Interesting comments on behind the scene high profile bank failure...Anyway I for one was surprised by TPG's initial investment and WM's longevity, surprised by the death spiral financing clause associated with it, and then surprised by WM's strange and rapid downfall. Interesting to note that the initial 19 on the naked short list were only PD's...now I am not conspiracy minded too much but it is also interesting to note that WM took the big dirt nap on a THURSDAY while congress was mulling over the PACKAGE...

Treasury's Paulson warned WaMu CEO to sell before it failed

Two months before Washington Mutual failed, Treasury Secretary Henry Paulson warned then-CEO Kerry Killinger that he ought to sell the Seattle-based thrift before it deteriorated further.

By Seattle Times business staff

Rami Grunbaum, deputy business editor, and Seattle Times Business staff

Two months before Washington Mutual failed, Treasury Secretary Henry Paulson warned then-CEO Kerry Killinger that he ought to sell the Seattle-based thrift before it deteriorated further.

"Paulson said, 'You should have sold to JPMorgan Chase in the spring, and you should do so now. Things could get a lot more difficult for you,' " said one of several current and former high-ranking WaMu executives familiar with details of the call.

Paulson's July comment, which has not been previously reported, caught Killinger and his top brass off-guard, executives said. Bank officials had recently raised $7.2 billion in capital from investors led by private-equity fund TPG, and they thought that was enough money to weather the worsening mortgage crisis.

Killinger declined to comment for this article, and WaMu executives close to him spoke only on condition of anonymity. A Treasury spokeswoman said it does not comment on Paulson's private conversations.

Last spring, JPMorgan offered up to $8 a share for WaMu, with the final price depending on how its loans performed. Instead, WaMu sold a partial stake to TPG. When WaMu was seized by federal regulators Sept. 25, most of its banking operations were sold to JPMorgan for $1.9 billion — and the company's stock was rendered worthless.

Killinger called Paulson in July to ask that the Treasury secretary use his influence with the Securities and Exchange Commission to add WaMu to a list of 19 financial institutions that were temporarily protected from a form of trading called "naked short selling" that can drive share prices artificially low.

Paulson refused to help Killinger get WaMu on the list.

WaMu did get on a subsequent list: In mid-September, panic in the stock market prompted the SEC to ban all short selling on 799 financial-institution stocks.

That ban came too late for the Seattle thrift, which failed the next week after a run on the bank that was precipitated by credit-rating agencies reducing WaMu's debt to junk-bond status. Its declining ratings were due partly to its falling stock price, which had been harmed by short selling.

The WaMu executives did not accuse Paulson of pushing WaMu to fail. Although the thrift's primary regulator, the Office of Thrift Supervision is a bureau of the Treasury, the head of the OTS reports to the president rather than to Paulson.