we concluded. i said this morning would be an opportunity for the nation's collectively to make concrete commitments and take tangible steps to secure nuclear

materials so they never fall into the hands of terrorists who would use them. this evening i can report we have seized this opportunity and because of the steps we have taken as individual nations as an international community, the american people will be safer and the world will be more secure. i want to thank all who participated in this historic summit. 49 leaders from every region of the world. today's progress was possible because they came not simply to talk but to take action, not simply to make pledges of future action but to commit the meaningful steps but they are to implement right now. i also want to thank my colleagues for the candor and cooperative spirit they have brought to the discussions. this was not a day of long speeches or lectures on with other nations must do. we listen to each other with mutual respect. we recognize as while different

countries face different challenges we have a mutual interest in securing these dangerous materials. so today is a testament to what is possible when nations come together in the spirit of partnership to increase shared responsible the and confront a challenge. this is how we will solve problems and advance the security of people in the 21st century and this is reflected in the communique that we unanimously agreed to today. first we agreed on the urgency and seriousness of the threat coming into the summit there were eight range of views on this danger but at the dinner last night and through the day we identified a shared understanding of the risk. today we are declaring nuclear terrorism is one of the most challenging threats to international security. we also agree the most effective way to prevent terrorism criminals from acquiring nuclear materials through strong nuclear security. protecting nuclear materials and preventing smuggling.

second, i am very pleased all of the nations represented here have endorsed the goal i outlined in prague one year ago to secure all laudable nuclear material around the world in four years of time. this is an ambitious goal and we are under no illusion that it will be easy but the urgency of the threat and catastrophic consequences of even a single act of nuclear terrorism demand an effort that is at once bold and pragmatic and this is a goal that can be achieved. third we reaffirm that it is the fundamental responsibility of nations consisted fair international obligations to maintain effective security appeared under the in our role. this includes fully implementing the commitments we have agreed to. fourth, we recognize even as we fulfill our national responsibility this threat cannot be addressed by countries

working in isolation so we have committed ourselves to a sustained effective program of international cooperation on the national security and we call on other nations to join us. it became clear in our discussions we do not need lots of new institutions and layers of bureaucracy. we need to strengthen the institution partnerships we already have and make them even more effective. this includes the allied nations, international atomic energy agency's, the multilateral partnerships that strengthen the nuclear security, prevent nuclear trafficking and assist nations in building the capacity to secure the nuclear materials. but as i said today was about taking tangible steps to protect our people so we have also agreed to a detailed work plan to guide efforts going forward. the specific actions we will take. i want to commend my partners for the important commitment they made in conjunction with

the summit. let me give some examples. canada agreed to give up the significant quantity of highly enriched uranium. chile has given up its entire stockpile. ukraine and mexico announced they will do the same. other nations such as argentina and pakistan announce new steps to strengthen port security and prevent nuclear smuggling. more nations including argentina, the philippines, thailand and vietnam agreed to join in and thus strengthen the treaties and international partnerships at the core of our global efforts. and number of countries including italy, japan, india and china will create new centers to promote nuclear security technologies and training. nations pledged resources to help the iaea meet its responsibilities. in a major and welcome the development russia announced will close its last

weapons-grade plutonium production reactor. and for many years of effort i am pleased the united states and russia agreed today to eliminate 68 tons of plutonium for our weapons programs. plutonium that would have been enough for about 17,000 nuclear weapons. instead we will use the material to generate electricity for our people. these are the kind of commitments cost for in a work plan that we adopted today. as we have made progress in building a safer world. i would also note the united states has made its own commitments we are strengthening security in our own nuclear facilities and invite the iaea to review the security of the new-found research centers. this is to share the best practice is needed in our global efforts. we are seeking funding increases for programs to prevent nuclear proliferation and traffic. and today the united states is

joining with our canadian partners and calling the nation to commit $10 billion to extended our highly successful global partnership to strengthen the nuclear security around the world. so, this has been a day of great progress but as i said this morning this can't be a fleeting moment. securing nuclear materials must be a serious and sustained global effort. we agree to have our experts meet on a regular basis to measure progress to ensure that we are meeting our commitments and plan the next steps. again i want to thank president lee and the republic for agreeing to host the next nuclear security summit in two years. finally, let me say while the summit is focused on securing nuclear materials this is part of a larger effort the comprehensive agenda that i outlined in prague last year to pursue the peace of security of a world without nuclear weapons. indeed in recent days we made progress on every element of

this agenda. to reduce nuclear arsenals president medvedev and i signed the historic new start treaty lonely committing the two nations but significant reductions in deployed nuclear weapons but also setting the stage for further cuts and cooperation between the countries. to move beyond outdated cold war thinking and to focus on the nuclear danger of the 21st century our new nuclear posture reduces the security strategy. and for the first time preventing nuclear proliferation and nuclear terrorism is at the top of america's nuclear agenda which we affirm the central importance of the nuclear nonproliferation treaty. and next month in new york we will join with nations for more of the world to strengthen the corners of the global efforts to prevent the spread of nuclear weapons even as we pursue a greater civil nuclear

cooperation. because for nations that uphold responsibilities, peaceful nuclear energy, and dancing in medicine and agriculture and economic development. all of these efforts are connected. leadership and progress and forces the other. when the united states and brazil were own nuclear security conspiracy and encourages others to do the same as we have seen today. when the united states fulfills responsibilities in a nuclear power committed to the npt we strengthen our global efforts to insure other nations fulfill their responsibilities. so again i want to thank my colleagues for making this unprecedented gathering a day of unprecedented progress in confronting one of the greatest threats to the global security. i work today the only advancing the security of the united states but the security of all of mankind and preventing nuclear proliferation of nuclear

terrorism will remain one of my highest priorities as the president of the united states. with that i'm going to take a few questions. >> the communique states of the unprecedented cooperation for which your colleagues will be done on a voluntary basis of finding commitment. what is the likelihood countries that have been at odds over these issues a number of years are going to cooperate? >> what's take a specific example. from about ten years we've been encouraging ukraine to either ship out its highly enriched uranium or transfer men's and lower grade, lower enriched uranium and in part because of

this conference. ukraine took the step and announced that it would complete the stepped over the next couple of years. so all of the commitments that we talked about our ones that we have already booked even before the community plan is put in place and i think there is actually strong unanimity about the importance of this issue as a threat to the global in the international community. keep in mind we have a number of international conventions that have been put in place. not all of them have been ratified in fact the united states needs to work on a couple of these conventions dealing with issues of nuclear terrorism and trafficking. what this does it sets up a bold plan and what i am encouraged about is the fact we've already seen efforts that had been

delayed for years and some cases since the end of the cold war finally coming into fruition here at this summit. bill, the point is we have world leaders that announced this is the commitment they are taking. they take their commitments seriously. if what you are asking is do we have an international one world will enforcement mechanism we don't. we never have. so in all of our efforts internationally in every treaty that we sign we are relying on good will on the part of those who were signatories to those efforts. that is the nature of the international relations. jay, abc. >> thank you, mr. president. the chinese foreign ministry

spokesperson said speaking of iran's nuclear program the sanctions cannot fundamentally solve the problem. i was wondering if you could clarify exactly why you believe president hu jintao has agreed whether you think there will be an economic sanction with peace the chinese will sign off on and what you have told the chinese in terms of their concern about how much fuel they get from iran, with the u.s. can help with in that regard. >> here's why no, the chinese officials have had negotiations a new york to begin the process of drafting a sanctions resolution. that is part of the p5 plus one effort and the united states is not moving the process along.

we have participation on the russians as well as the other members of the p5 plus one all of whom believe it's important for us to send a strong signal to iraq that there is violation united nations security council resolutions have consequences and the have a better process to take. now you are right, jake, the chinese are obviously concerned about what ramifications this might have on the economy generally. iran is an oil-producing state. i think a lot of countries around the world have trade relationships with iran and we are mindful of that but what i said to president hu jintao and every leader i talked to is that

words have to mean something. there have to be consequences and if we are saying that the npt is important that nonproliferation is important, then when those obligations are repeatedly flouted it's important for the international community to come together and what i would say is if you consider where we were a year ago with respect to the prospect of sanctions, the fact that we have russia and china as well as the other key five plus one members having a serious discussion around the sanctions regime following up on a serious sanctions regime past when north korea flout its obligations to the npt is a sign of the degree to which international diplomacy

is making it more possible for us to isolate those countries picking their international obligations. and as i said several weeks ago my interest is not having a long process, not for months. i want to see us move forward boldly and quickly to send the kind of message that will allow iran to make a different calculation and keep in mind, i've said repeatedly that iran has the right to develop peaceful civilian nuclear energy as to all signatories. but given the repeated violations we've seen on the part of iran fighting understandably the community questions of their commitment towards a peaceful civilian energy program. they have a way of restoring the

trust. for example we put before them i am saying that he five plus one now put before them a very reasonable approach that would have allowed them to continue their civilian peaceful nuclear energy meetings but would have deleted the concerns are around their nuclear weapons program. they have rejected that so far and that's why it's important and i said from the start we will move on a dual track and part of that track is making sure that any sanctions regime is in place. the last point i will make about sanctions. sometimes i hear the argument will sanctions aren't going to necessarily work. sanctions are not a magic wand. what sanctions to accomplish is hopefully to change the calculus

of a country like iran so they see that there are more costs and fewer benefits to pursuing a nuclear weapons program. and in that process what we hope is that if the costs get high enough and the benefits are low enough that it's time they make the right decision on just for the security and prosperity of the world also their own people. scott wilson, washington post. where is scott. there we go. >> thank you, mr. president. you've spoken about the need to bring u.s. policy in line with the treaty obligations internationally to eliminate the procession of hypocrisy. in that spirit and then you will you call on israel to declare its nuclear program and sign the

nonproliferation treaty? and if not why would in other countries do that as an incentive not to sign on to the treaty that you say is important to strengthen? >> scott, initially were talking about u.s. behavior and then suddenly israel. let me talk about the united states. i think as part of the npt, our obligation is the largest nuclear power in the world is to take steps to reducing our nuclear stockpile and that is what the treaty was about. sending the message that we are going to meet obligations and as far as israel goes i'm not going to comment on the program. i'm going to point to the fact that consistently we urged all countries to become members of the npt. we think it is important that we

have a international approach that is universal and that rests on three pillars and those of us who have nuclear weapons are making serious efforts to reduce the stockpiles that we are working against the proliferation of nuclear weapons and the countries that don't currently have nuclear weapons make the decision not to pursue nuclear weapons and all countries have access to peaceful nuclear energy so whether we are talking about israel or any other country we think that becoming part of the npt is important. that by the way is not a new position position of the government prior to my administration. let me call on a efp. >> in your meeting with

president hu did he give an indication he would heed your call for exchange rates if there is and be a change when would you envision that taking place? and what happened in the last few weeks to help you move on from the period of common equity stormy period disagreements with china? >> the fact is actually that the relationship between my administration and the chinese government has been very productive during the course of the last year-and-a-half. we started working together and various multilateral forms. the first one in london with veggie 20. i thin out of the bilateral meetings we had worked with

president hu to set up an economic dialogue that look set a range of areas which the united states and china could cooperate. i made a visit to china but that was considered successful. there are some areas where we have disagreement and those disagreements are not new and the amount of turbulence as you put that occurred was modest when you look at the overall trajectory of the u.s.-china relations. at no point was there ever a suggestion that it's not in the interest of both countries to cooperate and that we have not only by a little in business to do but we are very important countries in multilateral settings that have to deal with issues like climate change and the world economy in concert

with respect to the currency issue, president hu and i have had a number of conversations. as part of bg 20 process, we all signed on to the notion that the rebalancing of the world economy would be important for sustained economic growth and prevention of future crises and china like the united states agreed to the framework. we believe part of the rebalancing involves making sure that currency are tracking roughly the market and not giving any one country advantage over the other. and i've been clear of the fact that it's my estimation that the r&d is undervalued and that

china's own decisions in the previous years to begin to move towards a more market-oriented approaches the right one and i communicated that once again to president hu. china and rightly sees the issue of currency as a sovereign issue. they are resistant to international pressure when it comes to them and making decisions about their currency policy and monetary policy. but it is my believe that it is in china's interest to achieve this rebalancing because over time china is great to have to shift away from an economy that is oriented on exports and is going to have to start shifting towards an economy that is emphasizing domestic consumption and production and is preventing

bubbles from building up within the economy and all of that will be facilitated with a more market oriented currency approach. so i don't have a timetable but it is my hope china will make a decision that will be in their best interest. bob burns. >> mr. president, a few years ago when your stating the purpose of the sanctions against iran, he says the plan is to change government calculation leading to behavior. why hasn't that happened in the case of number three which like iran does have its nuclear weapons? >> well, i'm not going to give you a full dissertation on north korean behavior. i think it is fair to say that

north korea has chosen a path that has been extraordinarily damaging to the people. and it is our hope as pressure builds for north korea to improve its economic performance for example to break out of that isolation that we will see a return to the six-party talks and we will see a change in behavior. as i said, sanctions are not a magic wand. unfortunately nothing in international relations is. but i do think that the approach that we've taken with respect to north korea makes it more likely for them to alter their behavior that had there been no consequences whatsoever to them testing a nuclear weapon.

>> given the goals of conference and your administration on the nuclear policy why does it appear as if pakistan is playing by a different set of rules buy not signing on to the nuclear proliferation treaty that appears they are expanding the nuclear program and the proximity to al qaeda. should there be more pressure international law on pakistan not just coming from the united states but the world? >> i don't think pakistan is playing by different rules. we've been clear to pakistan as to every country we think they should join the npt. i have seen progress the last several years with respect to pakistan's nuclear security issues. i want to lower tension throughout the show when it comes to nuclear programs. and i think the fact that

president lonnie signed on to the communique and made a range of commitments that will make it more likely that we don't see a proliferation activity or trafficking occur out of pakistan as a positive thing. do we have more work to do? absolutely. but i think that the pri minister guilaume's presence is a step in ensuring we do not see a nuclear crisis anywhere in south asia. >> thank you, mr. president. a follow-up question asked. first, how realistic do you believe it is countries will agree on sanctions in the coming weeks which is the deadline the door looking for in the second, the follow on pakistan, is the united states confident pakistan's nuclear material are

protected and will not be vulnerable to terrorists like al qaeda? >> to take the second question first as a part of a follow-up on the question, i feel confident about pakistani security around nuclear weapons programs. but that doesn't mean that there isn't improvement to make an all of our nuclear security programs. you will recall that we had a incident a while back where we had nuclear missiles on a bomber flying across the united states and nobody knew about it and secretary gates to cut the right step which was to hold of those in charge accountable and to significantly alter our practice is to make sure something like that didn't happen again. so i think it's important to note every nuclear power, every country that has a civilian

nuclear energy program has to take better steps to secure these materials and pakistan is not exempt from that but we are not either and that is the goal of the summit and of the communique and plan we put forward. with respect to sanctions, i think we have a strong number of countries on the council who believe this is the right thing to do. but i think these negotiations can be difficult and i am going to push as hard as i can to make sure we get strong sanctions that have consequences for iran and is making calculations about the nuclear program and that those are done on a timely basis. i'm not going to speculate beyond that in terms of where we

are. last question. >> thank you, mr. president during the progress you've sighted on the foreign policy, to what extent do you feel like you have gained political capital with which to take to the international stage for the rest of this year to perhaps rejuvenate some initiatives such as the middle east and elsewhere? >> well, i think the work that we have done in the recent days of around nuclear security and nuclear disarmament are intrinsically good. they are good in and of themselves so we are pleased with the progress we have made and we could not have done this without extraordinary

cooperation first from president medvedev when it came to the start treaty and then my colleagues here today when it came to this nuclear security summit. what i think it signifies is that so many of the challenges that we face internationally can't be solved by one nation alone but i do think america's leadership is important in order to get issues on the international agenda and to move in concert with other countries to have an effective response. there's a host of other issues that have to be addressed and one of the points made during the communique is we are talking about the instruments of potential war for terrorism but obviously there are also other reasons, the rationale, the excuse for conflict that have to be addressed as well and i

remain committed to being a partner with countries around the world and hot spots around the world to see if we can reduce those tensions and ultimately resolve the conflicts and the middle east would be a prime example. i think that the need for peace between israelis and palestinians in the arab states remains as critical as ever. it is a very hard thing to do. and i know that we are applying all of our political capital to that issue that the israeli people through their government and the palestinian people through the palestinian authority as well as other arab states may say to themselves we are not prepared to resolve these issues no matter how much pressure the united states brings to bear and the truth is in some of the conflicts the united states can't impose

solutions on less the participants in the conflicts are willing to break out of old patterns of antagonism. i think it was a former secretary of state jim baker who sit in the context of the least peace we can't want it more than they do but what we can make sure of is we are constantly present, constantly engaged and setting out clearly to both sides our belief that not only is it in the interest of each party to resolve these conflicts but also in the interest of the united states. it is a vital national security interest of the united states to reduce these conflicts because whether we like it or not, we remain a dominant military superpower and when conflict

breaks out one way or another we get pulled into them and that is up costing us significantly in terms of blood and treasure so i'm going to keep at it, but i feel all of these issues, nuclear disarmament, nuclear proliferation, middle east peace , progress is going to be measured not in days or weeks. it is going to take time and progress will be halted and sometimes we will take one step forward and two steps back and there will be frustration so is not going to run on the cable news 24/7 use cycle. but if we are persistent and we've got the right approach, then over time i think we can

make progress. thank you very much, everybody. [inaudible conversations] [inaudible conversations] [inaudible conversations]

a senate subcommittee today held the first of four hearings looking into the 2008 failure of washington mutual, the largest bank failure in u.s. history. next, testimony by the company's former chairman and ceo joined here by the former chief operating officer. this part of the hearing is just

under two hours. >> we will come back and do a session here and call our final panel of witnesses for the hearing. stephen ruechel, the chief operating of washington mutual bank, carey calenture former president and ceo and chairman of the board of mutual bank and we appreciate both of you being with us this afternoon. and we look forward to your testimony. we have a rule six that requires all witnesses who testified before the subcommittee to be sworn in and at this time i would ask you both to please stand and raise your right hand. do you swear the testimony you are about to give this committee be the truth, the whole truth and nothing but the truth so help you god?

the timing system will be the same and i believe you heard that means the minute before the red light comes on you will see the light changed from green to yellow that will give you the opportunity to conclude your written testimony and will be made part of the record. in its entirety we would ask you try to limit your oral testimony to more than five minutes and if it we will have you go first followed by mr. kissinger. >> thank you. chairman levin, a ranking member coburn and distinguished subcommittee members, thank you for inviting me to testify and sharing these remarks with you. this is my first public statement since the fbi washington mutual in september 2008. i want to be clear about the key factors that led to an elevated level of risk during the financial crisis. risks that were created over many years prior to my arrival

at wamu in 2005. i also want to summarize how the team i was a part of recognized those risks and made solid progress and proactively reducing them. in particular i want to be very clear on the topic of high-risk lending the committee is focusing on today. high risk mortgage lending in wamu's caisse primero the option arms and subprimal loans through long beach mortgage subsidiary of wamu work expanded and accelerated at exclusive rates starting in the early 2000's prior to my hiring in 2005. in 2004 alone the year before i joined, option arms were up 124% and said prime lending was up 52%. as the facts in my written statement to the subcommittee show those extraordinary rates ceased after 2,005 and we've

been reduced the total high-risk mortgage volume substantially every year after that. total high risk lending was not expanded and did not accelerate after 2005 as some have reported. the facts show the opposite. i provide my statement from a 30 year veteran financial services from nearly 18 years of jpmorgan chase and as the wamu chief operating officer for three and a half years. when i joined wamu in 2005, the company had over 340 billion in assets as a nationally chartered threat wamu developed a high concentration of mortgage risks relative to more diversified banks. as i noted the company had been accelerating its growth in high risk mortgage products and in addition it had a serious operating deficiencies particularly in mortgage lending. wamu's concentration risk was particularly acute because nearly 60% of the mortgage loans

were from california and florida which had experienced large unsustainable home price increases. what happened at wamu was principally the combined effect of the risks developed all for almost two decades which would be magnified and stressed by the market conditions of late 2007 and 2008. the team i was a part of worked very hard to adjust to the rapidly changing environment and address those risks. as public data shows we reduce the absolute size of wamu's business including the production, total high-risk lending, and portfolio every year after 2005 and by a substantial amount in aggregate. we made progress in diversifying the company and had planned to do more but there simply wasn't enough time to complete the enormous transformational change needed in a $340 billion thrift given the collapse of the

housing market roughly two years after we started. in fairness to all concerned few experts including the chairman of the federal reserve board and the secretary of the treasury anticipated what occurred in the housing market and the economy as a whole. i would like to provide you with more detail about wamu. prior to 2005 when i joined the company wamu had been growing the business at an accelerating rate. by 2003 it was the number two mortgage lender with a market share of over 11%. and the volume had been growing by nearly 50% every year from 2001 and forward until 2005. wamu stated strategy was similar to many firms with large mortgage units during the pre-christmas economy with the benefit of hindsight that strategy was ill-advised. as the financial crisis conclusively established credit risks for declining housing

markets in 2003 and 2000 for the company's mortgage business experienced a very serious risk management operating missteps. a management shake-up in sood and was not this time the new executive team began to take shape including my hiring in 2005. that team believed with a time and effort wamu could resolve its issues and take its place among the country's finest financial institutions. on and others recognize due to the wamu's commission of risks, changes needed to be made. as the market softened we began to migrate the company away from its mortgage legacy. by the end of 2005 we were making solid progress and by the time of the seizure, wamu's market share in mortgages had been cut buy nearly two-thirds the rate from 0311% to about 4%, and we have shut down long beach and option on lending. far from accelerating or

expanding as some large competitors did during this time we were slowing and contracting faster than the market as a whole. looking back now with course i would have tried to move even faster than we did in the areas where i had direct control. unfortunately after the capitol market stopped operating in the third quarter of 2007, we were unable to execute aspects of the strategy. subsequently the decline in the housing market exhilarated and it wasn't long before the financial crisis was in full swing. we continued our efforts as the team raised capital and infected today the company was seized our primary regulator, d.o.t. yes, determined wamu was well-capitalized. all of us wanted the opportunity to finish what we get started in 2005. thank you for inviting me and i look forward to the questions. >> thank you mr. rotella. mr. kilinger.

>> thank you mr. chairman and members of the committee. i appreciate the opportunity to contribute to your investigation of the financial crisis and in addition to my oral testimony i've submitted written testimony. i was the employee's washington mutual for more than 30 years and was honored to be the chief executive officer for 18 of those years. thanks to the efforts of tens of thousands of employees the bank enjoyed many successes over most of that tenure as ceo. however the financial crisis and seizure of the bank in september 2008 were devastating to the company, the customers, employees, investors and community and as the ceo i accept the responsibility for all of our performance and am deeply saddened by and sorry for what happened. beginning in 2005, two years before the financial crisis hit i was publicly and repeatedly warning the risks of a potential housing downturn and we didn't

just talk about it but we did some things about it. unlike most of the competitors we aggressively reduced residential first mortgage originations by 74% and cut home loan staffing in half between 2003 to 2007. the market shares of primerica subprimal loan originations declined by 50% over the period. we also deferred plans to grow many of our portfolios and instead return capital to shareholders to the repurchases and cash dividend this. we sold 30% of the loan servicing portfolio. we've reduced and then eliminated broker and correspondent lending we cut some prime and option originations dramatically in 2006 and 2007 and eliminate the products in 2008. now with the benefit of

hindsight that we know the housing price declines of 40% or more we would have taken even more draconian measures. washington mutual was a main street bank dedicated to serving everyday consumers. most of our activities centered on providing chickens, investments and credit card services to the millions of customers our residential lending was a declining part of the company's business in 2003 and contributed only 13% of the company's revenue by 2007 and it was focus predominantly on fingar worst. the company offered a full range of fixed and vegetable rate products and its portfolio is performed well over many years with lost rates significantly below 1% per year. approximately 90% of the residential first loan portfolio had a loan-to-value at the origination of 80% or less.

high-risk residential products like home-equity, option arm, said prime loans were not new or exotic but had been successfully offered to customers for many years. now we entered the sub prime business with the purchase of long beach mortgage in 1999 to better serve an underserved market. this was a small decline in part of our business since 2005 however due to the growing concerns over the housing market and third-party brokers as well as our own operating issues we greatly reduced subprimal originations in 2006 and shut down the business in 2007. we have a well-defined clear policies of fair dealing with customers and responsible lending principles were praised by community groups. our regulators consistently assigned the highest cra reading about standing and employees were expected to practice core

values that led to reprimands and terminations. this is why in particularly angry when i read any customer might have been sold and inappropriate project. now enterprise risc management was a vital like to the for the company. in fact i read a centralized enterprise risk management group in 2002 and well over 1300 people were involved in that activity by 2007. the chief enterprise risc officer was placed on the executive committee and reported to the board that the group was adequately staffed and functioned effectively on a quarterly basis. finally washington mutual should not have been seized and sold for a bargain price that should have been allowed to work its way through the financial crisis. the company suffered from rising loan losses but we were working through the crisis by reducing operating costs, raising over $10 billion of additional capital and setting aside a substantial loan-loss reserves.

when i left the bank in early september of 2008, capital greatly exceed regulatory requirements for a well-capitalized bank, deposits were stable, sources of liquidity appeared adequate and our primary regulator, the ots didn't address the house to find a merger partner. so it was with shock and great sadness when i read of the seizure and sale of the company in late september of 2008. i believe it was unfair that the company was not given the benefit extended to and have since taken on behalf of other financial institutions. within days of the seizure the fdic's insurance limit was raised to an hundred $50,000. the fdic guaranteed bank debt and the treasury department announced favorable treatment of tax losses the federal reserve purchased assets and injected massive liquidity into the system and the t.a.r.p. program added billions of dollars to the new banks.

these would have been extraordinarily helpful to washington mutual just as they were to all of their banks. in the unfair treatment of the company did not begin with and all necessary seizure in july 2008 the company was excluded from the do not short list which protected many wall street banks from abusive short-selling. the company was similarly excluded from the hundreds of meetings and telephone calls between wall street executives and policy leaders that determine the winners and losers in this financial crisis. for those the or part of the inner circle and work too clubby to feel the benefits for obvious. for those of us outside the penalty was a severe. now i have other suggestions for regulatory reform in my written statement that i would be happy to discuss further. thank you. i look forward to answering questions and request mr. chairman my complete statement and documents referenced this morning be placed in the written record.

>> it will be placed in the record as well all of the opening statements. we will try a 20 minute first round here. first on the numbers. mr. killinger, your opening statement use it in 2003 to 2007 wamu reduced its residential first mortgage originations and reduced its market share and that may be accurate but misleading and what it leaves out. you made a major shift in your strategy and reduced loan origination in 2003 by almost $200 billion. so, most of the reduction in the mortgage business that you were engaged in came to the reduction in the fixed loan 30-year mortgages that we see on that chart. and if you look at exhibit juan

c. -- 1c you will see that the securitization of the subprimal loans continued to rise right through 2006. you said you believe you reduced significantly york our origination of these subprimal loans but is it not true those numbers are accurate and in terms of systematizing you continue to securitized your subprimal home loans right through 2006. is that accurate? >> thank you mr. chairman. you raised an excellent white -- >> are my numbers eckert? , i appreciate the opportunity to make a clarification for the benefit of the committee. regarding the first chart, my data was correct that we get a 74% reduction in our rich nation from 2003 to 2007. you're point is correct is significant part of that reduction was the decline in

origination however that does not reflect a change in strategy or policy. that reflected low interest rates prevailing in 2002 and 2003 that led to massive refinancing to the united states. and since i've been at the organization so many years i can back you up a couple of years prior to that product like the option arm would have been a very large percent of total just two years before that. >> excuse me for interrupting i just want to go into the numbers. the major reason for the reduction was the reduction in the fixed-rate number; is that correct? >> yes, that's right, i just want to be sure we understood the primary cause was the refinancing boom from 2002 and 2003 subsided and the other areas. >> you also changed our strategy. one year was that? >> first, we had a adjustment in our strategy that started in

about 2,004 to gradually increase the amount of home-equity subprimal, commercial real estate and multifamily loans that we would hold on the balance sheet. we had that long-term strategy but as i mentioned in my of opening comments we quickly determined that the housing market was increasing its risk and we put most of those strategies for expansion on hold in fact our sub prime portfolio that we have held out shortly declined from the time that we had that strategy versus the strategies which had the increase in size. >> in 2003 your subprimal about according to the filings with the fcc was $20 million. it went up in 2004 to $31 billion. it went up in 2005 to $34 billion leveled back to

30 billion in 2006. the sub primm savitt actually went up 2005 and stayed high through 2006. the fixed mortgage loans in 2003 were $263 billion a drastically dropped in 2004, 2005 to 77, $78 billion respectively. they jumped in to those and three windber 30 billion up to more than doubled in 2004 and in 2005 they were also double what they were in 2003. so in terms of the direction you increase your option arms from 03 to 05, even in 06 they were more than they were in 03. que dramatically dropped your fixed amount and said prime again almost doubled not quite from 2000 through 2005. those are the sec filings and we will let them speak for

themselves. mr. rotella, you and your testimony said that you did not design the strategy that was designed by the board which was a higher risk strategy. page four and five of the printed testimony for the record he said prior to the time that you joined wamu in 05 the board of directors had established a five-year strategic plan that calls for additional growth in the mortgage lending business but a particular emphasis on how your risk, i'm sorry, higher margin and higher risk products. that's your statement; is that correct? that's what you found when you got there? >> yes, mr. chairman. >> you also said that the bank's strategy with a benefit of hindsight was an ill-advised. you did not design the strategy that the board had approved but

here's something else he said that i want to ask. due to the state of the company's operations which were weaker than you had anticipated before you joined wamu then you realized the changes to this strategy needed to be implemented. what did you mean by the company's operations were weaker than you had anticipated? >> mr. chairman, when i was hired in 2005 the chief operating officer position was a brand new position at wamu. part of the reason for this was created to substantial problems that had come up in the mortgage business prior to my arrival. as i mentioned in my oral statement in 2003 and in 2004 there were substantial issues in market risk management and it was mentioned earlier a project that had to be written off and i just added at the end of my comment a number of mortgage

companies over the course of about from 2001 to 2005 there were 12 mortgage origination systems when i joined the remember of servicing systems. the operation needed a lot of work. ..

were on success-- satisfactory. approximately 4000213000 loans in the warehouse had been refused envies approximately 950 were deemed salable. that is 950 of the 4000. 800 were deemed unfavorable. the remainder contained deficiencies requiring remediation prior to sale. you remember those problems in long beach and 2003 mr. killinger? >> s.. >> then you halted the securitization until the problems were cleared up but they began again in 2004 at 52,005 the problems started erupting again with a surge of early payment defaults. wamu ended up with repurchasing almost a billion dollars in loans, suffered a 100 million-dollar loss. why didn't you halted the securitization in 2005 when

those problems began to appear? >> senator, we entered long beach mortgage back in 1999 to help better serve that community. when we-- it was a relatively, very small part of our business and when they first encountered some of the securitization problems or some of the loan quality we sent a team and to work on that. we believe they made substantial progress with that and then they started to increase the originations again because we felt that the operational issues were under control. and then we started seeing additional evidences of difficulty there. the actions that we took were to change out management, to go in and do some organizational redesign to get to a point where we felt comfortable that we could proceed with doing both

the whole loan sales in the securitizations that the company did. >> let's talk about those years where you got comfortable. mr. rotella take a look at exhibit 11 if you would. this is an e-mail chain from april of 06 between you and mr. killinger where you describe the situation in long beach. this is april of 06. quote, a major weak point is that review of long beach. delinquencies are up 140% of foreclosures close to 70%. first payment defaults are way up in the 2005 is way up relative to previous years. it is ugly. then you cited a number of factors for why the problem should be solved. five months later you sent mr. killinger another e-mail about long beach which we have marked exhibit 12, if you want to look at that. this e-mail chain was in september of 06. you wrote mr. killinger the following. quote, long beach is terrible.

repurchases, early payment defaults, very weak servicing, collection practices and a week staff," matt. you said that you were addressing the problem and the problems didn't get addressed in a year later now august 20 of 07 and the audit of long beach loan origination and underwriting, and this is exhibit 19. if you look at page 3 of exhibit 19, here is what it says, basically the same old problem. quote, repeat issues. this is a repeat issue. underwriting guidelines established to mitigate the risk of unsound underwriting decisions are not always followed accurate reporting and tracking of exceptions to policy does not exist. so, that takes us up to august 20 of 07 so now let me ask you mr. rotella why did these problems exist year after year? what is the explanation for that?

>> mr. chairman just by way of background when i was with jpmorgan chase i ran a small sub-prime business relative to long beach. when i joined and 05, my initial focus was on the main home loan business. i shortly became very concerned about long beach around the middle of 05. as we have heard a couple of times, management was being-- relieved of their duties. that was my recommendation and responsibility. at the end of 05 the folks that were running long beach were asked to leave or left. i transferred that business at the beginning of a six into the main home loans unit under a group of people that were better equipped to run it and we went about a process to try to improve that company. in addition while we were doing that, we did ring the volume give long beach down substantially. every quarter starting in the first quarter of 06. as we went through that process

it became increasingly clear that was indicated here that the problem in long beach was deep in the only way we could address those were to continue to cut back all yum and ultimately shut it down. so from my perspective as the chief operating officer, taking out management, restructuring the business, bringing down volume and ultimately shutting it down was a proactive number of steps. >> august of 07 if you look at exhibit 79, page 2, our august of 07. here is what you right. home loans, the original prime only was the worst manage business i've i have seen in my career. this isn't just long beach. that is until we got the load of long beach even before we got to long beach you said home loans were is the worst manage business you have seen in your career so what was the process of the home loans management?

>> mr. chairman there was a reason i was tired after 18 years of experience at jpmorgan chase. as i said earlier the company and this is well-known in the industry, in the mortgage business, had experienced significant problems in a three in 04. the problems in the main home loan group, which is where i focused a lot of my initial attention, were several. first i mentioned is the management team did not have a great deal of experience in running a mortgage company of that size. i went to a process along with david schneider who joined later in the year of repopulating most of the senior jobs in that business. secondly, the technology in the business was antiquated and as i said earlier, there were literally 12 different production systems as a result of many acquisitions. there were manual processes in the business and relative to what i have seen in my previous

employers, the company had many many shortcomings as it related to processing closing and servicing loans. >> i think you were here earlier this morning when we went through a panel for the 2005 internal wamu investigation of the two southern california loan offices, montebello and downing, found problems affecting their loans, rates of 83% and 50% or ago that was all on 23 b. if you want to read view that. we also repeat a memorandum which is exhibit 24 which was prepared in 2008 after the fraud, evidence of it reserved it and found virtually no action had and taken following the 05 investigation. after reviewing their loans and montebello in 07, down 62% contained fraudulent information

so we got year after year after year, we got a couple parts of your company that are apparently engaged in serious fraudulent loans with this information that is pervasive. so, starting in 05, why weren't any actions taken after that first 05 review? >> in the particular case of the 05 review, i was not aware of that at that time. i was aware of the 08 review that you referenced earlier that came through one of our mortgage insurers and i would simply say senator, as president of the company with 40,000 employees, first of all all fraud is-- and any incidents of fraud that was brought to my attention would be turned over to internal audit and/or legal to do a separate review and if they came back and told me that there indeed was fraud, believe me significant action would be taken.

>> somebody didn't tell you about it. is that what you are saying? you were not aware of the 2005 situation? >> at the time. somebody did not tell you. >> nosair. >> these are very serious allegations. these are high fraud rates. who should have told you about them? >> that would normally come from the business or from the auditor legal department. >> the first you heard of that was when? >> i became aware of this particular situation when it was brought to my attention in 2008. see it was referenced in your documents from later in the finder. in 2007, we had a review. this exit civet number 21-- this went to you also. this was now a problem,

corporate credit review, high risk, ineffectiveness of fraud detection tools, weak credit risk infrastructure impacting credit quality. they looked at 187 loans they were reviewing. 132 of those of the 187 files that were looked at, of those 132 that were sampled, were identified with red flags, not addressed by the business unit. adie had income loans that were identified as being unreasonable 87 exceeded program parameters. 133 had loan decision errors present. are you familiar-- this was sent to you according to the cover

sheet here mr. rotella. do you remember this one? >> i do. >> you said you found out about it in 2008 for the first time. this is 2007. senator, this report labeled wholesale specialty lending is about the sub-prime business. by august of 07, we had shut that business down. this audit report is reflective of the actions that i took, which were to release management of their duties, take the volume down and ultimately shut this business down by the time this was issued. >> but you said he first became aware of fraud in 08. to show significant fraud in 07. >> i was referring to the two to california retail offices from montebello and downey when i mentioned 08. >> if you take a look now--

exhibit 33. this is a report by radiance guarantee which ensure some of wamu's or bridges. they reviewed a number of 07 wants to evaluate its underwriting compliance with their guidance. they sound-- found so many problems they raided wamu's loans unacceptable if you look on page 233. just one of the loan examples, i am picking one from page 5 but there are many. this is a 484,000-dollar loan given to a sign designer. that is somebody who designs find, making $34,000 a month in income. borrower stated monthly income of 34,000 does not appear to be reasonable. they noted another problem. they appraise the house at 575,000 but another report said the probable value is 321,000.

an amount less than alone. that is just one of the loan said radian found unacceptable and uninsurable. whether either of you are aware of the report, mr. rotella, were you aware of the? >> nosair. >> let's look at exhibit 30. this is a significant incident notification related to early payment of defaults at the westlake village home loan center and it said that in this report, exhibit 30 said that one sales associate at ended during the crunch time, some of the associates, some of the associates would manufacture assets statements from previous loan documents and submit them to the loan processing center. she said that pressure was tremendous from the loan processing center to get them to document if the loan had already been funded. pressure from the loan consultants to get the loan funded or go all the sales

associate stated that the loan officers did not instruct them to falsified documentation. it just told them to get the loan funded with whatever it took, whatever it took. internal investigative report about the same incident says the sales associate would take assets statements from other files and cut and paste a current borrower's name and address. were you aware of this mr. rotella that wamu's employees were cutting corners and even engaging in fraud to meet value to man's? >> no, sir. >> were you aware mr. killinger? >> no, sir that is an absolute violation of code of conduct of the company. >> the were you aware of that? >> exhibit 31. were you aware of that investigative report? >> and regarding westlake, i believe it was prior to this particular report.

i had someone give me a call and attempt that there might have been, in history with that office i forwarded that information to our internal audit to did an investigation on that and i turned it over to them for that investigation. >> in terms of that specific exhibit though, are you aware of that? have you seen that? >> i do not recall the specific exhibit. >> mr. killinger, you seem to have some opinions about why wamu sees. why do you think wamu ceased? >> i mentioned in my comments, i think washington mutual was very well positioned with its capitol and operating plan to work itself through this financial crisis and i think it was making excellent progress on that. i think it was seized in my opinion in an unnecessary manner

clearly there was a lot of pressure on the financial system and regulators and policy leaders at that point in time and in the wake of the collapse of lehman. however, i just don't think the company was treated in the same fair manner that all other financial institutions were and it is very much, to use the analogy of oxygen, you know none of us can live on oxygen if it is choked off for a brief period of time and liquidity is the equivalent in financial services and liquidity did start to become tight, not just for washington mutual but for the entire industry for a brief period of time. but the policy leaders elected to open up those tubes of oxygen for most banks and gave them a huge amount of assets and washington mutual inexplicably in my opinion was not allowed to have the benefits of having that

oxygen come to them for that brief period of time and now in hindsight we can see those that were able to get through that reef period, and started to get back on the mend, that the financial positions were extraordinarily different today than i was 12 months ago and i believe washington mutual credit should have been able to be one of those surviving banks of. >> why was washington mutual specifically, i mean was it just bad luck? >> well, i think there is just an element of timing. as i indicated. >> why washington mutual? they were given oxygen and you were not. why is that? >> obviously i had time to look at this for an extended period of time and it just doesn't look fair to me and i think the company was not treated fairly earlier in the year when it was six looted on the list.

by removing the target from the backs of other banks to put the target on the backs of washington needs to-- mutual. i don't think washington mutual was treated fairly when the hundreds of telephone calls and meetings took place between wall street executives and policymakers to decide a debate on how things would work. washington mutual was excluded from most meetings and they think it is just inexplicable that washington mutual gets quickly seized and within a matter of just a few days all of these other managers that gave the lifeblood to the rest of the energy-- industry took place and i think those are unfair things than i wanted to speak about that on behalf of my fellow and past employees and investors who i think were harmed as a result of that. >> do you think wall street banks were given preference by the regulator's? >> well, i am looking in hindsight, if you look at the position we were in and we made

a decision to overnight, instantly give wall street banks access to becoming bank holding companies have access to the feds for liquidity. we quickly passed the various legislation that increased the fdic insurance limited 250,000 that had the fdic guaranteed bank debt. that would have would have been huge for washington mutual. they injected the t.a.r.p. money across the board. there were many thanks particularly wall street banks that liquidity was a major issue for them and they were saved by this. >> what was your relationship with the regulators before this? did you have a good relationship with the regulator's? >> we worked very closely with the regulators. we had frequent meetings with the otf has as i indicated in my comments. at the time i left which was in early september 2008, we had not been directed to raise any additional capital. we had not been directed to seek a merger partner so it is almost

incomprehensible to me that two weeks later the company-- three weeks later the company sees. >> did you ever meet in 2008 with mr. paulson are mr. bernanke? >> i met with mr. paulson on a couple of occasions because i was a member of the thrift industry advisory council which means actually three times a year with the federal reserve. i did not meet personally with mr. paulson. i did talk to mr. paulson on the phone. >> let me ask you some other questions. i am kind of new at this. >> to think we heard this morning stated income loans or loans to which information is put on application, where a customer tells us what their income is then than it is not verified. >> how did it develop? >> again, that product or that

feature has been around for many many years. i think what we are all dealing with is the housing crisis, excuse me, the housing boom grew and as the competition grew, the use of limited documentation and no documentation on loans certainly expanded and as we were commenting earlier, as we became more concerned that the housing market had increased in risk, i think that is one of the elements we all started to take a look at so in our case we started to cut back on our originations. we eliminated some of the product offers. we tighten underwriting and as we heard from david schneider earlier this morning at one point we also decided limited documentation loans were not appropriate. >> what size mortgages for state income loans used for wamu? >> again i don't have direct knowledge. what i heard this morning is that most loan categories could

be done without. >> when the stated income loan was resold,. [inaudible] >> i have no knowledge about what was put in the disclosures or anything in our securitization that was done by her capitol corporation because i was simply not involved in any of those. >> do you think people were lying about their income on these, stated income loans? >> clearly, it is speculation because i just don't know. i'm certainly very disappointed to think about my customers lying to me because that is broad and it shouldn't happen. but, i think the objective look at things, there must have been situations where people did not tell the truth on their applications. >> mr. rotella would you be surprised if he were lying on stated income loans?

>> senator, i believe given the expansion of stated income lending in the marketplace in general, it would be naïve to think that there weren't some who didn't. >> you have reason to believe wamu's-- in these kinds of attacks? >> as i said earlier senator, broad, all fraud is bad and there is broad in all financial products. i've seen that throughout my career. ave. i said i have related wamu's operating weaknesses. there were certain tools of at least when out there and even at the end. we were trying to implement to help us identify fraud or covera automated tools and various techniques you can use. wamu is behind the curve when i joined and we were making strides to get better at it is by no means were we perfect. >> why did you decide to stop stated income, either one of you mr. killinger why did you stop doing it? >> again market conditions

change very dramatically with housing prices coming down and there is a number of things we change. as you heard this morning we tighten underwriting, we change loan products. we ceased offering some of the sub-prime products. we ceased offering the option arms. we started to go back to more documentation on the loans and there are just a number of things that became more appropriate because the housing conditions changed so dramatically. >> was then when he found out how bad stated loans were? >> i think again these revolutionary processes and it became more evident to us that the housing downturn was going to be greater than we initially thought. we took incrementally more actions. as i mentioned in my comments, two years ago we were one of the first in our peer group to be out they are saying we are worried about housing. we are going to reduce what we

are doing. do you know how tough it is, of course you do, to be the only major player laying off thousands of employees and having to think about their families and what they are doing? >> you didn't understand people would concern when this thing went down, the whole thing, when did you know it and what did you know when you do it? these were being packaged up into mortgage-backed securities so it is really relevant. i think trying to figure out when these things happen in fact stated loans were bad and people knew they were bad and it went ahead and package them up into mortgage-backed securities. there is fraud involved in that so i'm not just talking about one. am i missing something here? >> all i can talk about is what we did. i got concerned. we started pulling back our operations. we have reduced the originations. we cut our market shares. we started going in these directions.

i did know there was going to be a 40% decline in housing prices. even in the middle part of 2007, secretary paulson was saying, i think is housing thing is contained and is is not going to impact the overall economy and lead us into a recession. chairman bernanke was saying something similar about the containment of the subprime issues. so it really wasn't until that second half of 07 when it became pretty obvious that things were going to be pretty difficult than we needed to pull in our horns even more. >> but all these deals you had to sign them as the ceo, right? >> no, sir. >> you did not? >> again i was not directly involved in any of our securitization's worth of security bill's. >> let me ask you about fico because we talked about that in earlier-- while my use fico

scores, right? bes. >> are they a good indicator of creditworthiness? >> historically. the two best indicators of a long performance was loan-to-value ratio and fico score. and, those did a pretty good job of predicting how a loan would perform. there were other factors such as the amount of income that somebody had and their ability to cover their debt. there were indicators about full documentation, limited documentation, adjustable-rate, conforming and nonconforming, a lot of things that also impacted that the two most important were loan-to-value and fico. what changed in this cycle is this whole thing about housing prices declining by 40% or more.

as you heard i think this morning, all of a sudden people faced with being underwater in their mortgages and guess what? even if they had a decent fico their propensity to become delinquent was much much greater. >> you don't think any of any os has to do with the explosion of the mortgage-backed securities and people originally making money on it, rocher's making money on it, those at wall street making money and that is what caused the explosion in mortgage-backed securities and that was part of the problem? it was the fact that the mortgage-- stopped? >> some more interrelated. i made a comment in my written testimony that there is no simple or single cause. >> i'm not saying any one thing. i'm just saying that was part of that. at least the literature keeps saying that as this thing grew and got more and more profitable people reached out a little bit further and stretched it a little more or a maybe stated

value bones may be okay for a while. people started using it as a tool in order to get into more mortgage-backed securities so they could make this gigantic machine that was so incredibly profitable for everybody involved. >> there is no question that there was a tremendous growth of capitol coming in from wall street and the gse's. that increasingly put pressure, competitive rushers on everybody to adjust loan terms and things. >> at that point do you think the compensation help the fact that-- he said the compensation. you were part of the process to set the compensation for the folks out there generating loans, right? >> yes we did although i will tell you that people have mortgage reps have been paid on commission.

>> we had a chart that showed there was commission on the higher risk, higher return products than there were on the lower risk longer-term products, right? >> although i am not intimately familiar because those were done within the business unit that i know those change each year so you have got to look at what was it in each year and not necessarily just the one point in time. >> did you know the fico scores and some of these 550? do you know what the range was the washington mutual fico scores? >> again i don't have all the intimate knowledge but i do know because i've all of what the bulk of the fico scores were for our portfolio and for example, our option arm portfolio had an average fico score slightly above 700. are home-equity was slightly above 730 and our prime residential i think was about

718, in that range and i think in the case of long beach or sub-prime portfolio we held in portfolio it was somewhere in the mid-600th. >> you understand the problem with using averages, right? >> i know the absolute arbel but i don't have the absolute arbel numbers in front of me. >> you still understand using averages, that is what the rating agencies did and clearly there were folks out there, i don't know whether washington mutual was one of them using a barbell kind of distribution. >> we had matrices that show every fico and against the loan-to-value against every one of those fico's i just don't have the details. >> some of this information, some of the loans are being sold were clearly questionable.

is that you are feeling, that everything is sold while you were ceo of washington mutual, the vast majority of it were loans that you did not know were delinquent, no one knew there were any problems with them? >> i clearly, clearly our policy and what i believe is that at the time when certain loans were sold, all of our loans were sold, that's we felt that that would be appropriate for the customer. we have put out a responsible lending principle. in fact that requires us to make that proactive look as if an appropriate product for the customer and given the times, do we think it is reasonable? that changed when the housing market change. that is why we pulled back and stopped originating option arms and did the same uncertain sub-prime products because given what happened to the housing market those products were no longer appropriate.

at the times when they were part of our arsenal, we thought they would be appropriate. >> what do you think mr. rotella? the vast majority of products you are selling, mortgage-backed securities were safe for customers? there wasn't any fraud involved. there were no loans delinquent or anything like that they you know of? >> senator, the company again was a massive mortgage lender. as i said earlier prior to my arrival it was number two in the industry, and peaked at 420 billion in origination send 2003 so the amount of product either put into portfolio or sold with significant. so in any business doing that amount of volume over a number of years, particularly given some of the weaknesses in in the operating infrastructure, you are going to have loans that put it into the securitization process that probably shouldn't have.

our policies, my policy when i was at jpmorgan chase for 18 years, ceo of their mortgage company, you would not do that and if you knew about it you would stop it. >> you must have been alarmed when you read about these long beach memos and the things that chairman levin is talking about where people were cutting and pasting and things like that were going on at a time when it was pretty clear that the explosion not only a new houses being sold at this great sound. you had to be concerned that people were beginning to-- especially with the conversation. you are a smart man. as you said you have loads of experience in this business. you look at these things and you would say this business is so big i don't know what is going on. this is a big as that is exploding him exploding at a very competitive time. people's compensation was based on doing well and doing well met selling as many of these as you could. you had had to be at least have

a feeling that there was something going on that was this -- a little scary. >> senator, chairman levin repeated a couple of colorful comments i made in some e-mails about my views of the business. as i said in my opening statement, this business was on an explosive growth pattern when i joined. it was on an explosive growth path with a very weak infrastructure. >> exactly. >> i was brought in there to fix that in my work night and day to do that. i brought in the people to do that and we made a lot of strides. we also brought that business down significantly, so if i wasn't concerned i would not have taken some of the actions i did to bring in new management, bring in new technology and restructure the business and take volume down and ultimately shut down the subprime business totally as well as option arms. >> and that meant long beach write? >> i did recommend shutting down of long beach.

>> mr. killinger a final question i have. with all of that going on, they were worried about an impending crisis due to lack standard and poor internal controls as early as 2004. when they came and talked about that, didn't it kind of sends chills? you made washington mutual what it is today. the idea that you are to risk officers one right after the other coming in and saying hey we have got a real big problem here. kind of go through what went through your head between 2004, 2005 and 2006. >> this is relating to the sub-prime business? >> the whole thing that they were concerned about, lack standards, all of the things that were coming into your office. you were the ceo. two toppers guys are saying we have a real serious problem here and obviously you hired mr. rotella because you are concerned about this. >> absolutely. again let me put it quickly into perspective.

long beach mortgage was a small part of our operation. maybe 3% of our employees and they were just a small part of what we were doing. when reports arose that there were some problems there, the first time i actually instructed our general counsel to go in and work on getting things cleaned up in terms of the warranties and getting it straightened up and they thought they were making progress. we had a brief period where it looked like things were going along okay and then we started to get some reports about, that we are seeing some more problems, so we decided to change out management. a new opportunity to get in here and there was also obvious again, overall that the company had expanded to a size that it was appropriate in 2004. he made a decision to bring in a

chief operating officer to deal with either being hands-on or on top of these things because frankly more and more of my time would be pulled away from all of the things in travel you have to do as a ceo. we thought that that would be a very good structure and i think that was the right thing to do and i think it was not only bringing steve den, he in turn brought in a lot of talent in the mortgage base where we needed the most talented including you saw david schneider, david beck and a whole host of other people that came in behind it so our response to these ongoing problems was to try to fix it, change out management, try to work as hard as we could but then also understanding that the market was getting progressively more difficult and that kind of tipped us at one point in saying, i think we are making, we are making some progress here but the market has gotten tough

enough, let's just close that business down. >> thank you. >> mr. killinger, i want to refer you to exhibit dirty nine where on april 3, 2007, i think we ever be well prepared to send the option arm portfolio. if you will go to exhibit 39 in a statement that you made. what i would like to ask, did you believe at that time option arms were likely to cause wide spread problems and would cause, force wamu to defend its actions? >> no. >> what was the basis for that statement? >> the statement, i was passing on to some a letter that i received from somebody outside of the urbanization that had an opinion about option arms and part of what i was passing on

was for folks to think through both what did this mean in terms of what investor interest might be and how we might need to explain about option arms to the investors in our company and also to take a look again at market conditions are changing and if they are, is there anything else that we should consider doing in our option arm portfolio of. >> and exhibit 11 you said in april 2006, we may want to continue to sell most of the long beach originations until everybody gets comfortable with credit. why do you think anyone would have wanted to buy what you were selling at the long beach product was bad? >> again, long beach's business model was to originate and sell that product ever since we bought it so that was her sole business product was to either sell the bonds or into securitizations. we were in the process of changing them business to move

it under the bank so we had more flexibility to potentially retain some of their loans that we had originated. we just started to do some of that process but we also-- i wanted to be assured that before we expanded our volume and tip more to portfolio and change but we were doing, that we felt very comfortable about credit processes and all those kinds of things. >> and exhibit number 50, mr. beck said to you in november 2006 that long beach mortgage company papers were among the worst performing papers in the market in 2006. did you see in april what mr. beck not to be true november namely that the paper was going to tank? >> no, i don't recall. >> you weren't aware of his statement that it was the worst of the market?

>> you are referring to mr. beck? >> number 50 in november of 2006 that long beach mortgage corporation paper is among the worst performing paper in the market. >> i just do not recall seeing this memo. >> who is the memo addressed to? >> the one i am seeing is david schneider and arlene hide their. >> you were unaware of the assessment of your pay per? >> again, just don't recall the specifics of this at all. >> exhibit 78. this e-mail exchange from march 10, 2005 with jim but hasek, you wrote i've never seen such a high risk housing market as market after market thinks they are unique in forever reason they are not likely to experience price decline. this tabouli signifies a problem. is it accurate use saw a bubble

as early as 2005? five? did you see a bubble before march 2005? >> i don't recall my exact timing. i do remember making public comments beginning in the middle part of 2005. i remember talking to the board from time to time about, that there was growing risk because housing prices are growing faster than the rate of inflation. also at the same time i remember everybody arguing why that is going to be okay and it is unlikely to be a significant downturn in housing. we were at the front edge of trying to assess that there was concern here. >> that follows into my second question because in january of 2005 is when you push forward a high-risk lending strategy for board approval. only two months earlier he saw prices were declining in the near future why would you be pushing through the hybrid

strategy on the market you thought was? >> first, senator we approved a new strategic plan and actually the summer of 04 and this is not the whole plan. remember this is a small part of our business. part of that plan was increasing the subprime portfolio that we had in our portfolio over a period of time but i also was very careful to say that is going to be subject to market conditions and we will be opportunistic and the reality is we did not execute on that. we ended up drinking that portfolio that we held rather than growing at a. >> this chart actually shows that. >> what shows that is what we held in portfolio. our originations declined and our market share and sub-prime originations declined. we were only 6% and we cut it to about 3% of that rocker chair is

about half of what we had in the overall market but in terms of what we held in portfolio that portfolio shrank and we had plans to grow at. >> between 2004 in 2005 at the time he shifted towards this high risk strategy, it at the same time you switch from doing business with any to doing more business with freddie mac. is that simply a coincidence or what was the business advantage to moving freddie mac from fannie mae? >> i don't have the personal details of the pros and cons of doing business with each of them. those contracts were negotiated actually in the home loans group and i think steve might have been involved there so i can't recall why one over the other but we always try to have them in a good competitive position. >> i would like to enter into the record the washington mutual

document, fannie mae allies business relationship proposal to may of 2005. here is what your executive summary says. the key is pretty proposes provides the mythic illiquidity for option arm originations with more advantage and credit for amateurs, and preferred access to the balance sheet relative to our current agreement with any. so it was economically, it was economically driven position. >> that sounds like a better deal. and not just option arms but i think i also heard that are guaranteed fees amount explanation. >> alright. i have one final question for you mr. killinger and that was, at one time towards the end before the f. tic came in on your business, were you in negotiations to sell this business? >> in the spring of 2008, we

determined that the housing market was continuing to soften. and that we needed to either raise new capitol or seek a merger partner, and the board went through a very thorough review of alternatives at that time, and we considered those potential sales and we looked at the equity infusion that we could get, and we'll smiley made a decision to take in $7.2 billion in equity infusion. that is what the board elected to do a. >> how were you going to do that? >> we did it. >> how did you accomplish a 7.2 billion--. >> it was a combination as i recall of the convertible preferred that basically most of it would convert into a common once we got the additional

shares approved by shareholders and there were certain warrants of crude-- attest to that and it was led by private equity or a number of large institutional investors. >> you actually sold that equity and those warrants and that convertible preferred? >> there was a private basement offering of those. >> but it was sold. who represented the other side of veterans-- was the broker-dealer or the underwriter? >> placement for us would have been goldman sachs and lehman brothers i believe. be okay. mr. rotella under exhibit number two in your testimony you mentioned washington mutual adopted a high-risk lending before you arrive. that is on page 4. he said i did not design the strategy on page 5. did you mean to imply some distance between yourself and

the strategy? >> senator as i said in my opening statement, shortly after arriving at washington mutual, and having been an observer from jpmorgan chase i was aware of the fact that the company had an extreme concentration in real estate loans as a thrift. it had a concentration in florida and in california, 60% of its mortgage assets. as i said earlier it was going through explosive growth, particularly in high-risk lending and the operating infrastructure was quite week. that, combined with the view that the housing market was softening lead a group of us to begin a process of diversifying the company and deemphasizing the mortgage business which over time we hoped would lead us to a company that was concentrated less in real estate and had other asset.

>> in your testimony on the one hand you say you were simply carrying out the chairman and ceo's strategies but on the other hand you are saying it was your decision to decrease the high-risk lending. which is that? >> senator i'm not saying it was my decision but i and others believe the company needed to diversify its up and move away from its mortgage legacy. that was a discussion amongst a number of executives and ultimately up to the ceo and we made a firm decision to make some of the proactive steps that i mentioned in the mortgage business and also began to diversify some of our other businesses. >> what was going on at long beach other than what we discuss here today that require the whole management structure to be changed, in your view? >> when i joined in 2005, a big organization. i moved from east coast to the west coast and was getting familiar with the company. my first focus was in the main home of loan business which did

not have a leader at the time. it was reported to the same person who is running both our commercial mortgage and are sub-prime business. i took that business over and ran it myself until i hired somebody and as they instituted a series of business reviews in the company i became increasingly concerned that a couple of things in long beach. on the growth path was incredibly rapid and two, i couldn't get transparency into what was happening in the business which always worries an executive. over the course of the second half of the year i became increasingly concerned and ultimately towards the end of the year there was a fairly significant repurchase blowup that admin discussed earlier in the day. i made a recommendation at that point to move forward on making management changes based on the combination of those factors. >> one last question if i could. how dependent in your view is washington mutual was his

relationship with fannie mae and freddie mac? >> like all biggest mortgage lender senator fannie mae and freddie mac were important and i wouldn't call it dependent, but it was a substantial amount of production that was sold off to either fannie or freddie after i got there and it was switched over to freddie mac. so depending on what level of dependency you would like to characterize it as, any mortgage lenders in the mortgage business, given the government at managers and the duopolies that any and freddie had needed to do business with them. it is difficult to be a mortgage player without them. >> thank you. mr. killinger one last question. at any time prior to the closure by the fdic did you have conversations with a major financial firm in new york about the sale of your business? >> as i commented,. >> i am asking the question again specifically to give you a chance to answer that question.

did you have conversations with principals of financial firms in new york city about the sale of wamu or the capture of wamu by a larger financial institution? >> s., and as i said earlier that was in the spring in the march april period when the board considered all strategic alternatives between raising capitol. >> that was goldman sachs and lehman? were there others you have conversations with? >> they were representing us. >> who did they have conversations with, not raising additional capital but the sale of the business? >> there will i would say a handful of potential interested parties. we put out a net that was broad both domestically and internationally to see if anyone would be a potential partner at that time and we talked to the

investment bankers talk to a number of them and then there were a couple of parties that we talked on a more private vases. >> you would be so kind as to give the committee the name of those individuals. >> i'm not sure that has been publicly disclosed. >> your company is gone and for us to get to the bottom of this we need to know every detail, so you can refuse to answer and then we will work on that, but the fact is that information is going to come out and good lawyers don't ask questions they don't already know the answers to so i think it would probably be beneficial, and i'm not a lawyer by the way, for you to give us that information. you don't have to give it publicly but you can give it to the committee. thank you sir. >> thank you very much senator coburn. let me go back to your strategy. you say you adopted this shift to high-risk strategy in 04 and

05. is that correct? it wasn't implemented. >> not all elements. >> you surely executed your focus on high-risk projects. products. take a look at exhibit 6b. if you take a look at that exhibit, home loans 2007 strategy team goals, a dated 11 11/12/07. your goal is growth, 45%, drive non-rhyme expansion initiatives. support our could share increases for nonprime products. key to success focused by all channels on targeting higher margin products and that is higher risk products. exhibit 6b.

speier sure try to execute that new strategy for at least a year, year and a half and senator we did execute elements of the. >> let's just focus on the higher margin products. you want to focus all channels on targeting higher margin products. drive nonsanctioned-- non-expansion initiative. that is your goal. >> updated 11/12/07. do you see that updated, 11/12/07? >> seven? >> i am seeing this, yes. this is the target for the home loans group that we are looking at, not the company. >> nonprime expansion.

>> yes. if i could again, because i am setting the strategy with the board, setting the strategy for the overall company. it really needs to be in the context, when we talk about diversifying the company, that included having a strategy for entering the credit card business and we subsequently did the perfidy and acquisition which was a significant part. it also had a material reduction in interest rate risk and that is why we sold so many mortgage servicing rights and we also had even in the home loan area, that this would be a lesser part of our overall business and that the primary growth of the business with dnr retailed banking stores and that is where we are going to open up significant numbers of retail banking stores so the overall context of the company is still a shrinkage of the home lending business but within the home lending business that we would have more focus on some of these

other products. >> some of the other products being? high risk products? >> like sub-prime which we did not execute on. >> you executed on a bunch of high-risk problems. you have option arms, subprime and home-equity. >> we did execute on expanding our portfolio and home-equity. we did not expand the portfolio of option arms. option arms actually declined in the size of those portfolios. ..

>> we'll be in a position to profitably grow its market share of option arm, home equity, subprime, and loans. >> that was the plan. we just did not execute it because of changing market conditions. >> i know. but in june 12, '06, you're still planning on executing it. this is a plan you shifted to in '04 and '05, so you executed this for a year, year and a half. >> as housing became more challenging, we moved even further away from the plan.

>> i understand but i don't think you ought to get away with the statement you didn't execute on it. you tried to execute it until the market changed. >> okay. >> you know, -- >> here's a pie chart we have here some which shows the percentage of your inventory, which i high-risk, compared to the low-risk. take a look at '03 in blue. in blue, the majority low-risk. 30-year loans, fixed loans. '04, the dramatic shift. the red is your high-risk, and as a part of your invent at the, starting in '04, going through '05, '06, '07, the blue, which

is your traditional 30-year, typically fixed loans, become a -- they're no more than a quarter of your inventory. the high-risk part of the inventory goes from a third in '03 to three-quarters in '07. so you have have shrunk your total inventory, but as a percentage, you're still hokied on high-risk products. is that accurate? >> no. >> how is it wrong. >> it's a chart not of inventory. it's a chart of mortgage origination. >> i got you. i shouldi should have said that. origination in terms of purchases -- originations and purchases by percentage, two-thirds low-risk, fixed

mortgages in 2003, starting in '04, '05, '06, '07, becomes less than a quarter by '07. and that's the point. you changed your strategy. you shrunk the whole pie. that's true. but you also started to implement your high-risk strategy, and that's culled from your own words which i just read. and when the strategy became frustrated because of the market, you then shrunk the whole pie, but you did not shrink the percentage of your originations and purchased that went to the high risk products. >> just one point i want to be crystal clear on is that in 2002 and 2003 were very, very unusual years for fixed-rate products because the country was going through a massive refinancing boom, and that's where so much

of the origination was. if i went back to a more normalized time, like two years before that, you would have seen a balance that was more reflective in 2004, 2005, and 2006. >> 2006, june 12th, let me read you again. finally, our home loans group should complete repositioning in 12 months. that's your strategy. and will be in a prognosis to profitably grow its market share of -- you're trying to grow your market share of high-risk? june of '06. that's your plan. option arm, home equity, subprime, loans. that's your plan, right? june of '06. i know that changed after that but that was still your strategy. i'm just reading your words.

>> we had the plans. >> in june of '06 you still had the plans. >> if market conditions were good, we good profit. >> your plan was to complete the positioning in 12 months and will be in a position to profitably grow its profit share. i'm reading your own words. now, let's turn to exhibit 34. which is an internal wamu review by its mortgage fraud group. september 8, 2008. and right here on the bring -- brink of going out of business. take a look at the first -- this is september 8th, a couple weeks before you were taken over. page 3, first finding and

review. i want to get back to the fraud here. it's one thing to say you couldn't know with certain there was a housing bubble that was going to burst. even though you predicted it. the issue isn't if you didn't know when the housing bubble would burst. the issue is how much you now was going on in your own company, is the level of fraud and what you knew or didn't know about that. here's what you were told in '08. this is september 8th. the controls intended to prevent the sale of loans that have been confirmed by risk mitigation to contain misrepresentations and fraud are not currently available. now, that should have set off some alarm bells.

your fraud controls, and misrepresentation controls are not effective. it says, there is not a systemic process to prevent a loan in the risk mitigation inventory and/or confirmed to contain suspicious activity from being sold to an investor. then there's a test of 25 loans. 11 reflect a sale date after the completion of the investigation, which confirmed fraud. that's going on inside your company. you can't predict with certainty the bubble, but this is what is happening inside your company. when you got that report -- maybe i should ask mr. rotella. when you got this report, what was your reaction? >> any instance of fraud -- >> what was your reaction at this document. i know your any instance of

forecast. you said, you don't have any controls from fraud that is going on. >> there was instances overalled i was aware of over the three and a half-year-old i was with wamu, and i authorized -- i mean control. >> -- budgets, people, control, expenses to put in fraud monitoring, tools. >> was not effective. that's what you said. >> clearly this report indicates that in september of '08, three weeks before the seizure of the institution. >> it says something else. it says that there is evidence that this control weakness has existed for some time. >> the lack of controls were fraud, according to this report, your only internal report. existed for some time. what was your reaction that? >> i don't recollect exactly my

react, but i can tell you that reading this now, have the same reaction i probably had then. i would not be happy with and it i would authorize people to fix it. >> what was your reaction? >> i wasn't at the company at this time. >> you had already gone. now that your read it, what's your reaction? for sometime controls for fraud were not effective. >> exactly what i just heard from mr. rotella. we view this as very serious, and you say, get on it and get it fixed. >> during a prior panel we discussed the number of e-mails that showed that a decision was made in early '07 to self option -- sell appearing -- sell option arm loans. and those loans were already

showing serious delinquencies. and it was authorized $3 billion in option arms to be sold on an urgent basis. you were here when i went through those documents. they're already in the hold for investment portfolio, and were reclassified on an urgent basis for sale, and it's clear these were likely to be delinquent, and damn soon. we better get rid of these damn soon. there's a great risk of default. now, when you look at exhibit 40b, if you, would on page 2, one of these e-mails is february 18, 2007, by sheryl felt, the chief risk officer for

your home loans division. hearings what she wrote. there's a meltdown in the subprime market, which is creating a flight to quality. i was talking to robert williams after his return from the asia trip where he and allen talked to potential investors for upcoming covered bond deals backed by our mortgage. there's was still strong interest around the world that u.s. mortgages, gain on sale margin for option arms were attractive. seems to me to be a great time to sell as many option arms as we possibly can. kerry killinger was encouraging us to think seriously about it in the monthly review last week. what i can do to help? would your team like any help on determining the impact of selling certain groupings of option arms on overall delinquencies? now, i believe, mr. killinger,

mr. killinger,- -- you're reared to here. do you remember that? >> i remember that period of team and the mbr, monthly business review. >> do you remember saying you should think seriously about getting rid of these option arms? >> not these option arms. i do remember going through a discussion about the benefits of doing share repurchase versus growing our balance sheet. >> do you remember a discussion about delinquencies and that being a reason why you better get rid of option arms quickly, because they're likely to become del and then do you remember -- delinquent? do you remember those conversations? >> i remember conversations about attractive pricing and we would be better off to redeploy our capital some other way. >> she says you talked about

this subject, and the e-mails are full of that subject. you're saying delinquencies may have been part of the conversation. >> i don't recall. >> all right. did you know that during the first quarter of '07 that wamuas securitizing option arm loans because of their greater likelihood to fail? did you know that? >> i don't have a recollection of that. >> what did you think when you heard these e-mails today? did that surprise ouror trouble you? your staff is saying, we better get rid of these quick. did that trouble you today? >> i don't recall having seen something like that before. it's just something that was new to me. >> when you heard it today when it was new to you, what war your

reaction? >> my reaction on the plus side was that, if they're talking about -- >> no. no. just with the gel wednesday sis, del sequence sunday, urgent, midnight e-mails, we got move quickly on this. when you heard that, what was your reaction? >> we needed in a timely way to do a transaction. i didn't get that it was because there's going to be an urgent change in loan performance or something. when we decided to go sell or buy an asset, i know these people have to move fairly quickly to identify what they want to sell and buy, and there's also a factor of the geographic concentration, because we had -- it's difficult for us because we kept trying to find ways to reduce our concentration in california because we have a natural propensity to originate so many loans there. >> mr. killinger, is that what you would have liked to have

heard? i'm asking you what you heard today. what you heard today was, these loans are delinquent. they're having a heavy flood of delinquent loans in the fourth quarter. and then the criteria for the loans were laid out. then there was a decision made, we've got to sell these loans. we can still sell them. it was significantly based on delinquencies. it was the subject of every e-mail. you wanted to gain capital. what i read to you was that there was a high rate of delinquencies, and we have to move quickly. when you heard that -- not what you wanted to hear but you did hear -- i'm not going through them again unless you want me to -- did that trouble you? would selling those mortgages

for that reason trouble you? without disclosing that to investors? would that trouble you? >> it would trouble me, certainly, if it didn't have the proper disclosures which we have. i do want to make one point and be very careful here. i don't know if it relates here. we had a regular program of selling nonperforming assets. it was part of our risk mitigation program where we would take problem assets, pool them up, sell them to investors that were interested in buying those. >> i'm not talking about that. i'm talking about you had a significant set of delinquencies in the fourth quarter. you're continuing to originate or to buy these option arms. you had a study made. that study showed that certain specified criteria were the key factors in those delinquency.

the decision was made you better dispose of option arms, clearly following that assessment. you made an assessment. was that assessment disclosed to investors? >> i have no idea. >> should it have been? >> it would seem -- certainly any sale should have disclosure. >> is that not relevant to a buyer? >> again, i don't know what the actual sales were, and i don't know what the actual disclosures or anything about that. so, it's very difficult for me to talk in a hypothetical. >> you should have been disturbed by what you heard here today. okay? it's very clear you should have been disturbed by that. i hope you would have said, yes. if i had known that, i would have been disturbed.

instead you want to wrap it in hypotheticals. these are e-mails, one after not a, delinquence circumstance delinquency, we got move, urgent, urgent. midnight e-mails, we go to move. talked to killinger, he says we got to move. now your saying, sometimes we sell assets. i'm talking about these e-mails, mr. killinger. >> what i heard this morning is mr. beck didn't know if we sold these or what happened in the transactions. so i don't know what actually happened. >> should you have known? >> were you aware -- >> no, i wasn't aware of specifics. these are not the kind of size and transactions i would normally get involved. >> you don't get involved in $3 billion authorizations? >> no. >> those would be handled within the group. >> 3 billion, out of a 300 -- being sold on an urgent basis.

>> no. >> urgent basis, we need 3 billion. in fact, the loans that we're originating right now we're going sell immediately. that's how urgent it was to move on this. all right. you're under oath here. seems to me, if you're not disturbed by this, you should be, and it's hard for me, frankly to accept that you would not be troubled if you had read then what you heard this morning. and you're saying, if you had read all those e-mails back then, you would not have been concerned. is that what you're saying? >> i'm saying i would be concerned if there was anything that was done -- >> i'm talking about the e-mails. would you have been concerned then if you had read those e-mails? >> well, would you -- >> would you have inquired, are we selling these things? are they part of the $3 billion? would you have made that

inquiry? are we disclosing those investors? we made study of these and we have a reason for the delinquences. a guy says there's eight represents. they're laid out. and these are late evening, early morning e-mails, urgent, urgent. would that have troubled you, if you had seen those e-mails then? i. >> i did not see the e-mail and i don't know what ended up -- >> not ended up. i'm saying before they were securitized. the decision was made to put up to $3 billion of those mortgages into securities. my question is, before the decision picking which ones, would you have been troubled by the e-mails? >> i'm troubled it was just on the basis of -- >> just what you heard. today. just those e-mails. that's all i'm asking you.

if you had seen those e-mails. i'll read them again to you. would you have been troubled if you read those e-mails then? >> i would have inquired more. i wanted more information. okay. i want. >> okay. i guess that's progress. take a like at exhibit 69. this is an e-mail from you, mr. killinger, dated october 12, 2007. this is responding to a colleague's e-mail discussing the hiring of goldman sachs to help wamu raise new capital or reduce credit risk.

your senior staffer wrote, we always need to worry a little bit about goldman because we need them more than they need us and they're run by traders, presumably meaning they act anywhere open self-interest and not on buffalo behalf of their clients you say, don't trust goldie on this one. they're sharks. they were giving cfc advice. cfc being countrywide financial corporation. now, what led you to say that goldman sacks was shorting mortgages big time? >> i don't recall having any specific knowledge but i

probably read about that or heard in general about what they were doing at that same time, and i was just making -- trying to make a point probably in a little flippant way, if we're going to engage an investment bank that is going to help us, we need understand they may have a conflict of interest. >> was that a common perception at the time, that goldman sachs was shorting mortgages big time or giving advice to clients? >> is a recall in that time frame there was some speculation in the press about that, and i think that was kind of one of the points that was going around on wall street at that time. >> yet you hired goldman sachs to help you out. >> we did use them on trans

actions, yes. >> in your statement, you talked about how the office of thrift approved of wamu wamu's action,t you don't mention in your statement is the office of thrift supervision's criticisms of wamu, from 2004 to 2008, the office of thrift supervision repeatedly leveled serious criticisms of the bank. here's a couple samples. '04. several of our recent examinations concluded that the bank's single family loan underwriting was less than satisfactory due to excessive errors in the underwriting process, loan document preparation and its associated activities. that was may 12, '04. in '05, ots wrote, quote,

underwriting exception lack of compliance with bank policies. devoices if left unchecked could -- deficiencies could erode the portfolio. '06, subprime underwriting practices remain less than satisfactory, continuing weaknesses in loan underwriting at long beach in 2006 too -- 2007, too much emphasis was made at the expense of loan quality. loan-writing practices are less than satisfactory. 2008, poor financial performways exacerbated by conditions within managements control. poor underwriting quality. geographic concentrations in problem markets, liberal underwriting policy. that was presented to the board of directors, july 15th, '08. so you have the otc citing the

bank for weak lending practices. were you aware of those criticisms? >> yes. >> in your opening statement, i believe you made reference to a wall street's growing appetite

for these products. can you expand on that? >> i believe i was -- are we talk about back in the housing boom? >> yes. >> we're clearly -- >> you were talking about your high-risk products. >> clearly the money was flooding in to wall street, both from international sources and domestic sources, with a very strong appetite for buying mortgage-related securities and that strong pressure to buy certainly had an influence on the products that they were willing to buy and the kind of conditions around those loans. where we saw a particular change, i would say, is in the option arm, which for many, many years was a portfolio product and there was not a secondary

market. what we saw in the mid-2000s is the emergence of a secondary market with wall street and the fannie mae and freddie mac, and that led to a huge surge in brokers originating option arms. that certainly changed the competitive landscape for us, caused us to lose significant market share and had an impact on the different competitive features of that product, and so certainly the development of the secondary markets had a huge impact on the market. it was the primary outlet for origination of subprime loans and it had a big impact on the criteria used to underwrite subprime loans. >> would you say that the criteria were looser as a result of that demand?

>> oh, i don't think there's any question. you heard this morning about the -- what we called the layering of risk, where the loan to value ratios increased and there was more of a prevalence of putting second mortgages on top of first at origination, less documentation. some new products in some cases, and just -- and very thin pricing because there was so much money kind of chasing, wanting to make those loans. insure ...

cause they were so low in that product there were other parts of the market that will street and others looked to essentially chase. >> i think all this in our home sales depend on housing price

appreciation. for repayment to refinancing and are viable and a healthy market where housing prices are constantly on the rise but housing prices depreciate action arms become problem assets. would you agree with that, mr. rotella? >> i would. >> mr. killinger, would you agree? >> yes. >> i want to thank you for your testimony. we have a situation here where a bank, mainstream bank, again as a prudent well-run bank debt over time engaged in some high risk and shoddy lending

practices with early payment defaults, fraudulent information, and reasonable income statements, negative advertising loans and then at the end it became a conveyor belt that dropped into the stream of commerce literally hundreds of billions of dollars of mortgages that were substandard and a dubious and it wasn't the only lender doing that. we know it was one of many that together the toxic mortgages contributed to a financial crisis in 2008. so we are now debating financial reform and be sure needed. we will have three additional hearings in the next two weeks which will look at other aspects that cannot today about the question of the regulators where did they fall short, the credit rating agencies where did they fall short and the investment banks and wall street directly,

was their involvement, what was their role in this assault on our economy that we've got to do some financial reform in the senate. i hope that we are going to be taking action with respect to stated in come loans that have no verification of income or assets. i hope we are going to take action of the evidence to the negative three amortizing loans that hurt borrowers and increase the risk of default and stop that practice from occurring. we've got to ask on these high risk loans that are the product of financial engineering turned into high-paying aaa mortgage-backed securities. the short term wall street profits that one over for too many years over long-term fundamentals that have cost this economy dearly and you have heard a story today, and in that

story which i think is a sad story which cost the state of washington and seattle and cost a lot of jobs there and around the country, cost a lot of mortgages being foreclosed, a lot of homes lost and were part of the problem this economy faced that came to the head in 2008. so we look at other parts of this in the two weeks ahead and in the meantime we want to thank the witnesses today for coming forward. we always appreciate people who were willing to testify. we are grateful to the two of you and stand adjourned. >> here's more from the senate hearing on washington mutual. in this hour and 40 minute

portion you will hear from the former president as well as the former head of the capitol markets division. >> wamu's own data. if you look at the exhibit three which is seen april 18th, 2006 presentation you put together for the wamu board of directors about the high risk lending strategy you'll see that on page five there is a title and products on the left is about the gain on sale which is produced by the higher risk loans even in large that part of the chart so that you can see it better. it shows wamu earned about 19 basis points for fixed loan and traditional loan option arms are in the 109 on mckelvie loans are 114 basis points and said prime loans are 150 basis points so eight times more than fixed loans. is it fair to see that the gain

on sale for the subprimal loans was much higher than the six loans because the bank was able to heard dee dee could charge higher fees and interest rates? is that the case? mr. snyder? >> turn your microphone on if you would. >> if you look at the gain on sale there's a number of factors that would have driven what would be the ultimate game on the sale, six, a fairly low game which is the high product that plan to fannie mae and freddie mac. subprimal tended to have a large because the additional credit risk that investors would demand from the product and because it was probably less competitive. >> higher interest rates? >> yes, sir. >> and option farms? >> option arms would have higher gains on the sale primarily because of the -- it had less competition.

it also had most of the interest-rate risk remains to the bar for the banks the more attractive asset to hold. >> the was a higher interest rate as well? >> not on the option farms? >> no sir. >> after the recast higher interest rate than it was on six? >> would depend on their rate environment. >> there's a big appetite for presidential mortgages on wall street in september, 2007. is that true? >> it was around the summer of 2007 when the securitizations started. >> until then there was a huge appetite is that fair to say for the residential mortgages on wall street? >> i would say the appetite was significant. we started this to see some dimension appetite and late 2006 and the middle of 2007. >> okay.

what they leave rate sheets would be what we would post each day for the price of the mortgages we were offering on that particular day? >> maybe i should ask mr. beck this question to the the there were basically put together by the capitol markets group but these folks with seattle. >> they were distributed from seattle. the information that went into the sheets could have come from both new york and seattle. >> is wall street playing the biggest role in setting the prices for the nonconforming loans across the country. for the non-agency mortgages the sheets relied on the execution from wall street, yes.

>> basically -- >> as opposed to fanny or freddie. >> mr. snyder you're only a statement to describe long beach as having challenges you were asked to address and what were they? >> mr. chairman, when i first saw that audit report put together and we took over the next several months they did a number of steps to improve the way the origination or operated. we put into place exams, fraudulent tools. i changed management twice, mr. chairman, and over the course eliminated exceptions, he eliminated some of the high risk products and ultimately decided that the end in the middle of 2007 that it was an operation we

should shut down. >> and the audit you saw when he first got there, the 2006 audit which was exhibit tannin was the reason as i understand that you were asked to take responsibility for long beach; is that correct? >> i took responsibility for long beach at the beginning of 2006 and one of the primary drivers was the increasing repurchase demands long beach's experienced and the first area we looked at. >> in use all the audit? >> correct. >> you ordered a crackdown on early repayment fees'? >> correct puna sprick and they searched a year earlier and wrote in exit 13, december 2006 e-mail to your colleagues, quote, short story this is not good with a large potential risk for what appears to be a recent increase in the purchase requests rapidly using

credibility and to exhibit 13. does that sound familiar? >> is it does. >> eight months later, august 20, 2007 audit report that is exhibit 19 years what he said. quote, underwriting guidelines established to mitigate the risk of on sound underwriting decisions are not always followed. activity reporting and tracking of exceptions to policy does not exist. you see that? >> what page are you on, mr. chairman? >> repeat issue, which is page -- page two, page three.

repeat issue. see that at the top? high risk? >> yes i do. >> underwriting guidelines established to mitigate the decisions not always followed. it then and says that is high risk. the next one, number two, high risk. eckert of reporting and tracking of exception does not exist. you see that now? >> i do. >> long beach was continuing to issue the poor quality moments. is that fair to say? >> i think it's fair to say, mr. chairman. the underwriting audit group as well as myself is the reason we ultimately decided to shut down the operation. >> did you finally shut it down and transfer it to wamu? >> it was shut down -- when long beach was shut down we stopped originating subprime mortgages

through business long beach that was the third quarter of 2007. >> the vast majority of long beach mortgages, your data shows about 95% sold or securitized. exhibit 1c based on wamu data, the long beach mortgage annual securitization increased more than tenfold. two and half billion more than 29 billion in the year 2006. from 2000 to 2007 long beach and wamu together securitized 77 billion in subprimal mortgages -- mortgage backed securities. those are the securitizations numbers. these are wamu's summary of sep prime securitization as of june of 08. so they -- long beach and wamu securitizations doubled from 05

to 06 going from 14 to 29 billion. long beach at the same time was cutting back on loan originations during 2006 which means that wamu was purchasing south prime loans from other lenders and mortgage brokers through its conduct and other channels. is that right so far? argue with me so far? >> senator, i think if you look at that chart that sos securitizations. there were also whole loan sales in 2005 so i'm not sure the exact number and the other -- >> those are based on your numbers. do you have a problem with the numbers in terms of securitizations? >> and securitizations i do not. >> okay. now why were so many long beach mortgages defaulted? why were long beach securities consistently among the worst performing in the marketplace? >> senator, i don't have that market data in front of me.

>> but you know they were consistently among the most worst security performing. you know that. do you? >> you look at the performance of long beach i don't think any of us are happy with the performance -- >> why is it? why was that true? >> that is primarily to because long beach tended to a rich and how your credit risk assets than others of prime originators. >> now we stopped issuing the securitization in 2003. while it worked on correcting the problems; is that correct? windel wamu discovered they were issuing loans that violated its credit policies and stopped the securitization in to fill some three. to correct the problem to give the chance to correct the problems. is that correct?

>> that's my understanding. >> why when the securitizations in 2005 and in 2006 and in 2007 with similar underwriting problems, that is my question. >> senator, i wasn't there in 2003. >> why wasn't it stopped in 05, 06 and 07? >> i think as we look at the origination see the overall quality coming out, we felt that we were getting their way disclosures and that a was proven to be fraudulent or have a problem though we would buy them back out. >> thank you. if you would, would you put up the percentage chart on wamu product origination and purchases by percentage? in fairness to your testimony in terms of the decline in nature of this pie chart represents in fact t percentages of the origination of wamu as a

percentage and based on your testimony with to see is something very different what actually happened versus what you said you can see that each year six mortgages go down and my and conforming loans still are increasing versus your testimony that said that was not the case. when you came on board things started to change. so to questions. it did things change because he made an active process to change or was the market selling so much you couldn't market those loans? >> senator, if you look at the charts those are in percentage terms the could terms. they went down significantly. a few -- some of the items i focus on where subprimal to be like to go for the supply and in 2006. 16% of the volume at that time

by the time we got to 2007 was 5% on a very small base. option arms declined from 22% to 18% and by the time we got to 2008 option arms were zero and then the other product would be more conventional hybrid arms so those would be sold to fannie mae and freddie mac. >> when you put up the wamu loan type by 203 and 207. so not only for the percentages declining but the absolute dollars for declining. why was that? >> as we address the home loan business from 2005 until 2008i think there was a general consensus that the mortgage business was too large relative to the size of the bank we wanted to help bring of that size of the aggregate business down. we closed a number of sites, actually reduced the employment

level by probably 50% during that time. >> mr. chairman, i would like to add washington mutual executive summary that was put forth and we will have it available as part of our fannie mae alliance and freddie mac business relationship proposal. and by sorry you don't have this in front of you but one of the things it said is the key to the proposal was it provides significant liquidity for the option on originations. with more advantageous credit parameters competitive fees' and preferred access to the balance sheet relative to the current agreement with fannie between 2000 to 2008 washington mutual sold more than 500 billion-dollar in loans to fannie mae and freddie mac. how did that affect washington mutual's bottomline? >> mr. senator, i can only speak to the time i was there in 2005, 2008. we were going through some very difficult challenges. i think that the business was

losing money for most of the time period working aggressively to see if we could help. >> how important was the relationship with freddie mac and the bank's decision to option farms? what you have been auditioning arms of freddie mac hadn't been there? >> washington mutual had originated option arms for years. i think it provided another source of liquidity for the company to sell its option arms by having freddie mac. >> so there was sold for years, right? >> had freddie mac not been there would there be a market in the last two years before you went outside of freddie mac? >> there would have been. >> would it have been advantageous as the relationship with freddie mac? >> i'm not sure the specifics of the moment. >> can look you look at exhibit for the presentation way to go be bold.

are you familiar with the power of powerpoint presentation? >> i am. >> when and where to get the power presentation? >> i don't know the specific. if i recall correctly the presentation was given a number of times. so i would have given it to the staff functions and i would have given the presentation to say operating functions as well. >> anybody about you that you would have given it to? >> i might have shown it to [inaudible] >> what did you intend by be bold? >> this was done and i think early 2007. we had gone through a very difficult time and quite honestly i was just trying to help improve the morale of the business which was feeling badly about what was happening.

>> on the second page there's a slide in the organizational chart that is capturing that we are all in a sales. were you ever concerned that the seals on oversight and risk-management was problematic? >> senator, this presentation was meant to be taken as a holistic view and what i meant by the sale was my we of saying we have to serve the customer and help the customer achieve their needs and help them in whatever way we can so that means we all have a part in helping the customer. speed in your testimony you made the point to make long beach subsidiary wamu was waiting for you got there. do you think it was a mistake to bring long beach into wamu? >> senator, i don't know the specifics like that was made. >> didn't ask the specifics. i said to you think it was a mistake to bring long beach and wamu?

>> yes or no. >> i would say no because it was a part of the holding company. >> were you aware of your time that flow loans underlying wamu securities were having problems? >> i knew that we had underwriting problems, yes. >> who were the most common customers from the meal mortgage backed securities? >> hedge funds, pension funds, insurance companies, corporations. >> do you believe that customers of a false sense what they were lying when they purchased the securities? >> i do. >> you think they were aware of the risk? >> i do. >> if you had to lead to anything relating to the securities and mortgages how would you do it differently? >> i would securitized mortgages

with more full documentation and the underlying documentation with an important aspect of the performance of the loans. >> were you aware as you securitized the significant problems in the credit risk side of the business in terms of what they were seeing in terms of loan originations? >> no i was not with respect to the audit reports referred to in the first testimony. >> did it surprise you? of 82% and surgeon offices were fairly unqualified and undocumented loans? >> those are high numbers but as i look at that document i did see that that was taken from an adverse sample from that loan origination center so those loans would already be identified as risky. it would be the first and early

payment default and of those first payment early payment defaults would expect there would be high percentages of problems. miss bernanke said under exhibit 50 the long beach peter was the list performing in 2006. how're you made aware of these problems? >> give me a moment to get to that. >> this is an e-mail i wrote from an ambassador conference. the long beach relative performance described repeatedly with ambassadors at the conference and said it would have been made aware of the

relative performance you say talking to people in the markets. >> did you continue selling similar long beach paper even after making that comment? >> yes, we did. >> ok. devah for your securities and practice is based on that knowledge? >> i can't recall that we did, dr. coburn. >> i asked the other panel and they said investors should know about problems. and i also asked if they were owners. there is also an sec requirement that requires notification of any adverse material adverse factors. were you aware of the nature and the death of the problems with

the significant number of loans that were originated that were either didn't qualify, had false documentation or had no documentation? >> i was not aware of the specific document that reference earlier, i was not. >> sigler see the end results of what had come through and packaging and selling it and after you received the information that performance was poor, did you inquire to say what is our paper performing more poorly than others? >> yes we did a couple of things, dr. coburn. we, in the course of securitization before the loans are pooled, there are post closing refuse many of which you've seen in the documentation that are done by an origination and their intent is to identify and remove loans from the pool that will come to me and my team

that had underwriting defects. after we received the sale of the loans and underwriting due diligence process is undertaken where significant samples over the loans is taken by adverse as well as random to try to identify any further underwriting defect to have the loans remove from the pool so we come to the process of securitization the loans are performing, they are current and the loans of underwriting defects should have been removed. now, as you know and as we have seen some loans with fraud and underwriting defects to slip through. if that happens. and it is not a good thing for us ever. we have an operation cold play and big financial problems as we talked about in terms of the purchase one of the. so each channel does have a