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OTS HIGHLY CONFIDENTIAL
Office of Thrift Supervision
Department of the Treasury
Pacific Plaza 2001 Junipero Serra Boulevard Suite 650 Daly City CA 940141976
PO Box 7165 San Francisco CA 94 1 207 1 65 Telephone 650 7467000 Fax 650 7
PRIVILEGED AND CONFIDENTIAL
MEMORANDUM FOR Scott M Polakoff Senior Deputy Director and
Operating Officer
THROUGH Timothy T Ward Deputy Director
Examinations Supervision and Consumer Protection
FROM Darrel W Dochow Regional Director
West Region
DATE September 25 2008
SUBJECT Recommendation for Appointment of the Federal Deposit
Insurance Corporation FDIC as Receiver for
Washington Mutual Bank Henderson NV OTS No 08551
1 RECOMMENDATION AND SUMMARY
The West Regional Office recommends that the Director of the OTS appoint the FDIC as
receiver for Washington Mutual Bank Henderson Nevada WMB or the Bank We believe that
grounds exist for the appointment pursuant to Section 5d2 of the Home Owners Loan Act
HULA 12 USC § 1464d2 and Section 11c5 of the Federal Deposit Insurance Act
FDIA 12 USC § 1821c5
As explained below we believe the following grounds exist for the appointment of a receiver
1 The Bank is likely to be unable to pay its obligations or meet its depositors demands in
the normal course of business and
2 The Bank is in an unsafe and unsound condition to transact business
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West Region Receivership Recommendation
Washington Mutual Bank Henderson NV 08551tember 25 2008
II KEY FINANCIAL AND SUPERVISORY INFOR•MIATION
e ecte ounce tote 30 208 F •1 PCA Capital Cate o Well Ca italzed June 30 2t08Tier I Core CapitalAdjusted Total Assets FDICIA Cap Adequacy 7 07
Total RiskBased CapitallRisk d Assets FDICIA Cap Adequacy 2
Selected Supe rvisory Information
Date of Most Recent Safety and Soundness Examination 191102007
CAMELS Ratings Ratings Date September 19 2008 Report
Composite C A M E L S4 3 4 3 4 4 2
YIN Comments if applicable
Consent Agreement YN N
Open Issues or Applications YN YDenied Capital Plan YN N
Capital Disputes YIN NEnforcement Issues YIN yPCA Directive YN N
III OVERVIEW AND KEY FINANCIAL INFORMATION
Corporate Structure and General Background
WMB is a stockform federally chartered savings association The FDIC insures the Banks
deposits through its Deposit Insurance Fund WMBs home office
is in Henderson Nevada
while its primary executive and business segment headquarters are in Seattle Washington As of
June 30 2008 The bank had 2239 retail branches operating in 15 states WMB operates
primarily in major metropolitan areas on both coasts and in selected middle states with four
primary business lines 1 Home Loans 2 Card Services 3 MultifamilyCommercial Loansand 4 Retail BankingProduction and Operations
WMBs toptier holding company Washington Mutual Inc WMI is a unitary thrift holding
company It
is mainly a shell Washington Mutual Bank fsb WMBfsb is the BanksOTScharteredoperating subsidiary and it holds WMBs investment portfolio
CAMELS = Capital Asset Quality Ma agement Earnings Liquidity and Sensitivity to Market Risk
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West Region Receivership Recommendation
Washington Mutual Bank Henderson NV 08551
September 25 2008
Pare 3 of 10
Senior management of the Bank consists of Chairman of the Board Stephen E Frank Chief
Executive Officer Alan Fishman Chief Operating Officer Steve Rotella and Chief Financial
Officer Tom Casey
The following table contains additional information about the Bank
Home Office Address 2273 North Green Valley Pkwy Ste 14 Henderson NVAdministrative Office Address 1301 Second Avenue Seattle WA 98101
Administrative Office Telephone 206 5008779 CEOs Administrative Assistant
Date on which Charter was Issued December 27 1988
Date of Federal Deposit Insurance December 27 1988
In 2005 the Bank began a strategy to remix assets liabilities and capital Management began to
portfolio higher yielding higher risk assets while diversifying liabilities and equity via preferred
stock and hybrid issuances During late 2006 and early 2007 as the credit environment started to
deteriorate management began tightening credit standards with respect to credit card and
subprime lending In the first half of 2007 management shrank the balance sheet by selling
certain loweryielding loans Total assets shrank to $3111 billion by June 30 2007 In July
2007 given the disruption of the secondary mortgage market management cut back on loans
originated for sale and began transferring held for sale loans to the held for investment portfolio
at a mark to market loss The lack of loan sale activity along with the transfer of loans into the
held for investment portfolio resulted in total assets increasing to $3288 billion at September 302007 Since 4Q07 management has discontinued the former strategy to focus on a more retail
oriented lending strategy through the branches At June 30 2008 total assets declined to $3070
billion and are projected to continue to decline due to a severe curtailment in singlefamily
residential SFR related lending
FW 1B `SM 63010$ 63007Total Assets $307022
33208 123107M
$317824 $325809
Significant operational changes since Q307 include
$328805 1 $311053
33107
$318295
Exiting all subprime SFR lending
Discontinuation of WaMu Capital Corp and its associated conduit loan purchasesale
operation
Continued wind down of the Mortgage Banker Finance warehouse lending unit
Tightened underwriting of all portfolios including a program to contractually limit
outstanding home equity lines in instances where collateral or borrower financial
condition has deteriorated
Closing all remaining freestanding home loan offices and exiting the wholesale broker
lending channel
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West Region Receivership Recommendation
Washington Mutual Bank Henderson NV 08551
September 25 2008
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Increasing reliance on FHLB advances by using classes of assets for collateral not
previously used February 2008
Releasing an estimated $300 billion in available collateral from REIT reorgan
the second quarter of 2008
issuance of $30 billion in perpetual convertible preferred stock in December 2007
0 billion infused into WMBReducing the WMI dividend from $056 to $001 per quarter and discontinuance of
WMB dividends to WMIWM issuance of $70 billion in common stock in April 2008 with $30 billion infused
into WMBCeasing option ARM and stated income lending
A WMI infusion of an additional $20 billion to raise capital levels at WMB in July 2008
A WMI infusion of $5000 million in September 2008
Current Condition
Asset Quality
Notwithstanding the numerous operational changes undertaken by WMB management asset
quality has deteriorated significantly Nonperforming assets NPA rose to 38percent
of total
assets as of June 30 2008 compared to 14 percent for the same period in 2007 The increase in
NPAs is concentrated primarilyin permanent SFR loans primesubprime option ARM and
home equity lines of credit HELOCs Loans secured by SFRs are WMBs primary asset
representing approximately 600 percent of total assets at June 30 2008
Problem assets have also increased significantly The ratio of classified assets to core capital
plus loss allowances increased to 433 percent at June 30 2008 an 85 percent increase in the
ratio from the same period one year earlier The absolute level of classified assets has steadily
increased over the last several years from $26 billion 08 percent of total assets as of December
31 2005 to $129 billion as of June 30 2008 42 percent of total assets
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West Region Receivership Recommendation
Washington Mutual Bank Henderson NV 0855
September 25 2008
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The following table
June 302008
WUS
hts W MBs problem asset trend
12131105 1 12131106
8000s
•m Decembe
1213107
Delinquent Loans 3389 days 1793237 071 2836771 105
Nonperforming Loans 2880054 087 2740081 079
Repossessed Assets 239485 007 578385 017
Nonperforming Assets 3119539 094 331 8466 096
Special Mention Assets 863090 026 2064002 060
Classified Assets 2591527 078 3615955 105Class AssetsCore Cap + ALjL 1143 1481
4741615 189
6431861 197
1015127 031
7446988 229
2309424 071
8177767 251
3274
CE 06130108
5441790
10025164
1531807
11556971
2485122
12873646
WMB reported total chargeoffs of $381 billion through yeartodate YTD June 30 2008
$146 billion for 1Q08 and $235 billion for 2Q08 or 24 percent of average assets annualized
This compares unfavorably to the $241billion 075 percent of average assets annualized
reported for the year ended December 31 2007 and the $106 billion 030 percent of average
assets reported for theyear ended December 31 2006 As with problem loans most of the
chargeoffs are in the SFR portfolio which accounted for $32 billion of YTD chargeoffs
through June 30 2008
The Bank predicts a high loss case of $19 billion in residential mortgages before lost interest and
foreclosure costs Current performance tracking is in line with the high end of the Companysestimates at the time of the April capital raise At $1894 billion the residential mortgage
exposure includes $525 billion in option ARMs $607 billion in HELOCs and $174 billion insubprime loans
WMBs asset quality problems have materially affected the Banks earnings and they are
projected to have a continuing negative impact at least through the second quarter of 2009
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West Region Receivership Recommendation
Washington Mutual Bank Henderson NV 08551
September 25 2008
Page 6 of 10
iings
Primarily because of the asset quality trends in the SFR mortgage loan portfolios net income for
the Bank has declined considerably with nominal income reported for 2007 and significant net
losses reported through June 2008 The following table illustrates the affect of the decline in
credit quality on the earnings of the Bank The table displays key financial performance figures
for 2006 2007 and YTD June 30 2008
2006
°I°
2007
°lo
YTD 613008
°lo
lEA Yield 641 684 611
Cost of Funds 372 388 275
Net Interest Spread 269 296 337
Net Interest Mar in 257 280 313
Loss Provisions avg assets 023 096 755
Noninterest Income 242 225 074
Noninterest Expense 321 382 307
ROAA 100 008 407ROAE 1192 099 5219Note Except for yieldspread information and ROAE above ratios are expressed as annualized percentage
of average assets
Source OTS Uniform Thrift Performance Report U TPR
In the first and second quarter of 2008 the Bank recorded a net loss of $11 billion and $32
billion respectively The most recent earnings projection by the Bank forecasts an annual total
net loss of approximately $60 billion for 2008 While actual credit losses through the second
quarterof 2008 remained within the forecasted range a decline in housing prices beyond the
levels assumed could produce a material increase in credit losses further depressing the
projected negative earnings
Management predicts a return to profitability in the third quarter of 2009 In the meantime the
Bank continues to report core operating earnings of approximately $16 billion per quarter This
amount is insufficient to fully offset projected increased loan losses provide sufficient funds to
meet significant deposit outflows and supplement capital
Liquidity
Recent events have significantly limited the Banks ability to meet its operating liquidity needs
As of September 25 2008 the Bank projected that it had $134 billion to meet liquidity
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West Region Receivership Recommendation
Washington Mutual Bank Henderson NV 08551
September 25 2008
Pate 7 of 10
obligations A review of the sources that make up that total reveals that the Banks liqut
position is far less than the projected number suggests
The Bank estimated having $38 billion in cash and investments to meet liquidity obligations as
of September 25 2008 Core earnings are insufficient to supplement its cash base In addition
most of the Banks assets are not readily saleable Accordingly the Bank is dependent upon
borrowings from the Federal Home Loan Banks of San Francisco and Seattle FHLBSF and
FHLBSEA and Federal Reserve Bank of San Francisco to meet funding needs The Bank
projected that it
had borrowing capacity of $29 billion from the FHLBSF and the FHLBSEA
on September 25 2008 Also as of that date the Bank projected that it
had $67 billion available
for borrowing from the Feds discount window
Given the Banks current ratings and the uncertain value of the collateral supporting its
borrowings from both the FHLBs and the Federal Reserve Bank there is no assurance that the
projected funds will be available in the amounts and in the timing needed by the Bank to meet its
obligations The Federal Housing Finance Agency notified OTS that FHLBSF has agreed to
fund $05 billion on September 25 2008 but there is no guarantee that it will provide further
funds The Federal Reserve lowered the Bank to secondary credit status on September 25 2008
which resulted in an additional reduction of $1 billion in borrowing capacity Under secondary
status the Bank is subject to increased haircuts and pricing The Bank will also likely lose
access to the 28day term auction facility TAF program
Moreover even if available borrowings from the FHLBs are subject to system funding
constraints Under those constraints the FHLBSEA is limited to providing approximately $05
to $10 billion maximum advances per day on the remaining line Similarly should theFHLBSFdetermine that the collateral is adequate to supportcontinued borrowing by the Bank it is
limited to providing approximately $20 to $30 billion per day At this time it is uncertain what
if any additional advances the FHLBSF will make2
In addition marketbased funding sources are not immediately available to supplement liquidity
Sales of new unsecured debt and securitizations are generally unavailable Moreover most of
the Banks unpledged assets ie that are not now collateralizing the borrowings at either the
FHLBs or the Federal Reserve Bank are of either insufficient quality or lack documentation to
make them readily saleable Those that may be saleable require time to arrange financing and
sale
2For example the FLHBSF has informed the OTS that as of September 23 they will advance $ t billion to the Bank
for September 24 but will not commit to any further advances The FHLBSF subsequently agreed to advance $5CO
million on September 25 The FHLBSF also stated that they have received additional data on the loan cools
collateralizing the borrowings and are in the process of evaluating it for future lending decisions
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OTS HIGHLY CONFIDENTIAL
West Region Receivership Recommendation
Washington Mutual Bank Henderson N 08551
September 25 2008
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Significant deposit outflows are compounding the liquidity challenge facing the Bank The first
significant deposit outflow occurred after the closure of IndyMac Bank W 1B lost
approximately $91 billion in interest bearing and small business deposits from July 14 2008
through August 6 2008 Thereafter the Bank had a net inflow of approximately $43 billion in
deposits through promotional deposit pricing at relatively high rates
Starting with the Banks disclosure on September 8 2008 that it entered into an enforcement
action Memorandum of Understanding with the OTS a more significant deposit outflow
started This outflow gained momentum following media speculationabout the future of the
company disclosures that the company was considering a sale adverse events in the financial
sector as a whole and further rating agency downgrades of the company and the Bank resulting
in a net deposit loss of approximately $187 billion between September 8 and September 24
2008
While the current outflow rate has declined from its peak itwill deplete the Banks available
cash resources and eliminate the Banks total projected liquidity in the short term absent
additional extraordinary events Given the Banks limited sources of funds and significant
ongoing deposit outflows it is highly unlikely that it
will be able to meet its operating liquidity
needs including paying interest on deposits
IV DESCRIPTION OF MAJOR PROBLEMSGROUNDS FOR TRANSFER
The OTS Director is authorized to appoint the FDIC as receiver for any savings association if the
Director determines that grounds exist under 12 USC § 1821c5 See 12 USC §
1464d2A The specific grounds applicable include
A The Bank is likely to be unable to pay its obligations or meet its depositors demands in the
normal course of business
As described above giventhe continuing significant deposit outflows from the Bank and the
limited and diminishing available sources of liquidity it is highly likely that the bank will not
meet its funding needs in the very near future As a result the Bank is likely to be unable to pay
its obligations or meet its depositors demands in the normal course of business Therefore in
accordance with 12 USC§ 1821c5f the Director may appoint a receiver for the Bank
B The Bank is in an unsafe and unsound condition to transact business
Pursuant to 12 USG § 1821c5C the Director may appoint a receiver for the Bank if it is in
an unsafe and unsound condition to transact business For all of the reason detailed above
including the Banks severe liquidity strain deteriorating asset qualityand conti
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West Region Receivership Recommendation
Washington Mutual Bank Henderson NV 08
September 25 2008
Pafle 9 of 10
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earnings the Bank is in an unsafe and unsound condition to transact business Therefore in
accordance with 12 USC § 182Ic5C the Director may appoint a receiver for the Bank
V ENFORCE ME l EIt ORY ACTIONS
OTS has taken the following supervisory or enforcement actions formal and informal with
respect to WMB
Cease and Desist Order CD On October 17 2007 OTS issued a CD order related to
weaknesses in WMBs Bank Secrecy ActAntimoney Laundering BSAJAML programs
Management has submitted a plan for compliance with the CD which OTS monitors as part of
the continuous exam process
Civil Money Penalty CMP On October 17 2007 OTS issued an order for CMPs totaling
$60448 related to WMBs violation of flood insurance regulations in its Commercial Loan
pup
Board resolution In response to a supervisory ratings downgrade letter from the Regional
Director on February 27 2008 the Board resolved on March 27 2008 to undertake strategic
initiatives to improve weaknesses related to asset quality earnings and liquidity
WMI Memorandum of Understanding OU On September 7 200$ WMI entered into an
MOLT Action items include 1 submission of a consolidated 3year business plan within 30
days for OTS review and nonobjection followed by quarterly variance reports and 2 a
contingency capital plan within 90 days
WMB Memorandum of Understanding On September 7 2008 WMB entered into a separate
MOLT Action items include 1 submission of a 3year business plan both base case and
stressed scenarios within 30 days for OTS review and nonobjection followed by quarterly
variance reports 2 a contingency capital plan within 90 days 3 a classified asset reduction
plan incorporated into the business plan 4 engaging an outside consultant to review risk
management practices 45 days and submitting a report to OTS 75 days 5 engaging an
outside consultant to review the underwriting process for the Home Loans Group 45 days and
submitting a report to OTS 75 days 6 submitting a report to OTS to address the consultants
recommendations within 30 days of receipt of the consultants reports 7 reviewing alerts for
the period April 1 2006 through June 30 2008 and filing SARs where required no later than
October 31 2008 and 8 ensuring that management corrects all OTS findings specified in the
Report of Examination and Findings Memoranda Within 55 days of the end of each quarter the
Board shall certify compliance with the MOU and submit a certified copy to the OTS
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West Region Receivership Recommendation
Washington Mutual Bank Henderson NV 08551
September 25 2008
Paae 10 of 10
CQNCLUSIO AND CONTACTS
Statutory grounds exist for the appointment of a receiver for the Bank We believe that the
appointment of a receiver for the Bank under these circumstances will protect the interests of the
Banks depositors and the Deposit Insurance Fund Therefore we recommend that the Director
take action to appoint the FDIC as receiver for WMB as soon as possible
The following personnel available to answer any additional questions
Name Title Phone
Benjamin D Franklin Regional Examiner 909 827 0066
James A Hendriksen Regional Counsel 650 746704I
Darrel W Dochow
Regional Director
Exhibit List Attached
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