WaMu board stuck with Killinger for too long

For the growing number of Kerry Killinger critics, the only question will be: What took them so long?

After watching the slo-mo destruction of Washington Mutual over the past year, its board has only now made the chief executive who presided over the disaster walk the plank.

The answer might provide little comfort. Yes, for part of that time Killinger had a board stuffed with allies.

Even after a $7 billion capital infusion from TPG in April, the board changed slowly. Only in June was Killinger stripped of his chairman title. Yet he was kept on as CEO, in stark contrast to the fate of leaders at other troubled institutions, such as Wachovia and Merrill Lynch.

The answer may be that Washington Mutual's troubles are so deep and complex that it took time to find a qualified executive who would take the job. He is veteran thrift executive Alan Fishman, and he'll be getting a $10 million signing bonus, according to The Wall Street Journal.

If he succeeds, the result may still be a civic calamity for Seattle. Sick financial institutions that regain their health are promptly sold. So in addition to the loss of thousands of jobs already, Seattle would lose a premier corporate headquarters, its claim to be a banking center, a centerpiece of the city's downtown and thousands more well-paid jobs.

Someday they'll study Killinger and Washington Mutual's board of directors in business schools. The lessons will all be: Don't do this.

Killinger is widely credited for taking a struggling institution in 1990 and turning it into the nation's largest thrift. What's less remarked is that he had a very strong team of lieutenants during most of that run, and many left.

For example, Deanna Oppenheimer, who built the retail-banking division into a powerhouse and was seen as a strong contender to succeed Killinger, departed in 2006 after being bypassed for the No. 2 job. Craig Tall, who presided over some of WaMu's biggest mergers, and Bill Longbrake, the chief financial officer, also left.

Yet even the go-go years had a powerful wind at their back: the Federal Reserve's extremely low interest rates powered the biggest housing boom in history. Subprime mortgages, relaxed lending standards and the promise that housing values would keep rising fueled not only a boom but also perhaps a sense of executive invulnerability.

But cycles go down as well as up, and under Killinger's reign, WaMu kept rolling the dice long after it was clear that the housing downturn was shutting down the casino. Thus, Washington Mutual would end up with nearly $50 billion in risky option-only adjustable-rate mortgages and heavy exposure in some of the epicenters of the housing recession. The thrift may ultimately face losses of up to $19 billion this year.

Business students will also study how the board stuck with Killinger despite missteps. In the idealized model of capitalism, the board of directors are the shareholder representatives, there to keep management from following its own, perhaps self-aggrandizing, agenda. Unfortunately, WaMu's board failed miserably.

To be sure, Killinger has lots of company in what will likely be the worst financial debacle since the Great Depression. The federal takeover of Fannie Mae and Freddie Mac is only the latest exclamation point on that.

But Killinger's damage is more. Large financial institutions are major prizes for cities, attracting capital and talent, and focusing them in a centralized location, usually a downtown. Many Northwesterners also invested loyally in WaMu as a hometown company.

Along with the loss of Safeco's independence, WaMu's eventual sale will be a heavy blow and very personal to this city.

Jon Talton is a journalist and author living in Seattle. For more than 20 years he has covered business and finance, specializing in urban economies, energy, real estate and economics and public policy. You may reach Jon Talton at jtalton@seattletimes.com