Customer Satisfaction (Total HL) – 55%"

Customer Satisfaction (Total HL) – 55%"

¶By conditioning her evaluation on whether her division hit pre-determined sales figures, the performance evaluation made her compensation more dependent upon the Home Loans division hitting revenue growth and product sales than upon her contributions to risk management.

¶Further complicating matters were Ms. Feltgen's two supervisors. In an interview, Ms. Feltgen stated that Ron Cathcart, her supervisor on risk matters, was "not well respected" and did not have "a strong voice."⁴⁰⁴⁴⁰⁴ Subcommittee interview of Cheryl Feltgen (2/6/2010). On the other hand, she described David Schneider, her supervisor on loan origination matters, as having a strong voice and acting more as her boss. This arrangement again de-emphasized the importance of her risk duties.

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¶Ms. Feltgen's dedication to the growth of the Home Loans business is apparent in her communications with her staff. For example, on December 26, 2006, she sent a year-end email to her staff. Under the subject line, "Year-End 2006 Message for the Home Loans Risk Management Team," Ms. Feltgen wrote:

"As we approach the close of 2006, it is fitting to reflect on the challenges and accomplishments of this past year and to look forward to 2007 and beyond. Earlier this year David Schneider and the leadership team of Home Loans articulated a new business strategy that included: (1) a shift to higher margin products (Alt-A, subprime and home equity); (2) reducing market risk … and taking on more credit risk and (3) aggressively attacking the cost structure. We have made great strides as a business on all of those fronts and you have all been a part of those accomplishments. You have partnered successfully with the business units of Home Loans in pursuit of our collective goal to drive profitable growth with the right balance of risk and return."⁴⁰⁵⁴⁰⁵ 1/3/2007 email from Cheryl Feltgen, "Year-End 2006 Message for the Home Loans Risk Management Team," Hearing Exhibit 4/13-73.

¶The email continued with a list of "accomplishments of the Home Loans Risk Management Team in support of business goals," that included the following accomplishment: "Our appetite for credit risk was invigorated with the expansion of credit guidelines for various product segments including the 620 to 680 FICO, low docs and also for home equity."⁴⁰⁶⁴⁰⁶ Id. The email continued with Ms. Feltgen stating her commitment to the High Risk Lending Strategy and emphasizing revenue and sales despite an acknowledgement of the worsening condition of the mortgage market:

"The year 2007 will be another challenging year for the mortgage industry with mortgage origination volumes down, the inverted yield curve putting pressure on profitability and gain on sale margins at lower level than prior years. The focus on the three key elements of our 2006 strategy remains important: shift to higher margin products, reduce market risk and increase credit risk and attack the cost structure. … In 2007, we must find new ways to grow our revenue. Home Loans Risk Management has an important role to play in that effort.

David Schneider has encouraged us to 'BE BOLD'…. Recognize that 'we are all in sales' passionately focused on delivering great products and service to our customers."⁴⁰⁷⁴⁰⁷ Id.

¶Ms. Feltgen's year-end bonus was based upon her performance review.⁴⁰⁸⁴⁰⁸ Subcommittee Interview of Ronald Cathcart (2/23/2010). According to Mr. Cathcart, in 2007, the bank made bonus distributions more dependent on the performance of each business line, rather than the performance of the bank as a whole, which largely removed his control over compensation of his risk managers. Mr. Cathcart told the Subcommittee that he disagreed with this change because it made his risk managers, who reported to him and to the heads of the business units, more beholden to the business heads. Mr. Cathcart said he approached the head of Human Resources, and strongly objected to the change, but was told to take it up with Mr. Killinger. Mr. Cathcart told the Subcommittee that he voiced his objection to Mr. Killinger, but Mr. Killinger told him to talk to Mr. Rotella. He said that he took his objection to Mr. Rotella, but was unsuccessful at preventing the policy change.

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¶Mr. Cathcart told the Subcommittee that this change created further separation between him and his risk managers, and compromised the independence of risk management.⁴⁰⁹⁴⁰⁹ Id. He testified at the Subcommittee hearing:

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 to 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.⁴¹⁰⁴¹⁰ April 13, 2010 Subcommittee Hearing at 34.

¶The subordination of risk management to sales was apparent at WaMu in many other ways as well. Tony Meola, the head of home loans sales, reported directly to David Schneider. He had direct access to Mr. Schneider and often pushed for more lenient lending standards. According to Ms. Feltgen, the sales people always wanted more lenient standards and more mortgage products, and Mr. Meola advocated for them.⁴¹¹⁴¹¹ Subcommittee Interview of Cheryl Feltgen (2/6/2010).

¶One example was the 80/20 loan, which consisted of a package of two loans issued together, an 80% LTV first lien and a 20% LTV second lien, for a total CLTV of 100%. Ms. Feltgen said she was nervous about the product, as a 100% CLTV was obviously very risky. WaMu's automatic underwriting system was not set up to accept such loans, but Mr. Meola wanted permission to "side step" the systems issue.⁴¹²⁴¹² See 2/2006 WaMu internal email chain, "FW: 80/20," JPM_WM03960778. Mr. Schneider approved the product, and Ms. Feltgen ultimately signed off on it. She told the Subcommittee that it was a high risk product, but was priced accordingly, and that it might have been successful if housing prices had not declined.⁴¹³⁴¹³ Subcommittee Interview of Cheryl Feltgen (2/6/2010). See also 2/2006 WaMu internal email chain, "FW: 80/20," JPM_WM03960778.

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¶When the housing market began to collapse, a time in which prudent risk management became even more critical, Mr. Cathcart, the Chief Enterprise Risk Manager, was accorded even less deference and authority. Mr. Cathcart testified at the April 13 Subcommittee hearing:

"Financial conditions … 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."⁴¹⁴⁴¹⁴ April 13, 2010 Subcommittee Hearing at 19.

¶During his interview with the Subcommittee Mr. Cathcart provided additional details about his marginalization by senior management.⁴¹⁵⁴¹⁵ Subcommittee interview of Ronald Cathcart (2/23/2010). He said that he initially had extensive interaction with the WaMu Board of Directors and presented to the full Board every six months. According to Mr. Cathcart, he attended all of the Board meetings until the end of 2007 or the beginning of 2008, at which time he was no longer invited. Mr. Cathcart felt he was excluded from Board meetings and calls with investment bankers because he was forthright about WaMu's mortgage loss rates, whereas senior management used older, more favorable numbers. According to Mr. Cathcart, during one of the last Board meetings he attended, after a presentation on expected mortgage losses, he interjected that the loan loss data being presented were already out of date, and the real figures would be much worse. He also recalled speaking up in a 2007 conference call with investment bankers to correct an overly optimistic loss figure. According to Mr. Cathcart, he was chastised for his corrections by WaMu management and told to leave the credit discussions to another senior manager.

¶Mr. Cathcart told the Subcommittee that regulators were also given out-of-date loss projections as the situation worsened, because Mr. Killinger and Mr. Rotella wanted to prevent a negative reaction. Mr. Cathcart said that the loss rates were increasing every week, and the regulators were being provided with three-week old information. Mr. Cathcart told the Subcommittee that in February or March 2008, he discovered that Mr. Killinger had provided the Director of OTS, John Reich, with out-of-date loss rates. Mr. Cathcart said that he called a meeting with Mr. Dochow, head of the OTS West Regional Office, and provided him with the current numbers. Mr. Cathcart said that Mr. Killinger found out about the meeting and was upset. In April, Mr. Killinger fired Mr. Cathcart.

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