'Greedy' Washington Mutual Channeled Sir Mix-A-Lot

Remember that Sir Mix-A-Lot song "Baby Got Back"? The one with the line, "I like big butts and I cannot lie…"?

In an incident that critics view as emblematic of rampant greed at Washington Mutual, a remix of that song -- with the lyrics changed to "I like big bucks and I cannot lie…" -- was performed at one of the company's lavish annual retreats years before it became the largest bank to fail in U.S. history.

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Every year the bank would hold huge parties in exotic locales to celebrate its mortgage originators who created the most loans -- the same high-risk loans that would ultimately prove to be the company's undoing.

At the 2006 retreat in Kauai, a group of employees performed a "tribute" to the event's honorees. To the tune of the 1992 hit "Baby Got Back," the employees came out on stage and started rapping, "I like big bucks and I cannot lie / You mortgage brothers can't deny / That when the dough roles in like you're printin' your own cash / And you gotta make a splash / You just spends/ Like it never ends / Cuz you gotta have that big new Benz…"

At a retreat in Maui the year before, NBA Hall-of-Famer Magic Johnson was the emcee. "President's Club," Johnson told the gathering. "It's kind of like the NBA All-Star game. Everyone there is an All-Star."

But on Sept. 25, 2008, collapsing under the weight of these now-toxic loans, Washington Mutual -- with over $300 billion in assets, $188 billion in deposits, and 43,000 employees – was seized by federal regulators and sold to JP Morgan Chase for $1.9 billion in the largest bank collapse in the country's history.

For the past year the Senate Permanent Subcommittee on Investigations, led by chairman Carl Levin and ranking member Tom Coburn, has been examining Washington Mutual's collapse as part of a probe into the financial crisis.

What they have found is widespread fraud. The investigators have said that Washington Mutual engaged in fraudulent lending practices for years leading up to its demise.

Investigators Found WaMu Made Risky Loans on Purpose

The bank's first mistake, investigators found, was a conscious decision to make risky mortgage loans -- a high-risk, high-reward strategy that ultimately backfired. The bank then packaged those mortgage loans together and sold them to investors, a move that ended up infecting the financial system with a stream of toxic assets.

But perhaps most alarming, Senate investigators discovered, was a culture of fraud that pervaded the bank's lending practices and continued unchecked despite the company's own probes. One internal probe in 2005 -- only conducted after three years of reports about fraud -- found that two California offices had loan fraud rates of 58 percent and 83 percent. However, "no steps were taken to address the problems," investigators said. The fraud included bank employees manufacturing documents to support loans; third-party mortgage brokers bringing in loans with fraudulent information; and other loans where the bank's systems indicated that a borrower's information was false but the loan was processed anyway.

All the while, the bank was selling its toxic loans into the market: not only were some marred by fraudulent information, but others were ones that the bank believed would likely go bad. Still, the company did not alert the securities' buyers about the looming problems. In fact, the bank even boosted compensation for its loan officers who sold higher-risk loans: the faster the speed and the greater the volume, the bigger the payday a loan officer would earn for the sales.

"The recent financial crisis was not a natural disaster; it was a man-made economic assault. People did it," Levin said at a hearing Tuesday. "Extreme greed was the driving force and it will happen again unless we change the rules."

The panel's hearing on Tuesday featured a string of former Washington Mutual executives, including former CEO Kerry Killinger, who walked away from the company with nearly $100 million in compensation, as well as former president Steve Rotella.

WaMu's Home Loan Unit: 'Worst Managed Business'

In one internal e-mail from 2007, Rotella said Washington Mutual's home loan unit was "the worst managed business" he had seen in his career -- "that is, until we got below the hood of" the bank's subprime lender Long Beach Mortgage Corp.

James Vanasek, who served as chief risk officer at Washington Mutual from 2004 to 2005, told senators at the hearing that he sounded the warning alarms about the company's risky lending practices years before its 2008 collapse. Back in 2004, the company promoted its efforts to offer loans to all consumers with an ad campaign geared around the motto, "The Power of Yes."

But Vanasek noted, "'The power of yes' absolutely needed to be balanced by the wisdom of no."

Vanasek's warnings, he said, went unheeded by his bosses.

But Killinger, the former CEO, said the company's seizure was unnecessary and unfair.

"I believe Washington Mutual should not have been seized and sold for a bargain price," Killinger said in his prepared testimony for the hearing. "There is no question that the company suffered from rising loan losses, but the company was working its way through the crisis by reducing operating costs, raising over $10 billion of additional capital, and setting aside substantial loan loss reserves."

"I believe that Washington Mutual's seizure was unnecessary and the company should have been given a chance to work its way through the crisis. I also believe it was unfair that Washington Mutual was not given the benefits extended to and actions taken on behalf of other financial services companies within days of the company's seizure," said Killinger, citing government economic rescue efforts such as Treasury's $700 billion Wall Street bailout, the Federal Reserve's asset-purchasing program, and the FDIC's debt guarantees and insurance limit increase.

On Friday Levin's panel will turn its focus to the regulators' actions at a hearing featuring FDIC chief Sheila Bair.

In a letter to the inspectors general for the FDIC and Treasury obtained by ABC News, Bair vowed "to move quickly to address the lessons learned from the current financial crisis and to strengthen its overall financial regulatory framework."

In all the Senate panel has planned four hearings to examine the financial crisis. Levin said Monday that the subcommittee will not decide until after the hearings whether to formerly refer Washington Mutual to the Department of Justice for any possible criminal prosecution.