Ex-WaMu insider now an angry outsider

Lee Lannoye was part of the innermost executive circle at Washington Mutual when the Seattle company was an industry wonder, strong enough to acquire a string of competitors and grow its assets from $6 billion to more than $200 billion.

Now he's on the outside looking in, and he's angry at the downward spiral of the institution he played a role in building. He's also angry that no one has been held accountable.

"The reason I'm so upset is I know it shouldn't have happened, it didn't have to happen."

Lannoye says he will be at Tuesday's annual meeting of WaMu shareholders with several other former senior executives. They've kept in close touch over the years, gathering to reminisce over dinner or traveling together on exotic vacations.

But Tuesday they will meet up on business. They intend to ask chairman and CEO Kerry Killinger some pointed questions.

"I remember Kerry telling me the only thing that will hurt a bank is bad loans," says Lannoye, "and I don't know when he forgot that, but he was absolutely right."

Lannoye, now 70, retired at the end of 1998 after a decade as chief credit officer and executive vice president of WaMu. He was among the half-dozen senior executives alongside Killinger on WaMu's top management committee and faced monthly quizzing by the finance committee of the board of directors.

He wants the current leaders, including Killinger and the board, to take responsibility for leading the bank down the path of aggressive lending to subprime borrowers.

"It obviously has not been very well managed the last four or five years," he says. "They made some pretty stupid decisions."

Lannoye recalls that when WaMu's home-lending operation took a $500 million swing from profitability to red ink in late 2003, the group president for that unit took the fall.

"Now they are losing $8 billion, $12 billion [in total projected credit losses]. And not one person has been let go," he says. "They closed down construction lending, they closed home-loan centers, but none of the people who made the strategic decisions to lower the credit standard ... they're all still there, including the board."

Lannoye traces WaMu's problems to its purchase of subprime lending specialist Long Beach Mortgage in 1999.

"Kerry and the executives and the board made a conscious decision to buy Long Beach, which got them into subprime." Then, he says. "They consciously lowered the standard for lending, which led to where they are today.

"The question is why anybody would think the people who made that decision should continue to run the bank."

He rejects the notion that profit demands from Wall Street forced lenders to plunge into the subprime pool to boost their profits.

"None of this would have occurred if Wall Street hadn't found a way to take bad loans and make them look good, and sell them to people who didn't know any better," Lannoye acknowledges. "That doesn't excuse WaMu management for changing their risk profile and making loans to people who didn't qualify."

"There's nothing wrong with reporting to your shareholders, 'We didn't do that business because it wasn't a good idea.' That's what they are paid a lot of money for."

And Lannoye notes that despite the widespread impact of the current mortgage mess, "Not every bank has got this kind of problem. ... Wells Fargo doesn't have this kind of loss and they were doing as much business as Washington Mutual, if not more."

At the Tuesday shareholder meeting, though, Lannoye won't be asking about the past decade.

If he gets the microphone, he'll ask about the past couple of weeks.

He has what he calls a cynical question about the $7 billion infusion of capital the WaMu board announced this past week.

The next day The Wall Street Journal reported that WaMu also had an acquisition offer on the table from JP Morgan.

Lannoye says he isn't sure which deal was superior, but he's also not sure about the motives of WaMu's leadership.

"The decision not to work with JP Morgan for a sale — was that in the best interest of the shareholders or was that because they (management) would not have kept their jobs, nor would the directors have kept their jobs?"

He wants the question asked, says Lannoye, but "nobody's going to answer it, I know that."

Killinger said last week that the $7 billion investment deal will strengthen WaMu's capital base and "will position us for a return to profitability as these elevated credit costs subside."

Several proxy advisory firms have urged shareholders to withhold their votes from some or all of the board members who face re-election. Lannoye says that's his intention: "I don't know of anyone who's not (withholding) — it's the only thing we can do as shareholders."

If enough of the big institutional shareholders do the same, he says, "There could be some consequences."

Directors who don't get a majority of affirmative votes must offer to resign, with their board colleagues deciding whether to let them go.

WaMu shareholders have had a lot to celebrate at past annual meetings, as the company became a national powerhouse. This year is likely to be quite the opposite.

How will the executives and the board react?

Predicts Lannoye: "They'll listen, and they'll make sure there's plenty of security around."

Comments? Send them to Rami Grunbaum: rgrunbaum@seattletimes.com or 206-464-8541.

Seattle Times researcher David Turim contributed to this report.