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Washington Mutual

In: Business and Management

Submitted By sharro434
Words 1431
Pages 6
Phase 5 Individual Project
Accounting for Non-Accounting Majors
ACC310-1203A-03
Colorado Technical University Online
Sharon Williams
August 13, 2012

Washington Mutual Bank
Add on from Phase 4

What went wrong that caused the system of internal control to fail at Washington Mutual Bank? High risk mortgage lending, shoddy lending practices, maneuvering borrowers into high risk loans, corrupt the financial system, selling delinquency prone and fraudulent loans, and giving compensations that help bring down financial disaster on them. Starting in 2004 they started using a strategy in lending to make more money by taking high risk loans. In 2006 they started experienced high rates of failure and defaulting loans. By 2007 the bank was losing money that had to do with poor quality and fraudulent loans and securities. The bank internal control systems fail because no one took the evidence that was provided by employees in email, audit reports, and reviews seriously. The bank CEO and president was told of the extensive fraud by Long Beach Mortgage Company. After looking over the review the bank tried to stop the fraud, but it was ineffective. The senior management also helped in sells the delinquency loans to investors.

Regulatory failure of the Office of Thrift Supervision (OTS) did not try to stop what they knew was unsafe and unsound practices at WaMu that help with their down fall. This bank had over 500 grave defects. The records of OTS has shown that during the last five years the bank had many problems dealing with lending, risk management, asset quality, and appraisal practices, but WaMu told OTS that the problems would be fixed, it never happen. OTS did not follow through with enforcement acted. 1999 WaMu bought Long Beach Mortgage Company and they started doing shoddy lending procedures.

WaMu knew the loans were fraudulent because some of the applications contain white out or signatures were not the same. The bank was warned by the risk officer and internal audit was done spoke badly about Long Beach stating they was using poor loan origination and underwriting procedures. WaMu unsuccessfully did not form anything for their system for risk management. This fraud problem went from the top to the bottom with compensations.

Washington Mutual could have prevented their problems if they had used the Sarbanes-Oxley that requires the CEO and the CFO to sign statements declaring that all of their annual and quarterly financial statements are correct. This law would have held the CEO responsible for any falsified or deceptive financial reports. Also they could have used the clawbacks on the CEO and the CFO that would have confiscated their compensation that they had received for the breach of securities laws. Or the auditing rules and the whistleblowers so any employees that wanted to tell what was going on in the company audit committees. Should have followed the FDIC advice and listen to their risk officer about Long Beach Mortgage Company. They could have followed regulation for the financial market and form a financial stability oversight council to help identify threats to the financial systems.

The recommendations I would make is to make sure that qualified mortgages is low risk, make risk retention meaningful, demand greater reserves for negative amortization loans,
Protection against high risk produce, and have in place a safety measure for bank investment portfolios. If they had listened to their risk officer they would not have been seized by the government. Everybody was to blame for Washington Mutual down fall. OTS did nothing when they realize that Washington Mutual was behind fraudulent loans and bad loan deals. Instead of correcting the situation they started rewarding their employees with bonuses and compensations. A lot of stockholders, bondholders, and employees lost a lot of money and their shares were worthless.

Washington National Building Loan and Investment Association were formed after the great fire in 1889 that nearly demolish Seattle’s heart. By the following year they are making their first home loan for $ 700.00. By 1917 their name change to Washington Mutual Saving Bank and they have over 16,000 depositor owners, by World War 1 their asset grew to 68 %. In the 1930 during the Great Depression, Washington Mutual saves Continental Mutual Saving Bank from going under. In 1970’s Washington Mutual started the first shared cash machine ever in the nation, calling it The Exchange.

In 1980’s they bought a brokerage firm Murphey Favre of Spokane. They change it to investor ownership and started trade in March 11, 1983. Kerry Killinger has become the new CEO in April 1990 and also the chairman of the board by January 1990 through 1996. During that time Washington Mutual picked up 16 minor banks from Washington, Oregon, Utah, and California. The Great Western Financial and H.F. Ahmanson were bought by Washington Mutual in 1997 through 1998, with that their joint asset was totaling over $13.6 billion, making them very powerful in California. Washington Mutual decided to buy the subprime lender Long Beach Financial in 1999. The write mortgages for less than perfect credit and the CEO calls a great venture on becoming the number one leader for consumer financial services.

Washington National Building Loan and Investment Association were formed after the great fire in 1889 that nearly demolish Seattle’s heart. By the following year they are making their first home loan for $ 700.00. By 1917 their name change to Washington Mutual Saving Bank and they have over 16,000 depositor owners, by World War 1 their asset grew to 68 %. In the 1930 during the Great Depression, Washington Mutual saves Continental Mutual Saving Bank from going under. In 1970’s Washington Mutual started the first shared cash machine ever in the nation, calling it The Exchange.

In 1980’s they bought a brokerage firm Murphey Favre of Spokane. They change it to investor ownership and started trade in March 11, 1983. Kerry Killinger has become the new CEO in April 1990 and also the chairman of the board by January 1990 through 1996. During that time Washington Mutual picked up 16 minor banks from Washington, Oregon, Utah, and California. The Great Western Financial and H.F. Ahmanson were bought by Washington Mutual in 1997 through 1998, with that their joint asset was totaling over $13.6 billion, making them very powerful in California. Washington Mutual decided to buy the subprime lender Long Beach Financial in 1999. The write mortgages for less than perfect credit and the CEO calls a great venture on becoming the number one leader for consumer financial services. Little did this company realize it was a start of their down fall in to failure?

A financial statement is an official document and a form of written record of financial deeds for a certain time period. The financial statement consists of a balance sheet, income statement, cash flow, stockholder’s equity statement, profit, loss, out flows and liabilities. Also you could find gross profit, net profit, expenses, return on capital, dividend yield and footnotes. The investors or the government can see how well a company is doing and see how financially they are doing and how they are performing. They would be able to compare financial statements from different time periods to see how much development a company has made or improvement.

To determine if any fraudulent or illegal activity has taken place you could check the Account Receivables and Payables to see if the financial statements has been altered to try to hide asset that has been stolen from the company. Also by having internal controls it could find in a timely manner if fraud or illegal activities are going on and see who is committing the fraudulent crime or illegal activity. One of the best internal controls that are use is a budget. It can compare the correct variance and see if any variance is missing. How would you know if fraud is happening? Any changes in account balances, coming up short of cash, investments, inventories or assets missing, any backup documents has been changed or missing, financial data incomplete, late financial records, mysterious variance linking budget and actual amounts, and personnel quitting for no reason at all. As of September 25, 2008 all of Washington Mutual Bank was closed and was renamed JPMorgan Chase.

References

1999-2012 http://www.ehow.com/financial-statements/ Upstart Business Journal
Why did they close WaMu? (12/07/2009) http://upstart.bizjournals.com/industry-news/banking-finance/2009/12/07/why-federal-regulators-closed-washington-mutual.html?page=all WALL STREET AND
THE FINANCIAL CRISIS:
Anatomy of a Financial Collapse
MAJORITY AND MINORITY
STAFF REPORT

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