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Feds investigate Washington Mutual failure

Federal authorities said Wednesday they have opened an investigation into the failure of Washington Mutual Inc., the largest bank failure in U.S. history.
/ Source: The Associated Press

Federal authorities said Wednesday they have opened an investigation into the failure of Washington Mutual Inc., the largest bank failure in U.S. history.

U.S. Attorney Jeff Sullivan said in a statement that his office, the FBI, the Federal Deposit Insurance Corp.'s inspector general, the Internal Revenue Service and the Securities and Exchange Commission created a task force to look into the thrift's failure. He asked anyone with information to contact authorities through a tip line, or to e-mail the FBI's Seattle office.

"Given the significant losses to investors, employees and our community, it is fully appropriate that we scrutinize the activities of the bank, its leaders and others to determine if any federal laws were violated," Sullivan said.

Seattle-based WaMu ran into trouble giving loans to people with poor credit repayment histories during the housing boom. As talk of the 119-year-old thrift's instability spread and its credit was downgraded, people began pulling their money out — leaving WaMu without enough cash to meet its obligations.

It filed for Chapter 11 bankruptcy protection and was sold last month in a $1.9 billion fire sale to JPMorgan Chase & Co., one of the nation's biggest banking companies.

Sullivan's statement did not say what laws investigators believe may have been broken. His spokeswoman, Emily Langlie, said the U.S. attorney's office would have no further comment.

The Associated Press reported last month that the FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration. Law enforcement officials told the AP the FBI was looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, and insurer American International Group Inc. Additionally, a senior law enforcement official said failed investment bank Lehman Brothers Holdings Inc. also is under investigation.

A spokeswomen for WaMu did not immediately return calls, and JPMorgan spokesman Tom Kelly declined to comment.

In January, the FBI announced that it was investigating 14 companies for possible accounting fraud, insider trading or other violations in connection with home loans made to risky borrowers. Agency officials did not identify the companies under investigation but said the probe involved companies across the financial services industry, from mortgage lenders to investment banks that bundle home loans into securities sold to investors.

Last fall, New York Attorney General Andrew Cuomo said he issued subpoenas to Fannie Mae and Freddie Mac in his investigation into potential conflicts of interest in the mortgage industry. He said he wanted to know about billions of dollars of home loans they bought from banks, including WaMu, and how appraisals were handled.

Jack Kirkwood, an associate professor who teaches corporate law at Seattle University Law School, said he had no firsthand knowledge of what the task force would be examining, but that there were several possibilities.

"I would imagine that especially with the SEC's involvement, one of the things they would look at is whether their financial statements or their statements to analysts were false or misleading, that investors were erroneously led to hold stock or hold debt in the savings and loan when it itself saw its prospects as less rosy than their statements to the public indicated," he said.

Another area of concern could be predatory lending, which dovetails with Cuomo's inquiry, he said. If investigators could document instances where WaMu overstated the ease with which homeowners would be able to repay loans, or otherwise victimized homeowners, prosecutors might be able to win relief for those borrowers.

This month, Bank of America agreed to pay as much as $8.4 billion to reduce interest rates and principal loans for nearly 400,000 customers of troubled mortgage lender Countrywide Financial Corp., which Bank of America had acquired.

"There's a felt political need to help homeowners who are facing foreclosures these days," Kirkwood said. If investigators can demonstrate "similar behavior by WaMu's mortgage people, that might lead to a substantial payoff to consumers, and it would be a nice political statement for the administration."