Ex-Washington Mutual Officials Killinger, Rotella Sued by FDIC Over Losses

Former Washington Mutual Inc. (WAMUQ) Chief Executive Officer Kerry Killinger and ex-Chief Operating Officer Stephen Rotella took extreme risks with the bank’s home-loans portfolio, causing billions of dollars in losses, the Federal Deposit Insurance Corp. said in a lawsuit.

Rotella, Killinger and David Schneider, Washington Mutual’s home-loans president, showed reckless disregard for the bank’s long-term safety and instead focused on short-term gains to increase their compensation, the FDIC said in the complaint filed yesterday in federal court in Washington. The agency seeks unspecified damages and an order freezing the assets of Killinger, Rotella and their wives.

The former executives “should be held accountable for the losses that the bank suffered as a result of their negligence, gross negligence and breaches of fiduciary duty in mismanaging the risks of WaMu’s HFI residential loan portfolio,” the FDIC said in the complaint.

The FDIC has authorized lawsuits against 158 officers and directors in an effort to recoup more than $3.5 billion in losses stemming from the credit crisis, agency spokesman Andrew Gray said today in an e-mail. The agency, which has shuttered more than 290 lenders since the start of 2008, has filed five other cases against officers and directors, including one in July seeking $300 million in damages from four executives of IndyMac Bancorp Inc.

Killinger Blamed

Federal regulators seized WaMu, once the nation’s biggest savings and loan, in September 2008 and sold it to New York- based JPMorgan Chase & Co. (JPM) for $1.9 billion.

Bank executives blamed Killinger during hearings before the U.S. Senate last year for ineffective management controls and lax lending standards.

Killinger was CEO for 18 years before he was ousted on Sept. 8, 2008. He told senators in April that his company became the largest bank failure in U.S. history in part because it was excluded from a group of financial institutions favored by U.S. policy makers.

Rotella, who last year blamed Killinger for failing to institute stricter lending controls, said in a letter to friends and family that the FDIC suit was an abuse of power.

“This action runs counter to the facts about my relatively short time at the company,” Rotella wrote in the letter, e- mailed to Bloomberg by his spokesman, Daniel Hilley. “As you might imagine, I am angered by this abuse of power by the FDIC. More than anything, I am angered that my wife and children may be subjected to the public attention this lawsuit may generate.”

$100 Billion

WaMu’s high-risk loan portfolio exceeded $100 billion, with product, underwriting and geographic risks “layered one on top of the other,” the FDIC said. Instead of managing the bank’s risks and establishing sound lending policies, the executives were fixated on rewarding themselves, according to the complaint. The men received more than $95 million in compensation from January 2005 to September 2008, the FDIC said.

Killinger advocated for the bank taking on more credit risk with less risk management, the FDIC said in the complaint, citing a June 2004 company memorandum. In the memo, Killinger expressed a goal of growing WaMu’s assets by at least 10 percent a year and said “above average creation of shareholder value requires significant risk taking,” according to the complaint.

Killinger and Rotella approved the first phase of WaMu’s higher-risk lending strategy in January 2005, aiming to increase the bank’s subprime market share to 12 percent from 4 percent, over warnings from risk managers, according to the complaint.

‘Flagship Product’

Option adjustable-rate mortgages became the bank’s “key flagship product,” enticing marginal borrowers with low teaser rates that dramatically increased later in the loan, according to the complaint. Killinger and Rotella ignored repeated warnings about the risks associated with the bank’s aggressive lending practices, according to the complaint.

As early as February 2005, the bank’s chief risk officer said in a memo that option ARM customers with 1 percent teaser rates might see payments jump as much as 72 percent. Still, amid repeated admissions that he foresaw a housing bubble in California and the bank’s other key states, Killinger continued to push for higher-margin products such as ARMs and subprime loans, according to the complaint.

‘Main Architect’

“Killinger was the main architect of the Higher Risk Lending Strategy,” the FDIC said in the complaint. “He wrote the annual strategic memoranda from 2004 through 2007 that kept the bank on its course of higher risk lending.”

Joseph Evangelisti, a spokesman for New York-based JPMorgan, declined to comment. No phone number is listed for Kerry or Linda Killinger in Washington State. His lawyer in WaMu’s bankruptcy case, Charles Ekberg of Seattle, didn’t immediately return a phone call seeking comment.

Schneider couldn’t immediately be reached for comment. Stephen Spence, a Wilmington lawyer who represented Schneider in the WaMu bankruptcy case, didn’t immediately return a call seeking comment.

The case is FDIC v. Kerry K. Killinger, 11-00459, U.S. District Court, Western District of Washington Seattle).

To contact the reporter on this story: Sophia Pearson in Philadelphia at spearson3@bloomberg.net

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net

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