D-Day for Washington Mutual

In February, WaMu's top earners were being feted in the Bahamas. On Apr. 30, most of them are out of a job

by Prashant Gopal

At the end of February, around 200 of Seattle-based Washington Mutual's (WM) best performing retail loan consultants, their guests, and top company brass set off for four days of sun, snorkeling, and gambling at Atlantis Paradise Island resort in the Bahamas.

This was one of many such incentive trips over the years the retail banking and mortgage company had bankrolled for the top 10% of its commission-driven mortgage team. But the trip was not only a reward for its top earners, it was also a chance for them to mingle with their peers from all over the country as well as with the company's top executives, including frequent attendee Kerry Killinger, WaMu's chief executive officer.

A False Sense of Security

As always, the surroundings (usually luxury resorts in Hawaii) were sun-drenched, exotic, and expensive. It was a time to get fired up for the coming year, and at the Atlantis, despite the woes besetting the mortgage industry, the mood was encouraging and the outlook for the company optimistic. For those salespeople who had been with the company during the real estate boom of the past few years, it was only the latest of many such trips. For first-time invitees it was a trip they had worked hard to earn. But for all of them, though they didn't know it then, it would be their last.

That's because a little more than a month after returning from the Bahamas, the loan officers began hearing rumors from competitors and employees involved in loan processing that their jobs would soon be eliminated. In December, the company said it would be laying off 3,150 employees, including loan consultants, as it exited the subprime lending business and closed loan centers (BusinessWeek.com, 4/8/08). But the company kept many of its best loan officers, most of whom were included on the Bahamas trip.

An Apr. 7 memo from management confirmed the rumors. WaMu announced the next day that another 3,000 employees were being let go as part of a plan to exit the wholesale lending business entirely and close the independent home loan offices. Apr. 30 would be their last day.

For staff who had been in the Bahamas, the news was particularly hard to fathom. They were, after all, members of the elite President's Club, top earners who were able to generate annual revenues of $40 million to $200 million.

WaMu refused to comment on employee incentives and compensation, claiming it couldn't disclose this competitive and proprietary information. "We recently announced steps that accelerate our efforts to more closely align our home loans business with the company's retail-focused business model," WaMu spokeswoman Sara Gaugl said.

Staggering Losses Lead to Deep Cuts

As the subprime crisis worsened and the numbers of defaults increased, WaMu saw its share price drop 70%, from a high of 44.66 on May 24, 2007. Like most other mortgage lenders, it was hemorrhaging money. Since April, 2007, it had lost 74% of its market value. At its first-quarter earnings call Apr. 15, the company announced it had lost $1.1 billion during the quarter and also needed to set aside $3.5 billion to cover loan losses in the quarter.

To survive, WaMu's senior management cast about for ways to save the company. On Apr. 8 the bank had announced that it would receive $7 billion in capital from private equity investors led by Texas Pacific Group. But the bank's wholesale mortgage business, which had played a large part in its growth into a national powerhouse, had to be jettisoned. In addition, WaMu would close all of its stand-alone home loan offices, and carry on lending operations at 2,200 retail branches and through telephone and online sales.