When BIG Went Wrong: Washington Mutual

The seeds of destruction were planted in 1999, when WaMu acquired Long Beach Mortgage Company—a subprime lender based in Southern California.

Subprime lending isn’t inherently evil. There’s a legitimate market for providing credit to borrowers who don’t qualify for conventional loans, at higher interest rates that reflect higher risk. Done carefully, with proper underwriting and reserves, it can be profitable and even socially beneficial.

WaMu didn’t do it carefully.

Decision 1: Volume over quality. WaMu’s compensation system rewarded loan volume, not loan quality. Mortgage brokers got paid when loans closed, regardless of whether borrowers could actually afford them. The incentive was to say yes to everyone and let someone else worry about defaults later.

Decision 2: The Option ARM obsession. WaMu became the nation’s largest purveyor of Option ARMs—adjustable-rate mortgages that let borrowers pay less than the interest owed each month. The unpaid interest got added to the loan balance. Borrowers felt like they were getting a great deal. In reality, they were going deeper underwater with every payment.

By 2006, Option ARMs represented 47% of WaMu’s new mortgage originations. These were time bombs with three-to-five year fuses.

Decision 3: Stated income, stated assets. WaMu enthusiastically embraced “stated income” loans—mortgages where borrowers simply declared their income without verification. In the industry, these were nicknamed “liar loans.” WaMu made billions of dollars worth of them.

Decision 4: Ignore the warnings. By 2005, WaMu’s own risk managers were raising alarms. Internal audits showed surging early payment defaults—borrowers missing payments within months of closing. A company whistleblower warned about systemic fraud in the loan origination process. The warnings were dismissed or buried. The machine kept running.

Decision 5: Double down at the top. When the housing market started cooling in 2006, WaMu didn’t pull back. Killinger pushed for more market share, believing that the company could outrun any downturn through sheer scale. In 2007, even as defaults were accelerating, WaMu continued to originate over $150 billion in mortgages.

My firm has coached more than 2,000 CEOs. The WaMu story is a masterclass in how incentives drive behavior—and how quickly a culture can go wrong when the incentives point the wrong direction.

They confused growth with health. WaMu’s loan volume was spectacular. Revenue was growing. The stock was climbing. But underneath those numbers, the loan portfolio was rotting. When your business model depends on asset values rising forever, you don’t have a business model—you have a bet.

Compensation created the culture. When you pay people for volume, you get volume. When you pay people regardless of quality, you get low quality. WaMu’s mortgage brokers weren’t bad people—they were rational actors responding to the incentives in front of them. The system was designed to produce exactly what it produced.

Risk management was a speed bump, not a guardrail. WaMu had risk managers. They wrote reports. They raised concerns. And they were systematically overruled or ignored when their findings conflicted with growth targets. When risk management reports to the people whose compensation depends on taking risk, risk management becomes theater.

The Power of Yes became the inability to say no. A good tagline became a dangerous ideology. Saying no to a loan meant leaving money on the table. It meant missing volume targets. It meant being the person who didn’t believe in the mission. The culture made caution feel like cowardice. They believed the music would never stop. Housing prices had risen for so long that an entire generation of bankers couldn’t imagine them falling. WaMu’s models assumed continued appreciation. When prices flattened and then dropped, the models broke—and so did the company.

Washington Mutual’s failure wiped out shareholders entirely. JPMorgan acquired the deposits and branches for $1.9 billion—a fraction of what they were worth a year earlier. The FDIC’s deposit insurance fund took a $6 billion hit.

Thousands of WaMu employees lost their jobs. Thousands more borrowers lost their homes—many of them people who should never have been approved for loans in the first place. They were victims of a system that told them yes when it should have told them no.

Kerry Killinger was forced out in September 2008, days before the seizure. He walked away with reported to be over $100 million in compensation accumulated over his tenure. No criminal charges were ever filed against WaMu executives.

The Senate Permanent Subcommittee on Investigations later called WaMu “a conveyor belt for toxic mortgages.” Internal documents later showed executives were aware of serious loan quality issues and continued originating them anyway.

The Power of Yes was a lie. It wasn’t empowering borrowers—it was exploiting them. It wasn’t building a great bank—it was inflating a balloon that everyone knew would eventually pop.

The question wasn’t if. It was when.

And when the answer came, the largest bank failure in American history happened in a single day.

Next week in Part 6: FTX—The Thirty-Two Billion Dollar Hallucination