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D-Day for Washington Mutual

In February, WaMu's top earners were being feted in the Bahamas. On Apr. 30, most of them are out of a job

At the end of February, around 200 of Seattle-based Washington Mutual's (WM) best performing retail loan consultants, their guests, and top company brass set off for four days of sun, snorkeling, and gambling at Atlantis Paradise Island resort in the Bahamas.

This was one of many such incentive trips over the years the retail banking and mortgage company had bankrolled for the top 10% of its commission-driven mortgage team. But the trip was not only a reward for its top earners, it was also a chance for them to mingle with their peers from all over the country as well as with the company's top executives, including frequent attendee Kerry Killinger, WaMu's chief executive officer.

A False Sense of Security

As always, the surroundings (usually luxury resorts in Hawaii) were sun-drenched, exotic, and expensive. It was a time to get fired up for the coming year, and at the Atlantis, despite the woes besetting the mortgage industry, the mood was encouraging and the outlook for the company optimistic. For those salespeople who had been with the company during the real estate boom of the past few years, it was only the latest of many such trips. For first-time invitees it was a trip they had worked hard to earn. But for all of them, though they didn't know it then, it would be their last.

That's because a little more than a month after returning from the Bahamas, the loan officers began hearing rumors from competitors and employees involved in loan processing that their jobs would soon be eliminated. In December, the company said it would be laying off 3,150 employees, including loan consultants, as it exited the subprime lending business and closed loan centers (, 4/8/08). But the company kept many of its best loan officers, most of whom were included on the Bahamas trip.

An Apr. 7 memo from management confirmed the rumors. WaMu announced the next day that another 3,000 employees were being let go as part of a plan to exit the wholesale lending business entirely and close the independent home loan offices. Apr. 30 would be their last day.

For staff who had been in the Bahamas, the news was particularly hard to fathom. They were, after all, members of the elite President's Club, top earners who were able to generate annual revenues of $40 million to $200 million.

WaMu refused to comment on employee incentives and compensation, claiming it couldn't disclose this competitive and proprietary information. "We recently announced steps that accelerate our efforts to more closely align our home loans business with the company's retail-focused business model," WaMu spokeswoman Sara Gaugl said.

Staggering Losses Lead to Deep Cuts

As the subprime crisis worsened and the numbers of defaults increased, WaMu saw its share price drop 70%, from a high of 44.66 on May 24, 2007. Like most other mortgage lenders, it was hemorrhaging money. Since April, 2007, it had lost 74% of its market value. At its first-quarter earnings call Apr. 15, the company announced it had lost $1.1 billion during the quarter and also needed to set aside $3.5 billion to cover loan losses in the quarter.

To survive, WaMu's senior management cast about for ways to save the company. On Apr. 8 the bank had announced that it would receive $7 billion in capital from private equity investors led by Texas Pacific Group. But the bank's wholesale mortgage business, which had played a large part in its growth into a national powerhouse, had to be jettisoned. In addition, WaMu would close all of its stand-alone home loan offices, and carry on lending operations at 2,200 retail branches and through telephone and online sales.

Analysts cheered the move, saying that the company needed to make the moves to boost its liquidity and become leaner.

"It's unfortunate always when people lose their jobs, but you have to look at the forest rather than the trees," said Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, a boutique investment bank in New York. He added that home loans make up too much of the company's business and it needs to fix that "to limit earnings volatility."

WaMu isn't alone in closing loan offices. Companies such as Countrywide Financial (CFC) and Tennessee-based First Horizon (FHN) have announced layoffs in their mortgage sales forces, though they haven't closed down all of their loan offices. But the mortgage industry, while not mortally wounded, is still badly crippled. Home sales are down, stricter loan standards have reduced the pool of qualified buyers, and borrowers—especially in California, Florida, Arizona, Michigan, and Nevada—are defaulting in large numbers.

Analysts Applaud Moves

The company could lose home loan market share to competitors such as Wells Fargo (WFC) and JPMorgan Chase (JPM), which are now snapping up WaMu's most valuable loan officers. But the company needed to cut costs and increase capital to survive the downturn, said Jaime Peters, an analyst with Morningstar (MORN).

"There was not enough volume that the offices were producing to turn a profit," said Peters. "The question is how long the crisis will last before…they'd be getting enough money for those offices to be profitable."

Dick Bove, a financial strategist with Punk, Ziegel & Co., a New York-based investment bank, said the company had no choice but to cut its costs.

"They need to shrink their balance sheet and get loan losses under control," Bove said. "And they need to make sure that they're generating the most of the profits from deposits at their retail centers."

Blindsided by the Downside

Still, Apr. 30 is a red-letter day for the whole industry. The loan officers this week were cleaning their desks and planning their next moves. Some of them are fielding multiple offers. Others are considering the company's offer to place them in a bank branch, a move the top performers say they would not seriously consider, not just because of lower pay but because of potential delays in loan processing. They say less experienced branch-level mortgage consultants can clog the processing system with loans that don't meet proper guidelines.

Like many victims of the mortgage collapse, most of the loan officers, especially those who were in the Bahamas, feel burned. One loan officer, who agreed to be interviewed only on the condition of anonymity, felt so hopeful about WaMu and his future at the company that, on his return from Nassau, he bought more shares of the company.

Other employees, also anonymously, echoed his disappointment. "You always feel good about these things," a second loan consultant said of the trip. "We were told multiple times that we were valued and an important part of the strategy."

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