as potential acquirees, but it was going to require some time,” one high-level executive told the Business Journal.

Reich and Polakoff encouraged WaMu executives to keep pursuing potential suitors as well as follow up on efforts to raise more capital, according to executives familiar with the meeting.

After the meeting ended, Fishman and John Robinson, in charge of WaMu’s regulatory relations, walked the block and a half to the FDIC’s headquarters, near the White House, for a brief meeting with FDIC Chairman Sheila Bair. Bair doesn’t typically get involved in the details of bank closures, said David Barr, a spokesman for the FDIC. But, “a Washington Mutual doesn’t come around but once every 75 years.”

For his part, Fishman wanted to find out more about the September 30 sale deadline the FDIC had imposed several days earlier: What would happen if WaMu failed to find a buyer or raise additional capital by that time?

Bair told Fishman and Robinson that if WaMu was unable to sell the bank by the end of September it would be placed on the FDIC’s list of “troubled banks,” according to people familiar with the meeting. The list is like a scarlet letter: While it leaves out a financial institution’s name, WaMu’s asset size would clearly identify it in the financial community. The placement would damage the bank’s reputation far more than even rating-agency downgrades or the persistent news reports, according to several people familiar with the meeting. The list was scheduled to come out in less than a month.

The message to WaMu executives in that half-hour meeting was clear: Sell the bank, and fast.

“If WaMu had gone on the list, it would have been obvious to everybody that WaMu was being characterized as a troubled bank and that could have precipitated an additional run on the bank,” said one high-level executive familiar with the meeting.

Bair also told Fishman another intriguing piece of information: She said more than one bank had called the FDIC to ask whether there would be an opportunity to buy WaMu as a distressed asset, according to people familiar with the meeting. In other words, was the government planning to seize and sell the bank? If so, potential buyers would rather wait, for the price was sure to be lower in a government sale.

Bair said she had directed those banks to contact Fishman. The executives left the meeting believing the FDIC was indeed helping WaMu find a buyer. Yet in less than a week, regulators would seize the bank and sell it for less than a quarter of the $8 billion that JPMorgan Chase had previously offered.

What Bair might have said to the banks remains unclear, and is likely to be a focus of at least some of the ongoing investigations. Bair declined repeated requests to be interviewed about her role and decisions. The FDIC released Bair’s emails regarding WaMu. They were almost completely redacted.

Within days, JPMorgan Chase, Wells Fargo and Citibank stopped poring over WaMu’s books.