Exclusive: WaMu Insiders Claim Execs Ignored Warnings, Encouraged Reckless Lending

With Americans reeling from a global financial crisis, dozens of former Washington Mutual insiders have come forward to expose what they claim were calamitous executive decisions that led to the biggest bank failure in U.S. history.

These former WaMu employees, 89 of them who worked throughout the company and around the country, described a bank eager to profit from a housing boom and lending frenzy that seemed to have contributed to the credit crunch and housing bust now plaguing the economy. Some of them spoke to ABC News, all of them are confidential witnesses in a recently filed shareholder class action lawsuit against WaMu.

In court documents, the insiders said the company's risk managers, the "gatekeepers" who were supposed to protect the bank from taking undue risks, were ignored, marginalized and in some cases, fired. At the same time, some of the bank's lenders and underwriters who sold mortgages directly to home owners said they felt pressure to sell as many loans as possible and push risky but lucrative loans onto all borrowers, according to insiders who spoke to ABC News.

And this is "only the tip of the iceberg,"a former high-level executive claimed in the lawsuit.

A company representative told ABC News that Washington Mutual Inc. would not comment for this story.

Former Risk Manager: WaMu 'Took the Brakes Off the Car'

Dale George, a former WaMu senior risk manager who spoke exclusively to ABC News, explained that risk managers are like the brakes on a car. WaMu executives "took the brakes off and drove over a cliff," he said.

George described how he said senior management willfully ignored warnings from its own "gatekeeper," the bank's risk management group. He and other company insiders claimed that risk managers were brushed aside while the business units adopted a strategy of dangerous and reckless lending that eventually took down the company.

George, an MBA with three decades of experience in banking and risk management, said that the WaMu he joined in 2003, "was all about good old-fashioned banking." He described a company with a rigorous risk management program and sensible loan production. It was a bank he said he was proud to work at.

But as the housing bubble swelled and high-risk mortgage lending became more lucrative, the bank changed, according to George. WaMu began approving as many loans as it could. "Everything was refocused on loan volume, loan volume, loan volume," he told ABC News.

And to further boost profit, WaMu increased its share of higher-risk subprime and option adjustable rate loans, known as "option arms," said George. These loans offer low introductory rates and let borrowers defer interest payments, but can strap them with significantly higher interest rates and payments in the future.

George said WaMu was competing with subprime giant Countrywide, which also imploded. "They were in a neck-and-neck race." and "both went off the cliff together, one after the other," he said. This high-risk, high-return game turned a century-old traditional bank that made steady but modest returns into "just an arm of Wall Street," said George.

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