Kerry Killinger, who led the Seattle-based thrift, also argued that WaMu had adequate capital and shouldn't have been seized by the government and sold for a "bargain" price of $1.9 billion in September 2008. The bank "should have been given a chance to work its way through the crisis," Killinger testified at a hearing by a Senate panel.
The panel's 18-month investigation found that WaMu's lending operations were rife with fraud and that management failed to stem the deception despite internal probes.
Killinger rejected that conclusion. He argued that even before the crisis struck with force, the government treated WaMu unfairly. He noted it was excluded from a list of large financial firms whose stock couldn't be sold short under a temporary government ban in July 2008. In short-selling, traders bet a stock price will drop and use borrowed shares to profit from any decline.
"For those that were part of the inner circle and were 'too clubby to fail,' the benefits were obvious," Killinger said. "For those outside of the club, the penalty was severe."
Sen. Carl Levin, head of the panel investigating WaMu's failure, asked two other former senior executives why they failed to act when they were aware of loan fraud at the bank.
David Schneider headed WaMu's home loans division. And David Beck was in charge of selling mortgages packaged into securities to Wall Street investors.
"You knew all this," Levin told Beck. "You're telling us you didn't notify the investors" that loans with a high chance of default were being sold to them as securities, he said.
Beck replied that while he didn't notify the investors of problems with the loans, it's possible the loans weren't as risky as company officials had indicated in e-mails.
Two former chief risk officers of Washington Mutual said they tried to curb risky lending practices by the bank. But they said they met resistance from top management when they brought their concerns to them.
Fueled by the housing boom, Seattle-based Washington Mutual's sales to investors of packaged subprime mortgage securities leapt from $2.5 billion in 2000 to $29 billion in 2006. The 119-year-old thrift, with $307 billion in assets, failed in September 2008. It was sold for $1.9 billion to JPMorgan Chase & Co. in a deal brokered by the Federal Deposit Insurance Corp.
The former WaMu executives appeared before Congress for the first time since the bank's collapse.
As the housing bust deepened in late 2007 and early 2008, "I was increasingly excluded from senior executive meetings and meetings with financial advisers when the bank's response to the growing crisis was being discussed," Ronald Cathcart, who helped oversee risk until April 2008, testified at the hearing. By January 2008 he was "fully isolated" and was fired by Killinger a few months later, Cathcart said.
The other risk officer, James Vanasek, testified that he tried to limit loans to those who were unlikely to be able to repay and the number of loans made without verifying borrowers' income. But his efforts fell flat "without solid executive management support," Vanasek said.
Levin has said the panel won't decide until after the hearings on Tuesday and Friday whether to make a formal referral to the Justice Department for possible criminal prosecution. Justice, the FBI and the Securities and Exchange Commission opened investigations into Washington Mutual soon after its collapse.
In his testimony, Killinger said it was "unfair" that Washington Mutual didn't get the benefits of government actions that helped other financial institutions in the days of the crisis in the fall of 2008. He was referring to steps such as a doubling of the limit on deposit insurance to $250,000 and new federal guarantees for bank debt.
Between 2003 and 2007 under his tenure, WaMu cut in half its staff in the home loans division and sold 30 percent of its portfolio of loans, Killinger said in his testimony.
WaMu's pay system rewarded loan officers for the volume and speed of the subprime mortgage loans they closed on. Extra bonuses even went to loan officers who overcharged borrowers on their loans or levied stiff penalties for prepayment, according to a report released Tuesday by the Senate panel.
"Washington Mutual engaged in lending practices that created a mortgage time bomb," Levin said at the start of Tuesday's hearing. "WaMu built its conveyer belt of toxic mortgages to feed Wall Street's appetite for mortgage-backed securities. Because volume and speed were king, loan quality fell by the wayside."
The new report by the Senate investigators said the top WaMu producers, loan officers and sales executives who made high-risk loans or packaged them into securities for sale to Wall Street, were eligible for the bank's President's Club, with trips to swank resorts - like Maui in 2005.
WaMu was one of the biggest makers of so-called "option ARM" mortgages. They allowed borrowers to make payments so low that loan debt actually increased every month.
In some cases, sales associates in WaMu offices in California fabricated loan documents, cutting and pasting false names on borrowers' bank statements. The company's own probe in 2005, three years before the bank collapsed, found that two top producing offices - in Downey and Montebello, Calif. - had levels of fraud exceeding 58 percent and 83 percent of the loans. Employees violated the bank's policies on verifying borrowers' qualifications and reviewing loans.
In an episode in 2007, some of WaMu's mortgages were viewed as so suspect by American International Group Inc. that it refused to insure them and complained to both California and federal regulators, according to the Senate investigators. AIG itself nearly collapsed in the fall of 2008 and received about $180 billion in bailout aid from the government.
Washington Mutual was repeatedly criticized over the years by its internal auditors and federal regulators for sloppy lending that resulted in high default rates, according to the report. Violations were so serious that in 2007, Washington Mutual closed its affiliate Long Beach Mortgage Co. as a separate entity and took over its subprime lending operations.