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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

concentrated exposure in California. The reason WaMu liked option ARMs was sim-
ple: in , in combination with other nontraditional mortgages such as subprime
loans, they had generated returns up to  times those on GSE mortgage–backed secu-

rities. But that was then. WaMu was forced to write off . billion for the fourth
quarter of  and another . billion in the first quarter of , mostly related to
its portfolio of option ARMs.
In response to these losses, the Office of Thrift Supervision, WaMu’s regulator, re-
quested that the thrift address concerns about asset quality, earnings, and liquidity—
issues that the OTS had raised in the past but that had not been reflected in
supervisory ratings. “It has been hard for us to justify doing much more than con-
stantly nagging (okay, ‘chastising’) through ROE [Reports of Examination] and meet-

ings, since they have not really been adversely impacted in terms of losses,” the OTS’s
lead examiner at the company had commented in a  email. Indeed, the nontradi-
tional mortgage portfolio had been performing very well through  and .
But with WaMu now taking losses, the OTS determined on February , ,
that its condition required a downgrade in its rating from a  to a , or “less than sat-

isfactory.” In March, the OTS advised that WaMu undertake “strategic initiatives”—
that is, either find a buyer or raise new capital. In April, WaMu secured a  billion
investment from a consortium led by the Texas Pacific Group, a private equity firm. 
But bad news continued for thrifts. On July , the OTS closed IndyMac Bank in
Pasadena, California, making that company the largest-ever thrift to fail. On July ,
, WaMu reported a . billion loss in the second quarter. WaMu’s depositors

withdrew  billion over the next two weeks. And the Federal Home Loan Bank of
San Francisco—which, as noted, had historically served with the other  Federal
Home Loan Banks as an important source of funds for WaMu and others—began to
limit WaMu’s borrowing capacity. The OTS issued more downgrades in various as-
sessment categories, while maintaining the overall rating at .
As the insurer of many of WaMu’s deposits, the FDIC had a stake in WaMu’s
condition, and it was not as generous as the OTS in its assessment. It had already
dropped WaMu’s rating significantly in March , indicating a “high level of
concern.” 
The FDIC expressly disagreed with the OTS’s decision to maintain the  overall
rating, recommending a  instead. Ordinarily,  would have triggered a formal en-

forcement action, but none was forthcoming. In an August  interview, William
Isaac, who was chairman of the FDIC from  until , noted that the OTS and
FDIC had competing interests. OTS, as primary regulator, “tends to want to see if
they can rehabilitate the bank and doesn’t want to act precipitously as a rule.” On the
other hand, “The FDIC’s job is to handle the failures, and it—generally speaking—
would rather be tougher . . . on the theory that the sooner the problems are resolved,
the less expensive the cleanup will be.” 
FDIC Chairman Sheila Bair underscored this tension, telling the FCIC that “our
examiners, much earlier, were very concerned about the underwriting quality of
WaMu’s mortgage portfolio, and we were actively opposed by the OTS in terms of go-
ing in and letting our [FDIC] examiners do loan-level analysis.” 