Destructive Compensation Practices

Destructive Compensation Practices

¶Washington Mutual and Long Beach's compensation practices contributed to and deepened its high risk lending practices. Loan officers and processors were paid primarily on volume, not primarily on the quality of their loans, and were paid more for issuing higher risk loans. Loan officers and mortgage brokers were also paid more when they got borrowers to pay higher interest rates, even if the borrower qualified for a lower rate – a practice that enriched WaMu in the short term, but made defaults more likely down the road. Troubling compensation practices went right to the top. In 2008, when he was asked to leave the bank that failed under his management, CEO Kerry Killinger received a severance payment of $15 million.⁵³²⁵³² See "Washington Mutual CEO Kerry Killinger: $100 Million in Compensation, 2003-2008," chart prepared by the Subcommittee, Hearing Exhibit 4/13-1h.

¶(1) Sales Culture

¶WaMu's compensation policies were rooted in the bank culture that put loan sales ahead of loan quality. As early as 2004, OTS expressed concern about WaMu's sales culture: "The overt causes for past underwriting concerns were many, but included: (1) A sales culture focused heavily on market share via loan production, (2) extremely high lending volumes."⁵³³⁵³³ 5/12/2004 OTS Safety & Soundness Examination Memo 5, "SFR Loan Origination Quality," at 1, Hearing Exhibit 4/16-17. In early 2005, WaMu's Chief Credit Officer complained to Mr. Rotella that: "[a]ny attempts to enforce [a] more disciplined underwriting approach were continuously thwarted by an aggressive, and often times abusive group of Sales employees within the organization."⁵³⁴⁵³⁴ Undated draft WaMu memorandum, "Historical Perspective HL – Underwriting: Providing a Context for Current Conditions, and Future Opportunities," JPM_WM00783315 (a legal pleading states this draft memorandum was prepared for Mr. Rotella by WaMu's Chief Credit Officer in or about February or March 2005; FDIC v. Killinger, Case No. 2:2011cv00459 (W.D. Wash.), Complaint (March 16, 2011), at ¶ 35). The aggressiveness of the sales team toward underwriters was, in his words, "infectious and dangerous."⁵³⁵⁵³⁵ Undated draft WaMu memorandum, "Historical Perspective HL – Underwriting: Providing a Context for Current Conditions, and Future Opportunities," JPM_WM00783315, at JPM_WM00783322.

¶In late 2006, as home mortgage delinquency rates began to accelerate and threaten the viability of WaMu's High Risk Lending Strategy, Home Loans President David Schneider presided over a "town hall" meeting to rally thousands of Seattle based employees of the WaMu Home Loans Group.⁵³⁶⁵³⁶ Mr. Schneider told the Subcommittee that this meeting was held in early 2007, but Ms. Feltgen's end of 2006 email to her staff quotes Mr. Schneider's language from this presentation. 1/3/2007 email from Ron Cathcart to Cheryl Feltgen, Hearing Exhibit 4/13-73. At the meeting, Mr. Schneider made a presentation, not just to WaMu's sales force, but also to the thousands of risk management, finance, and technology staff in attendance.⁵³⁷⁵³⁷ Subcommittee interview of David Schneider (2/17/2010). The title and theme of his presentation was: "Be Bold."⁵³⁸⁵³⁸ "Way2Go, Be Bold!," WaMu presentation prepared by David Schneider, Home Loans President, at 28, Hearing Exhibit 4/13-4. One slide demonstrates the importance and pervasiveness of the sales culture at WaMu:⁵³⁹⁵³⁹ Id. at 30 [recreated by the Subcommittee staff from an image].

¶When asked about this presentation, Mr. Schneider told the Subcommittee it was an appropriate message, even for WaMu's risk managers.⁵⁴⁰⁵⁴⁰ Subcommittee interview of David Schneider (2/17/2010).

¶The sales culture was also promoted through WaMu's "President's Club," which sponsored an annual all-expense-paid gala and retreat in an exotic locale, such as Hawaii or the Bahamas, where the top producing loan officers were feted and lavished with gifts and plaudits.⁵⁴¹⁵⁴¹ Subcommittee interviews of Brian Minkow (2/16/2010), David Schneider (2/17/2010), and Kerry Killinger (2/5/2010). Only a limited number of top producing loan officers were made members of the club, and the President's Club trips were used to incentivize sales volume. Loan officers were encouraged to look up their sales rankings on the company's intranet to see if they would qualify for a trip.

¶In November 2006, as subprime mortgages began to incur delinquencies, Mr. Schneider sent a letter about the President's Club to WaMu loan consultants. Under a photo of the Grand Hyatt Kauai in Hawaii and the banner headline, "President's Club – Take the Lead!," Mr. Schneider wrote:

"I attended WaMu's President's Club last year for the first time and had an awesome time getting to know the stars of our sales force. You work hard, but you know how to have a good time too ….

"At the first-class awards dinner, I looked around the room and felt honored to be with so many talented people. Congratulations to those of you who were repeat President's Club honorees. Of those of you who have not yet reached the President's Club, I want each and every one of you to believe you have the potential to achieve this great reward. "Now is the time to really kick it into high gear and drive for attending this awesome event! Rankings are updated and posted monthly on the DashBoards (under reports) and on WaMu.net: President's Club Rankings. Where do you rank? What can you do to take your business [to] the next level? Your management team is here to help."⁵⁴²⁵⁴² 11/2006 "President's Club - Take the Lead!," WaMu Home Loans flier, Hearing Exhibit 4/13-62.

¶At the April 13 Subcommittee hearing, Mr. Schneider testified:

"As housing 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. ... During my time at WaMu, we reduced and then entirely stopped making Alt A loans and Option ARM loans."⁵⁴³⁵⁴³ Prepared statement of David Schneider, April 13, 2010 Subcommittee Hearing.

¶However, his November 2006 letter to WaMu loan consultants showed no reticence about the High Risk Lending Strategy. The letter went on to say:

"As you know, growth is a key area of focus for WaMu and Home Loans. I am extremely proud of the achievements in Production so far this year – and I know it's been tough. I'm especially pleased with your ability to change with the market and responsibly sell more higher-margin products – Option ARM, Home Equity, Non-prime, and Alt A. I also know that you – truly the best sales team in the industry – are up to the challenge of doing even more by year end. ...

¶"I hope to see you in Kauai!"⁵⁴⁴⁵⁴⁴ 11/2006 "President's Club - Take the Lead!," WaMu Home Loans flier, Hearing Exhibit 4/13-62.

¶The 2005 President's Club retreat had taken place in Maui. The awards night was hosted by Magic Johnson. An excerpt of the script from the evening gives a sense of the proceedings:

"VOICE-OVER ANNOUNCER

Good evening ladies and gentleman and welcome to your President's Club 2005 Awards Night program!

Please welcome the host of President's Club, the President of the Washington Mutual Home Loans Group, Mr. David Schneider!