Veteran of ’08 crisis says conditions are ripe for a repeat

Kerry Killinger has plenty of experience contending with a financial crisis — and he is concerned that another one is looming.

Killinger was CEO of Washington Mutual in the early 2000s when the Seattle thrift bulked up on mortgages and other loans as interest rates were at historic lows, a housing bubble developed and people were taking on more debt that they should have. WaMu’s assets increased by 77% between 2001 and 2007.

Forced out just weeks before the $307 billion-asset thrift was seized by regulators and sold to JPMorgan Chase in September 2008 in the biggest bank failure in history, Killinger still insists that WaMu had the capital and liquidity to navigate the crisis.

Today, Killinger is warning his former colleagues that many of the problems that engulfed his company and the banking industry are creeping back into the financial system.

“We think there are excessive accumulations of debt in many areas that could cause another crisis,” says former Washington Mutual CEO Kerry Killinger.

In “Nothing Is Too Big to Fail: How the Last Financial Crisis Informs Today,” a book he co-wrote with his wife, Linda, a former vice chair of the Federal Home Loan Bank of Des Moines, the former banker discusses mounting risk from rising debt levels, relaxed monetary policy and new asset bubbles.

The Killingers discussed those potential pitfalls in a wide-ranging interview. Here is an edited transcript of that conversation.

What should we be most worried about today?
KERRY KILLINGER: Whenever the Fed maintains easy money for an extended period of time, it leads to massive asset bubbles. Today, the loose-money policies going on for so long have created bubbles in housing once again — in commercial real estate before the pandemic and extraordinary growth in stock prices that far exceeds reasonable growth from earnings. These things are growing much faster than inflation or any reasonable measure of intrinsic value.

There’s also dramatic growth again in unregulated or less regulated financial products. The shadow banking system is growing faster than regulated banks. Many of the products that are coming up are more speculative in nature [including cryptocurrencies], and they have yet to prove how they will perform under stressed conditions. We need to monitor this very carefully. We’re certainly encouraging regulators throughout the whole financial system to spend more time assessing the systemic risk of those products on a system that is already highly leveraged — consumer debt, corporate debt and government debt.

You paint a scary picture of debt.
KELLY KILLINGER: With rates artificially low, people have taken on extraordinary amounts of debt. We’re seeing that here with our government and governments around the world. We’re seeing corporate debt at record levels. And some forms of consumer debt — especially student debt — continue to grow significantly. We think there are excessive accumulations of debt in many areas that could cause another crisis.

What are the similarities to the 2008 financial crisis?
KERRY KILLINGER: In the last crisis, housing was the principal bubble and the Fed helped create it, and when the bubble pierced, it was very, very painful. Today, the loose money policies have been going on for so long that it has led to bubbles again in housing but also to a record stock market — extraordinary growth in prices — and we’re also seeing it with government debt here and around the world, as well as corporate debt and some forms of consumer debt. There are bubbles on the asset side because of Fed policies and also on excessive accumulations of debt in many areas. These bubbles are things we should all be questioning.

WaMu failed during that crisis, though you have long maintained it didn’t need to be seized.
KERRY KILLINGER: In 2003, we became concerned that the housing bubble was growing. I expressed that publicly to shareholders, to regulators. I met with the Fed every quarter and told them they had a problem coming. What we did from 2003 to 2007 was actually reduce residential lending by 74% and increased the FICO scores every year in all of our businesses.

We ultimately had over 90% of loans to prime customers, and we raised a lot of capital. We diversified away from residential. We acquired a credit card business and grew our multifamily business and business lending. By the middle of 2008, Washington Mutual was actually the highest capitalized bank of the major banks in the U.S., and our loans were performing better than the industry average.

The collapse of Lehman led to a run on deposits at most banks, including Washington Mutual. But what was unusual about [WaMu was that] deposits had stabilized prior to the quick seizure. [Regulators] were pretty panicked coming out of the Indy Mac failure. We’ve maintained, based on all the data, that it was an inappropriate seizure. It was unfair. I can’t change that, but it’s the characterization I have of it. The core earnings level of the franchise was about $1 billion per quarter [pre-crisis], and the data shows that within a year or so it would have snapped back to strong profitability.

Your book connects debt and downturns to income inequality. Could you explain that?
KERRY KILLINGER: We’re continuing to see a shrinking middle class, and the net worth is increasingly concentrated in the top 10% or so of households. The benefits of easy money have gone disproportionately to holders of assets — those that own stocks, various forms of real estate and the like. The top 10% continue to benefit, while the bottom 50% still own less than 2% of the assets in the country. We see a furthering of inequality that harms the middle class. We encourage policymakers as they look at spending and taxation policies to reverse some of those trends.

LINDER KILLINGER: Every time we have a blowup, Wall Street and those at the top tend to recover and recover nicely. Every time, more and more, other people lose their savings, their jobs, their homes. The current asset bubbles again are likely to increase inequality. Right now, we think inequality is the highest it’s been since right before the 1929 stock market crash.

What should be done?
KERRY KILLINGER: Congress needs to work on tax policies to reduce the federal budget deficit and try to get to a more solid position. That’s going to mean that tax rates will have to go up. Nobody wants to pay additional taxes, but we have to look hard at taxation of higher-income folks. We have to look at capital gains. We have to look at corporate taxes. It’s difficult and not popular, but current policies are leading to unsustainable budget deficits.

What is the government getting right?
KERRY KILLINGER: We’re in good shape at this point with the regulated banking industry — it is strong, with excellent capital and liquidity. Underwriting is solid, and regulatory oversight is strong. I don’t take big exceptions there.

I think the government aggressively addressed the pandemic. The Fed action and government stimulus stabilized things quickly. But our concern is that if we continue this for too long, we risk adding to asset bubbles. I’d like to see them put the brakes on that. The outlook for the next year or two is relatively bright, so it’s time now to adjust.

What we’d like to see addressed are the Fed’s policies of super-easy money that are fueling asset bubbles. The longer this goes on, the bigger the risk to the economy. We’d like to see the Fed acknowledge that it is responsible for these bubbles, and it should be responsible for managing them. If the Fed is not managing them, who is? That clearly needs to be addressed.

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