Federal Official Confirms Probe Into Washington Mutual's Collapse

Oct. 15, 2008— -- The federal government is investigating whether the leadership of shuttered bank Washington Mutual broke federal laws in the run-up to its collapse, the largest in U.S. history.

"Due to the intense public interest in the failure of Washington Mutual, I want to assure our community that federal law enforcement is examining activities at the bank to determine if any federal laws were violated," U.S. Attorney Jeffrey Sullivan said in a statement released today.

"For more than 100 years, Washington Mutual was a highly regarded financial institution headquartered in Seattle. Given the significant losses to investors, employees, and our community, it is fully appropriate that we scrutinize the activities of the bank, its leaders, and others to determine if any federal laws were violated," he added. Sullivan is the U.S. attorney for the western district of Washington, which includes Seattle, the home base of the bank, also known as WaMu.

The task force probing the collapse consists of investigators from the FBI, the Federal Deposit Insurance Corporation (FDIC) inspector general's office, the Securities and Exchange Commission and the Internal Revenue Service's criminal investigations division, according to Sullivan's statement. The task force has set up a hotline, 1-866-915-8299, and e-mail account, fbise@leo.gov, for anyone with information.

WaMu did not immediately return phone and e-mail messages seeking comment on the investigation.

Eighty-nine former WaMu employees are confidential witnesses in a shareholder class action lawsuit against the bank, and some former insiders spoke exclusively to ABC News, describing their claims that the bank ignored key advice from its own risk management team so they could maximize profits during the housing boom.

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.

Dale George, a former senior risk manager at WaMu, who spoke exclusively to ABC News, likened his job to the brakes on a car. But George claims WaMu executives "took the brakes off and drove over a cliff."

Describing a housing boom that created more opportunity for profit from high-risk mortgages, George claims his former employer approved as many loans as it could and added more higher-risk subprime loans to its portfolio.

WaMu executives knew of these risks but chose to ignore them, according to the lawsuit.

In a September 2005 confidential "Corporate Risk Oversight Report" obtained exclusively by ABC News, WaMu's own risk management team found that the future performance of popular loans, like Option Arms, was "untested" and created "major and growing risk factors in our portfolio."

Another WaMu insider, former senior underwriter Dorothea Larkin, said she, too, was uncomfortable with the shift in lending standards. "It was all about making the numbers, closing all the loans that came through the door," loans like higher risk option arms and subprime loans, she said.

Ultimately, Washington Mutual collapsed, becoming the largest bank failure in U.S. history. The crash left investors, who held stocks that traded at about $36 per share a year ago, holding shares that were essentially worthless.

Investors are now taking WaMu to court, claiming the bank lied to them.

"WaMu was saying, consistently, up to the end, that they were conservative, prudent, rigorous," but in reality, "it was run in a way that was irresponsible, reckless, dangerous," contends Chad Johnson of Bernstein Litowitz Berger & Grossmann LLP, one of the attorneys representing the shareholders who filed the lawsuit.

ABC News' Arash Ghadishah, Beth Tribolet and Theresa Cook contributed to this report.