Washington Mutual didn't have to end like this

I wanted to be proved wrong about Washington Mutual — oh, how I wanted to be proved wrong.

Several months ago, I wrote that the Seattle thrift seemed headed for a sale, with serious consequences for shareholders, employees and Seattle's civic heart.

I was calling on years spent covering the banking industry. But maybe Washington Mutual really could right itself. Maybe the $7 billion capital infusion from TPG in April really could underwrite a revival of an independent company, rather than be a marker for a future sale.

Maybe fans of then-Chief Executive Kerry Killinger would be correct: He'd get back his touch and lead WaMu to a startling comeback.

Those statements about remaining independent, maybe they'd turn out to be correct. And perhaps that special Seattle vibe might allow the company to levitate out of a seemingly impossible predicament.

Apparently, it was not to be. Washington Mutual is reportedly trying to sell itself. It may not be easy, even if the government creates a depository for bad loans.

Ultimately, the company was caught in a vortex of the worst financial crisis since the Great Depression. A greed-made disaster that took down venerable Bear Stearns and Lehman Brothers, and forced the sale of once-mighty Merrill Lynch, would not spare what before the 1990s was just a hometown Seattle S&L.

Especially not a company that had done so much to wire up its own destruction.

We may never know how much WaMu was pushed by regulators to find a buyer. But the change in the company's willingness to sell comes as the federal government is taking unprecedented action in the markets: essentially nationalizing Fannie Mae and Freddie Mac, buying most of the insurer AIG and flooding capital into the system.

And still the system shudders.

This week has shown as much naked fear as in the market crash of 1987, but it came with different context: a year of crises and swoons, followed by federal improvisations, but never really calm in the system.

And no wonder: The fear is somewhat rational. The huge pile of bad mortgages turned into a contagion that, with integrated markets moving at an instant, cascaded into other credit markets, souring once-safe investments.

The capital markets kept asking: Who's next, and who else will that collapse bring down?

The trouble didn't stop with Bear or Wachovia, Lehman or Merrill or, what, a trillion dollars of wealth just vaporized in bets gone wrong?

These are no small questions for America, the world's largest debtor. Washington Mutual almost seemed to be just one more urgent footnote to the larger crisis. Yet the fate of the nation's largest savings and loan must have been much on the minds of Ben Bernanke and Henry Paulson.

The Financial Times was speculating the failure of Washington Mutual would put considerable stress on the already underfunded Federal Deposit Insurance Corp. That and other reports caused WaMu to issue repeated assurances.

But that doesn't mean the feds weren't also leaning on the company's leaders to find a solution, and fast.

Point of no return

When did Washington Mutual pass the point of no return? It was probably long before the TPG capital infusion.

The very smart people at TPG were betting with all their experience that the subprime fiasco had bottomed out and WaMu would be a smart buy; fix it up and make a killing on a sale. Of course, the credit crisis was only accelerating.

So the defining moment was probably years ago, when Killinger and his team decided to commit so much of Washington Mutual to making loans that no sane financial institution would have made a generation before.

This historical amnesia is a big part of the current crisis. Nobody working on Wall Street was around during the Depression; few recall even the bear market of 1973-74.

No wonder The Street turned out sharpies pushing for more risky mortgages from WaMu leaders who had forgotten how to be bankers, much less stewards who would build a lasting institution in this city.

Maybe the moment came even earlier, when WaMu was anointed a "growth company," with all the short-term profit and long-term peril that brings.

Wall Street only wanted more, and the margin for error by WaMu's well-paid executives vanished. In the end, how many thousands of employees and shareholders, who wanted to support the local hero WaMu, were just written off?

Soon, if we can avoid the financial sum of all fears, it will be time for Seattle to move on, with the genius for reinvention it has displayed before.

All our prowess with technology shouldn't cloak the serious loss of well-paid jobs, decision making and capital that went with a major financial headquarters.

Damage control

Coming atop the sale of Safeco, a WaMu acquisition will require an urgent strategy to limit the damage, particularly to downtown.

Right now, regulators are like paramedics working triage at a disaster, and mergers may provide a quick trauma dressing. (One has to wonder how many basket cases Bank of America can absorb without becoming one itself.) Yet consolidation and bigness are arguably part of the problem.

At a certain point, consolidation crowds out competition and creates groupthink. For customers, it means fewer choices. It feeds manias with a fire hose, the big investment bank's role in the subprime debacle being exhibit No. 1.

In banking, over-consolidation creates institutions that are too big to fail, adding even more potential liabilities to taxpayers.

But for now, I'm also in mourning for an important part of Seattle, lost. Oh, how I wanted to be wrong.

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