The Washington Mutual Bank Failure

Sean Campbell

ACCT 804

Links to relevant information

Brief summary of class action by Bernstein Litowitz Berger and Grossmann LLP http://www.blbglaw.com/cases/00067

Article from Scotland newspaper on auditing firm fallout http://www.sundayherald.com/business/businessnews/display.var.2459694.0.0.p hp

Article on Wamu failure http://www.bloomberg.com/apps/news? pid=20601087&sid=aWxliUXHsOoA&refer=home

NY Attorney General’s suit against Wamu’s appraisers http://www.oag.state.ny.us/media_center/2007/nov/nov1a_07.html

Washington Mutual, Inc. (hereafter Wamu) is the former owner of

Washington Mutual Bank, the formerly largest savings and loan institution in the

United States. Washington Mutual Bank was placed into FDIC receivership in late

September 2008 after a massive run on deposits forced the US Office of Thrift

Supervision to seize the bank from the parent corporation. Following these events a class action complaint on behalf of investors was brought by Bernstein Litowitz

Berger & Grossmann LLP against Wamu, its directors, underwriters, auditors, and all signatories to relevant documents filed with the Securities and Exchange

Commission on behalf of Wamu..

Wamu’s business model relied heavily on home loan origination and related products. The company was a national leader in the prime and subprime home mortgage business during the recent asset bubble in the residential real estate market. As described in the complaint, Wamu publicly described itself as a responsible and conservative mortgage lender and touted operational safeguards such as high standards for underwriting, legitimate appraisals of property to ensure adequate collateralization, and appropriate allowances for losses and nonperformance in the companies’ loan portfolio. In fact, a series of disclosures and testimonies that followed standard reporting periods revealed that Wamu had suffered massive nonperformance in its loan portfolio and incurred substantial losses related to its home-loan division. Wamu continued to raise money through a series of securities offerings but was unable to overcome the turmoil in the financial sector and its poor decisions brought the company down.

Wamu raised money through 4 securities offerings that used the materially false financial statements. The complaint charges that Wamu’s financial statements incorporated into these offerings were materially false and not in accordance with

GAAP. The deposition given by plaintiff’s consultant argues that Wamu failed to properly account for the impairment of their loan portfolio and charge income for losses related to nonperformance of these loans, causing their Allowance for Loan and Lease Losses to be understated, resulting in overstatement of net income, assets, and diluted earnings per share. Most egregiously, Wamu booked negative amortization (an increase in principal balance due to nonpayment of principal) on its Option ARM loans as non-cash income, essentially turning nonperforming, impaired loans into performing income streams on their financial statements.

Washington Mutual Bank’s auditor Deloitte and Touche LLP (hereafter

Deloitte) is one of the “Big 4” accounting and audit firms that perform audit services for large companies. Wamu paid Deloitte over $27 million in 2006 and 2007 to provide audit, accounting, and other services to the company and its shareholders.

As the company’s outside expert Deloitte consented to incorporation of their unqualified auditor’s reports on Registration statements and prospectus supplements related to four securities offerings that represented Washington

Mutual Bank’s financial statements as materially true and accurate. As the retained audit firm Deloitte was responsible for certifying that Wamu operated under GAAP and was presenting a realistic picture of the company’s performance to shareholders and prospective shareholders. Their failure may cost them substantial fines, penalties, lost business, and a loss of prestige, but what did it cost the taxpayer and shareholders? What does this failure say about Deloitte, the audit industry and the regulatory regime and the need for reform?