Levin Uses Wamu in Push for Key Reform Provisions

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Byline: Cheyenne Hopkins

WASHINGTON - As the Senate prepares to debate regulatory reform legislation, Sen. Carl Levin is using the failed Washington Mutual Inc. as evidence that the bill's most contentious provisions are necessary.

The chairman of the Permanent Subcommittee on Investigations is prepping four hearings related to the financial crisis, the first of which is scheduled April 13 and will focus on Wamu's risky lending practices.

Based on an 18-month investigation, Levin said, he believes that certain provisions of the reform legislation, such as the creation of a consumer protection agency and a requirement that lenders maintain a stake in loans they sell to the secondary market, could have helped avoid, or lessen the impact of, the thrift company's failure.

"A lot of proposed reforms will gain additional support, we believe, from these findings," Levin said. "It is my hope that these hearings, these findings, give a boost, a momentum to strong regulatory reform in many, many different ways."

Levin began his investigation in November 2008, two months after Wamu's failure. The panel did more than 100 interviews and collected millions of documents, some of which are to be released today.

The investigation focused on four areas - lending practices at Wamu, supervision by bank regulators, credit rating agencies and investment banks. Levin argued that Wamu is a case study in poor lending practices that infected the entire banking industry.

Today's hearing is to feature past executives, including Kerry Killinger, Wamu's former CEO, while a hearing scheduled Friday assesses more broadly the banking agencies' performance during the crisis.

During a press conference Monday, Levin said the $300 billion-asset Wamu failed because of poor underwriting, an aggressive appetite for securitization and compensation incentives based on the quantity, not quality, of loans.

Senate Banking Committee Chairman Chris Dodd's reform bill could have prevented some of the damage to the thrift, Levin said. For example, he argued, the proposed consumer protection agency would probably have banned some of the most egregious products, including negatively amortized loans, and ensured that lenders did not make mortgages that borrowers could not repay.

"There is no good purpose served by having people pay less than the interest owed," said Levin. "I don't know if there would be amendments to this, but I would certainly support an amendment that prohibited the negatively amortizing loans."

Risk-retention is just as critical, he said. The Dodd bill would require lenders to keep at least a 5% stake in any loan they sell to the secondary market.

"To do shoddy loans and pass along the risk - that is what happened here by the billions," Levin said.

"There are a lot of ways to stop that. One way is to require securitizers to maintain [ownership of] a percentage of the securities that they issue."

Levin said Wamu was one of many banks that sold loans to the secondary market in order to remove risk from its books.

"This hearing is less about Wamu's failure than it is about a pattern of selling toxic mortgages into our financial system, poisoning the secondary market," he said. "That market had a huge appetite for subprime and high-risk mortgages. The quality was not the key thing. It was whether or not they could get a stamp of approval and it could be sold. These toxic sales upstream played a central role in the financial crisis. …