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Did WaMu's fraud lower rest of market?

Kerry Killinger, right, former Washington Mutual Bank chief executive, and Stephen Rotella, former Washington Mutual Bank president and COO, raise their right hands as they are sworn in during a Senate Homeland Security and Governmental Affairs Committee hearing on Capitol Hill in Washington, D.C.

TEXT OF STORY

Kai Ryssdal: For a long time, Washington Mutual had this catchy tagline it used in its ads to show that it could help everybody buy a home. The "power of yes," it went. As new congressional investigations show, WaMu wasn't just talking the talk. Widespread fraud let it say yes to just about everybody, which might have helped set the bar for everybody else.

Marketplace's Alisa Roth reports.


ALISA ROTH: The stories this investigation have turned up are pretty alarming. WaMu gave bonuses for selling higher risk loans. There were also bonuses for using things like higher interest rates or extra points to over-charge clients. Employees even helped loans get processed faster by falsifying bank statements.

John Coffee is an expert on securities law and corporate governance at Columbia. He says the easiest way for a bank to increase its profitability in the short-term is to take on more risk.

JOHN COFFEE: And that can arguably produce the lemming-like race over the cliff as each institution increases its level of risk because it wants to have its profitability look at least comparable to its rivals.

He says WaMu was one of a lot of institutions in the game.

There's no proof that anybody else was engaging in the same kinds of questionable practices. But everybody ignored the bigger issue: that the market for these mortgages was unsustainable.

Thomas Cooley is an economics professor at the Stern School of Business at NYU. He says we should also blame the ratings agencies. And the big banks who bought the securitized mortgages because they enabled WaMu.

THOMAS COOLEY: Their ability to do what they did was dependent on other parts of the financial system being willing to purchase the assets that they created. So it was kind of just a collective failure of common sense in a lot of ways and a collective breakdown of the system.

There are more hearings scheduled for Friday to look at the role of regulators. After those hearings, Senate investigators will decide whether to refer the case to the Justice Department for criminal prosecution.

In New York, I'm Alisa Roth for Marketplace.

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