One of the central unanswered questions of the financial crisis is whether bank executives knew fraud was rampant within their mortgage loans.
A Senate committee tomorrow will present evidence that in the case of Washington Mutual Bank, the largest bank failure in history, executives knew about the fraud - and in some cases failed to take much corrective action. By doing nothing, the bank could report higher profits and employees could earn higher bonuses.
So far no criminal charges have been brought against any senior executives as a direct result of the subprime meltdown. And today Sen. Carl Levin, the Michigan Democrat who will chair the hearing, sidestepped questions about whether Washington Mutual executives broke criminal laws.
But Levin’s committee has unearthed documents that show that in 2005, WaMu’s own internal investigation of two top-producing offices making loans in southern California found that fraud was out of control. At one office in Downey, Calif., 58 percent of mortgages were found to be fraudulent. At an office in Montebello, Calif., the rate was even higher: 83 percent.
Yet “no steps were taken to address the problems, and no investors who purchased loans originated by those offices were notified in 2005 of the loan problems,” Levin's Permanent Subcommittee on Investigations stated in a report released in advance of the hearing. (A summary of the committee's findings are here)
Some problems persisted two years later. A follow-up internal review of the bank's Montebello operation, in 2007, still found a fraud rate of 62 percent.
