WaMu Execs Target of FDIC Lawsuits: Report

NEW YORK (TheStreet) The Federal Deposit Insurance Corp. has sent legal notices warning of possible litigation against former CEO Kerry Killinger and other former executives of Washington Mutual, the largest failed bank in U.S. history, according to several published reports.

The Puget Sound Business Journal reported late Friday that the FDIC was "seeking to collect more than $1 billion" in damages, citing unnamed sources. The Wall Street Journal separately reported on Tuesday that the FDIC may press its lawsuit within 30 days, also citing unnamed sources.

Washington Mutual had $307 billion in total assets when it was shuttered by the Office of Thrift Supervision in September 2008 after suffering a run on deposits. The FDIC was appointed receiver and sold the failed institution to JPMorgan Chase (JOPM) for $1.8 billion.

Word of the coming lawsuits against Washington Mutual's executives follows another high-profile claw-back attempt by the Securities and Exchange Commission, which on February 11 announced charges of securities fraud against three former top executives of IndyMac Bank, during the months leading to the thrift's failure in July 2008. Former CEO Michael Perry denied the charges later that day.

Washington Mutual was doomed by its focus on option-payment adjustable-rate mortgages, also known as option-ARMS, which were among the riskiest loans made during the real estate boom. These loans allowed borrowers to choose to make monthly loan payments of less than the prior month's accrued interest, meaning that the loan's principal balance would increase, rather than decline like a regular amortizing mortgage.

The negative amortization "feature," combined with reduced underwriting standards and declining real estate values, created a perfect storm for the lender's credit quality, causing massive losses. Meanwhile, an over-reliance on CD deposits exceeding FDIC insurance limits and wholesale borrowings, caused liquidity problems during the summer of 2008.

The FDIC declined to comment and JPMorgan didn't immediately return a call from TheStreet.

-- Written by Philip van Doorn in Jupiter, Fla.

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