Washington Mutual (WaMu)

  • By Jim Kershner
  • Posted 10/21/2008
  • HistoryLink.org Essay 8821
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Washington Mutual sprang into existence in Seattle in 1889 as a two-person operation and eventually became the largest savings-and-loan in the nation. It began as Washington National Building Loan and Investment Association right after Seattle's devastating fire in 1889, dedicated to helping Seattle rebuild. It became the Washington Savings and Loan Association in 1908 and was renamed Washington Mutual Savings Bank in 1917. It survived two harrowing "runs" by depositors during the Great Depression. Washington Mutual became known for a number of innovative banking ideas, including a penny-deposit program for children, cash machines, and telephone banking. It expanded throughout the state in the 1960s, and, following a series of mergers and acquisitions, throughout the West and the rest of the nation in the 1990s. An aggressive move into the sub-prime mortgage market in the 2000s eventually proved to be the bank's downfall. Saddled with billions in bad loans, it was seized by federal regulators on September 25, 2008, and was immediately sold to JPMorgan Chase & Co., thus ending Washington Mutual's 119-year run as a Seattle banking institution.

Seattle's Great Bank

The bank that eventually became known as Washington Mutual -- or simply WaMu -- had its beginnings in a glue pot. That glue pot boiled over in June 1889 in a downtown Seattle woodworking shop and started the Great Seattle Fire, which left 29 square blocks of downtown Seattle in ruins.

Seattle immediately began to rebuild -- and that required credit in the form of building loans. Businesses could get the loans they needed from commercial banks. But many Seattle residents needed money to rebuild houses, and that required a different kind of institution. On September 21, 1889. Seattle mayor Robert Moran (1857-1943) called a group of businessmen together to discuss forming a Building Loan Association, to loan money to ordinary people for residential construction.

The group included P. B McD. Miller, a doctor; James Hamilton Lewis, a lawyer; Ira Hill Case, a former judge; Edward Oziel Graves, a former assistant superintendent of the federal Bureau of Engraving and Printing. They joined Moran that rainy night in 1889 and approved the articles of incorporation of the Washington National Building Loan and Investment Association, which would later evolve into Washington Mutual. Graves was the first president and Case his only employee.

Case worked at the company's single desk in a second-floor office shared with a number of other small businesses. Case "opened the doors in the morning" and "swept out in the evening," according to historian Murray Morgan, who wrote a corporate history of Washington Mutual.

Buying Shares, Building Homes

Case immediately went to work raising capital by selling stock in the association for $100 a share. These shares were typically sold on a monthly payment schedule, for amounts as small as 65 cents per share per month. Only stockholders were eligible for loans. Even they had to make at least six monthly payments on their shares before they could apply for a loan.

Traveling salesmen on contract fanned out all over Washington and Oregon to sell shares. Some shares were sold in places as far away as Alaska and Montana. The list of shareholders ranged from East Coast financiers to recent Chinese immigrants.  The company's archives include letters from early stockholders, many of whom were attempting to explain why their payments were late. An Astoria lighthouse keeper explained that he was at the mercy of the mail boat's schedule. A Seattle man said that his payment was late because he had recently "came near dying" (Morgan), but now he was feeling better.

It took the fledgling company only until February 10, 1890, before it issued its first three loans. One of those went to Peter Nord, 30, a seaman from Norway who was living aboard the Cottage City, a steamer tied up on the Seattle waterfront. Nord wanted to build a house in Ballard. He asked for $700, which he duly received.

Financially Historic

Nord was typical of hundreds, if not thousands, of the Washington National's borrowers over the next decades. More than 2,000 houses were built in neighborhoods all over Seattle and other Northwest cities during the next 20 years using loans from Washington National.

Nord's loan was also historic from a financial perspective. It was an "amortized home loan," meaning that it called for equal monthly payments for 72 months, each payment reducing the balance on which interest was charged. Morgan called it "perhaps the first of its kind in the United States." It was almost certainly the first on the West Coast.

Selling shares by commission proved to be lucrative -- a fact not lost on Case himself. He soon realized that he could make more as a sales agent than he could as general manager (his salary was $3,500 a year). So he quit in 1892 and became the sales agent for Oregon. In less than 10 months, Case closed 72 loans, almost double the number sold in all of Washington. Case later quit for unexplained reasons.

At the time, Washington National was one of 3,500 building-and-loan societies across the country. It thrived and grew along with the Northwest, which was experiencing a population boom. But around the turn of the century the company hit hard times and in 1908 it made a key change in direction. It abandoned the building-and-loan model on which it was founded and decided to try a new kind of banking, called mutual banking.

Mutual Banking

It wasn't actually all that new. It was already established on the East Coast and had been around for a century in Europe. Raymond Frazier, who would later become the bank's president, first encountered it in 1903 in Denmark, where it had worked well for that country's thrifty farmers. It differed from the commercial banks of the day in that it was intended as a safe haven for people of modest means. A mutual bank is, essentially, a bank that is owned and operated by its own investors. It relies on the mutual investment of funds by small depositors "more interested in security than the chance of a big profit" (Morgan).

So in 1908, the firm changed its name to the Washington Savings and Loan Association and patterned itself after the already-established mutual savings banks of the East Coast. It wasn't officially a mutual savings bank yet, because that would require alterations in Washington's state laws. But it instituted some major changes, including the elimination of membership requirements. It also gave its customers the right to withdraw deposits at any time. The Washington Savings and Loan Association began to advertise heavily and new customers responded. By 1913, the number of accounts jumped almost seven-fold. It was now the state's largest savings institution.

Frazier and the bank also started lobbying hard in Olympia for new legislation establishing a true mutual savings bank structure. It took five years, but the legislation finally passed. On September 12, 1917, it changed its name to Washington Mutual Savings Bank. It was the first mutual savings bank west of the Mississippi.

"Money Makes Money"

Depositors flocked to the new Washington Mutual; deposits increased 68 percent during the World War I years. It became the first bank in the state to loan money at reduced rates for purchasing war bonds. The bank grew so fast it finally needed its own permanent home. It purchased the five-story Emily T. Walker Building on the northwest corner of 2nd Avenue and Spring Street in Seattle and turned it into a grand temple of finance, with marble columns and Renaissance-style terra cotta decorations. About 20,000 people showed up to gawk on opening day, June 20, 1921.

Washington Mutual continued to thrive through the 1920s and began a program to serve another kind of saver -- the kind who own piggy banks. In 1923, it started the School Savings Program, in which schoolchildren all over Seattle saved their pennies and nickels, brought them to school and then deposited them in Washington Mutual at a 5 percent interest rate. Similar programs had been successful across the country, but Washington Mutual was the only Seattle bank willing to give it a try.

It was an immediate, massive success. Within a month, half the schoolchildren in Seattle -- more than 21,000 – had opened accounts. After six years, $1 million was on deposit. The kids were given free tours of the bank where they could visit the massive iron vault and heft a stack of $1,000 bills. They were encouraged to memorize a slogan which explained the glories of compounded interest: "Money makes money, and the money money makes makes more money" (Morgan).

For Washington Mutual, it was a smart way to earn customers for life. Yet bank president Frazier believed it had other advantages as well.

"The most important feature of the system is that it teaches the child the regular habit of thrift at a time when he is most easily molded," said Frazier. "... The next step will be the acquisition of property. And a nation of property holders is a nation free from the dangers of Bolshevism and every other form of internal disruption" (Morgan).

Fear and Financial Panic: The Great Depression

The Great Depression arrived in 1929 and caused the demise of many banks around the country. Washington Mutual had its share of scares. The first came in February 1931 when an unrelated bank, Puget Sound Savings and Loan announced it would not open one Monday morning. This should have had little effect on Washington Mutual except for one thing: That bank had merged just a few months earlier with an unrelated entity called the Mutual Savings and Loan Association. Washington Mutual depositors were so jittery that they saw the word "mutual" and panicked.

When people were afraid a bank would fail, they had only one choice: Rush to the bank and take out their money by the bagful while there was still time. Deposit insurance did not exist. Customers converged on Washington Mutual the next morning and began lining up to withdraw their money.

The lobby was jammed; lines stretched outside to the sidewalks. Thousands withdrew large sums, hundreds closed their accounts. The run lasted another two days, but no one was turned away and cash was handed over cheerfully The bank's trustees had arranged for an emergency transfer of cash from New York to meet the demand. The bank took the extraordinary measure of staying open late on one of those days to accommodate all the patrons. Actions such as these served to settle the depositor's nerves and the panic subsided.

Yet it subsided only briefly. In 1933, Washington Governor Clarence D. Martin (1884-1955) declared a "bank holiday" (suspension of banking activities) for two days, which set off another panic on March 1, 1933. The scene at the big building at 2nd and Spring was even more chaotic this time around. So many customers jammed into the marble-columned lobby that some actually fainted and had to be carried over the counter and revived.

The doors were closed at 4 p.m. but hundreds of people were still in line in the lobby. An employee later described the scene:

"The lobby was packed with customers to the doors. All was quiet. The air was heavy with tension and fear. Customers wondered whether they were going to be paid. I will never forget that weird feeling. Mr. Frazier, who was a short man, stood on a desk to tell the customers not to be in a panic, all would be taken care of" (Morgan).

The last customers weren't paid until 9 p.m. But paid they were, because the bank had arranged for more cash to be delivered from the Federal Reserve. President Franklin D. Roosevelt was inaugurated on March 4 and immediately called for a bank holiday lasting through March 13. When Washington Mutual finally reopened on March 14, 1933, new restrictions had been imposed nationwide. Nobody could withdraw more than $50 per week without a "good faith need." Only a handful of people were waiting in the lobby. Another crisis was averted.

Regaining Health, Buying Banks

The bank gradually regained its financial health through the rest of the 1930s. In 1941, it acquired Coolidge Mutual Savings Bank in Seattle, which had ties to Washington Mutual personnel. The former Coolidge Mutual building then became Washington Mutual's first "branch" office. Washington Mutual thrived during the World War II years and sold just short of $30 million in war bonds. At the close of the decade, Washington Mutual had expanded to four branches in the Seattle area.

It took Washington Mutual until 1964 to expand outside Seattle, when it acquired Spokane's Citizen Mutual Savings Bank, which had branches in Spokane and Pullman. This boosted Washington Mutual to 26th place in size among all savings banks in the nation.

Then in 1965, Washington Mutual acquired Liberty Mutual Savings Bank, with branches in Yakima, Kennewick, and Grandview. By 1973, had snapped up several other banks, making it a truly statewide bank with 15 branches across the state, including Everett, Tacoma, Vancouver, Bellingham, and Gray's Harbor. The headquarters building on 2nd Avenue was torn down and replaced with a larger modern building in 1969.

Innovative and Leading-Edge

The bank introduced a new service in 1976 -- an innovative pay-bills-by-phone service. It was a harbinger of things to come. Washington Mutual soon gained a reputation for being on the leading edge of telephone banking and eventually on-line banking.

The bank was also an early developer of the cash machine, which later evolved into the ubiquitous ATM (automatic teller machine). Washington Mutual's machine was called The Exchange. It was introduced in Bellevue Square in 1974, in a concrete installation designed to "withstand a burglar with a bulldozer" (Morgan). Washington Mutual soon joined with 16 other banks to make The Exchange into a cash machine network, one of the first such systems in the nation.

In 1976, it introduced a different kind of innovation, the "step-rate" loan, in which the rate starts low the first year and gradually rises for the next six years. It resembled, in some respects, what would later be called the adjustable-rate mortgage, which would have fatal consequences for Washington Mutual decades later. In 1976, however, it was considered a progressive attempt to help low-income families afford homes. The company said that the "response has been spectacular" (Bartel, "Step-Rates").

More Than a Bank

However, the end of the 1970s was rough on savings institutions in general and on Washington Mutual in particular. A recession and a tight money supply forced Washington Mutual to take the extreme step in October 1979 of granting no more home loans. The bank wasn't able to resume lending on a limited basis until 1980. The bank suffered big losses in 1981 and 1982. In 1983, Washington Mutual made the decision to go public: It converted from a mutual bank to a savings bank owned by holders of capital stock. The stock sale helped the bank recover from its losses. Cost-cutting measures and an improving economy also helped the bank return to profitability in 1983.

Meanwhile, the bank embarked on an aggressive expansion strategy in 1982 by acquiring the Northwest's oldest brokerage securities firm Murphey Favre, Inc., a firm founded in Spokane in 1888, and its sister company, Composite Research and Management. Soon Washington Mutual was doing business in a number of new areas, including insurance, travel services, real-estate partnerships, junk bonds, and commercial construction loans. The bank's new motto was "the bank that's more than a bank."

In 1989 -- its 100th anniversary -- the company built a dramatic new addition to the Seattle skyline: The Washington Mutual Tower, just a block from its longtime headquarters. The bank entered its second century bigger, stronger, and able to claim "no depositor has ever lost a dime" (Morgan).

The Kerry Killinger Era

The bank expanded even more dramatically in the 1990s. New chairman Kerry K. Killinger, who had started as a young Murphey Favre executive, told the Puget Sound Business Journal in 1990 that the company's goal was to be the premier consumer bank in the Northwest.

If anything, he understated the goal. The company began purchasing other Northwest banks at an average of two per year. It leapfrogged from 84 branches in 1991 to 248 in 1995. Then it began to expand throughout the entire West, purchasing banks in Oregon and Utah. The biggest acquisition of all came in 1996, when it acquired California's American Savings Bank and its 158 branches. Washington Mutual immediately became the third largest savings-and-loan in the nation.

In the 2000s, powered by a boom in housing prices and a subsequent boom in home loans, Washington Mutual expanded throughout the nation. It became the country's largest mortgage originator and the country's largest savings-and-loan bank.

This growth came, in part, from subprime loans, which were aggressively marketed to people with bad credit (known as subprime borrowers). It also came from a loan Washington Mutual called the Option ARM (adjustable rate mortgage). It was promoted as "all the loan you'll ever need" because of its flexibility. Customers could choose from among a variety of rates and payment plans. Many opted for the minimum payments, which were not always enough to pay even the interest.

 By 2006, as interest rates went up, defaults grew. By 2007, the housing bubble had burst and the subprime lending crisis was making headlines around the country. Washington Mutual was in trouble. It drastically curtailed its subprime lending and then, in June 2008, the bank stopped offering Option ARMs.

WaMu's Historic Collapse

But it was too late. Killinger was replaced as the CEO and the bank had to raise outside cash from the private equity firm TPG Capital. Then, in September 2008, nervous depositors, spooked by the government takeover of Freddie Mac and Fannie Mae, embarked on another "run" on Washington Mutual.

This time, no panic was evident in the lobby. No executives stood on desks. Depositors quietly and methodically withdrew $16.7 billion in deposits in just over a week. This created what the Federal Deposit Insurance Corporation (FDIC) called "severe liquidity pressure." In other words, the bank ran out of money.

On September 25, 2008, the federal Office of Thrift Management seized the bank.  It was the largest U.S. bank failure in history. Washington Mutual was sold hours later to JPMorgan Chase & Co.

Depositors and customers experienced a seamless transition to the new bank. Washington Mutual's proud and longstanding claim remained intact: No depositor ever lost a dime. But stockholders and bondholders weren't so fortunate. They lost everything.

After 119 years, the Seattle bank that had survived recessions, panics, and the Great Depression was dead.

Sources: Murray Morgan, The Friend of the Family -- 100 Years With Washington Mutual, (The Washington Mutual Financial Group, 1989); International Directory of Company Histories, Vol. 17, 1997 edition, "Washington Mutual," by Jeffrey L. Covell (St. James Press); HistoryLink.org Online Encyclopedia of Washington State History, "Federal Bank regulators seize Washington Mutual on September 25, 2008" (by Tom Brown) http://www.historylink.org/, accessed October 14, 2008; "Mutual Savings Branch for City," Spokesman-Review, July 26, 1964, p. A-5; "Firm Says No More Loans," Spokesman-Review, October 28, 1979; "Bank Again Providing Mortgages," Spokane Chronicle, July 17, 1980; Frank Bartel, "Touch-Dial Away Your Bills Today," Spokane Chronicle, September 10, 1976, p. 3; Frank Bartel, "Step-Rate Loans Become Popular," Spokane Chronicle, December 13, 1976; Associated Press, "FDIC Seizes Troubled WaMu," Spokesman-Review, September 26, 2008, p. A-1; Tom Kelly, "Tracing the collapse of WaMu," Spokesman-Review, October 5, 2008, p. E-1.

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