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WaMu CEO Feared Goldman 'Sharks'

WaMu's former CEO Kerry Killinger rejected the idea of hiring Goldman Sachs' investment bankers in 2007, citing fears the bank would use sensitive information to trade against WaMu.
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Updated to add link to video, latest share price.




Washington Mutual

(WAMUQ.PK)'s former CEO, Kerry Killinger, rejected the idea of hiring

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. Report

investment bankers in 2007 because he feared the bank would exploit sensitive information to trade against WaMu, according to an e-mail disclosed by a Senate subcommittee on Tuesday.

"I don't trust Goldy on this. They are smart, but this is swimming with the sharks. They were shorting mortgages big time while they were giving

Countrywide Financial Corp. advice," Killinger wrote in an email dated Oct. 12 2007.

Even WaMu Didn't Trust Goldman

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>>>Click here for an excerpt from the Senate's report on Washington Mutual's failure

A Goldman Sachs spokesman declined to comment for this article. The Senate Permanent Subcommittee on U.S. investigations is holding a hearing Tuesday on the role that high-risk mortgages played in the financial crisis, and WaMu is the main focus of the proceedings. A long list of former WaMu executives, including Killinger and former WaMu Chief Risk Officers James Vanasek and Ronald Cathcart, are appearing. The subcommittee is holding a total of four hearings on the crisis this month.

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Ironically, Killinger had more trust in Lehman Brothers, which, like WaMu, would file for bankruptcy protection some 11 months later. "I trust Lehman more for something this sensitive. But we would need to assess if they have the smarts we need," Killinger wrote.

Killinger sent the e-mail in response to a message from Todd Baker, a WaMu executive who served as an internal investment banker and top advisor to Killinger. Baker wrote to Killinger that WaMu's finance team would soon be looking at "structural ideas around large scale risk transfer (everything from good bank/bad bank to securitization ideas)."

While I am not sure exactly what Baker had in mind, "large scale credit risk transfer," sounds a lot like creating complex off balance sheet vehicles to hide debts. Such practices led to the downfall of

Enron Corp.

at the start of the decade and has lately come to light in connection with

Lehman Brothers

(which hid its own debts) and the Greek government (which was advised by banks including Goldman and

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. Report

on how to hide its debts).

In his e-mail to Killinger, Baker also expressed concerns about seeking advice from Goldman.

"We always need to worry a little about Goldman because we need them more than they need us and the firm is run by traders," Baker wrote. Nonetheless, Baker characterized Goldman as "our strong first choice," in the email, which copied other senior executives including CFO Tom Casey.

While I could not immediately find out if WaMu hired Goldman Sachs for this assignment, Goldman did advise WaMu on an investment it received from private equity firm

Texas Pacific Group

, and an attempt at an outright sale of WaMu before it was seized by regulators and sold to JPMorgan Sept. 25, 2008.

The revelations that WaMu executives were suspicious of Goldman bankers leaking information to its traders add fuel to a frequent criticism of the securities firm -- that it exploited sensitive client information for its own profit. Goldman Chairman and CEO Lloyd Blankfein and President Gary Cohn attempted to address the criticism in their

annual shareholder letter

last week.

"Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a 'bet against our clients.' Rather, they served to offset our long positions," the letter stated.

Goldman shares are up 5.3% so far in 2010, and the stock was up 1.3% to $179.09 in recent action. The company is slated to report its first-quarter results on April 20 with the average estimate of analysts polled by

Thomson Reuters

calling for earnings of $4.02 a share on revenue of $11.2 billion.


Written by Dan Freed in New York