WaMu's No. 2 faulted by some for wrong priorities

As Washington Mutual's top executive for the past 18 years, Kerry Killinger publicly received much of the blame when the thrift failed after huge losses on risky mortgages.

The board ousted him two weeks before the government seized WaMu on Sept. 25 and sold most of its operations to JPMorgan Chase of New York.

Yet to hear several high-level former WaMu executives tell it, Stephen Rotella, the No. 2 man who had worked at the company less than four years, was more responsible for WaMu's fate than Killinger.

They say Rotella, until last month WaMu's president and chief operating officer, pushed for more mortgages, including subprime and other risky loans, and ignored warnings from colleagues who said the company needed to be more careful in its lending.

"When some of us would say, 'Stop the focus on mortgage lending,' he'd shoot it down," said one longtime executive who took part in such conversations.

Others say Rotella is unfairly blamed because he knocked heads and bruised egos while trying to fix a company that was already broken.

"He was a real manager, and so much tougher than people who had been there before," said another executive hired before Rotella.

WaMu had always been "fair, caring and human," said a current executive who asked not to be named. Rotella brought the attributes of "dynamic and driven" to the mix, "and a lot of people didn't like that part of it."

Killinger and Rotella declined to comment for this story.

Most of the former executives critical of Rotella were at the Seattle-based thrift before he arrived in January 2005. Other longtime executives defend him. They all spoke on condition of anonymity, citing confidentiality agreements or fear of retribution in a close-knit industry.

WaMu already had problems when Rotella was hired. Although it was boom times in the mortgage industry, WaMu's profits and stock had languished for years because of a litany of issues: customer-service problems, losses on derivative investments and poorly executed mortgage acquisitions that left the bank with high operating costs and disparate computer systems.

Rotella was brought in to fix those problems. Killinger gave up the title of president but remained chairman and CEO.

Under Rotella, supporters say, WaMu deliberately pulled back on conventional and subprime mortgages.

Its market share in both categories fell every year Rotella was there, according to the research firm Inside Mortgage Finance.

Still, Rotella's critics say he was more interested in sales than caution.

At the end of 2007, more than 56 percent of WaMu's loan portfolio still consisted of option ARMs, home-equity and subprime loans — all considered risky categories. Option ARM mortgages — which allow customers to pay so little that their balance could rise instead of falling — were being made by the thrift as recently as last spring.

When Rotella arrived after leading JPMorgan's residential-lending business, WaMu had been making subprime and other risky loans for years.

Even then, people in its credit-risk department, which controls how tight or loose lending standards are, thought WaMu's mortgage business focused too much on driving sales and not enough on limiting risks, said two former executives.

They had just begun to overhaul that area, adding more controls to the appraisal process, improving loan underwriting standards and creating more realistic mortgage pricing. Within weeks of his arrival, Rotella halted that overhaul."It was abandoned," said one executive. "The part that was supposed to reverse risk was reversed."

According to yet another longtime executive, Rotella became involved more than most top bank executives when the mortgage sales staff complained about applications that were declined.

More than once, Rotella pressured credit officers to reverse their decisions, this executive said. "Steve Rotella created a culture of fear."

While Rotella pushed for sales, former executives said, the credit-risk department that was supposed to balance that impulse was in disarray.

WaMu had five chief credit officers during the less than four years Rotella was at the bank.

Insiders who cautioned that WaMu needed to pay more attention to risk were "looked at as heretics for talking about the need for better disclosures and concerns about option ARMs" and other high-risk mortgages, one former executive said.

According to another former executive, Rotella hassled the bank's internal reviewers, whose job was to make sure WaMu followed its own policies on lending, deposit accounts and other matters, and to report problems to top executives and the board.

"Most presidents say thanks for bringing this to my attention, we're going to fix this fast," he said.

With Rotella, "these people had to have a very thick skin. He would say, 'You need to be better qualified, you're wrong.' "

There is a natural tension between sales and credit risk at a bank and "the role of the board and also the CEO is to balance those forces," said Bill Longbrake, WaMu's longtime chief financial officer, who retired from that job in 2002 but continued until Sept. 1 as vice chairman, though he was not a board member.

He wasn't one of the former executives who spoke anonymously and does not blame Rotella specifically for WaMu's demise.

"Rotella's background was as a salesperson, and he had a built-in bias based on that experience not to be very happy about people throwing up roadblocks to getting additional sales," Longbrake said.

He said he warned executives and the board that the industry's lending standards had gotten too loose.

"The whole market accepted 'stated income,' and there were quips about those being liars' loans, but everybody did it. Nobody was paying attention," Longbrake said. "WaMu's great sin was following the herd and doing what the rest of the market was doing."

Several former executives say they told Killinger about their issues with Rotella, but that the CEO's instinct to avoid conflict kept him from doing anything.

When Killinger heard criticism about his No. 2, "it was always, 'Steve's a good guy,' " said one former executive.

Killinger appeared to trust Rotella to oversee WaMu's daily operations while he focused on strategy and oversaw "control" functions like risk management, legal and technology.

People who place more blame on Rotella acknowledge that he reported to Killinger, who was at WaMu's helm. They blame Killinger mostly for inaction.

"He should have stepped in and said, 'stop,' but he didn't," said one former executive.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com