Tip of the Iceburg?

For all the little-girl-like whining that occasionally whimpers forth from the panty-waists who write this blog about tin-foil-hat-wearers who contact us, we have to admit that the majority of the contact we receive is interesting and sometimes downright enlightening. Yesterday's post on Andy Hardy's Cuomo's publicity-hounding over WaMu's alleged coercion of appraisers, generated a couple of contacts of the latter sort. One reader pointed me to a recent article that reports that class action attorneys--Errrrpp! Sorry, I just spit up a little bit in my mouth; let's try this again--attorneys have already filed a class action lawsuit against WaMu over the appraisal practices alleged by Cuomo's office to have occurred.

Wolf Popper LLP has filed a class action lawsuit against Washington Mutual, Inc. ("Washington Mutual") and certain of its officers and directors in the United States District Court for the Southern District of New York, on behalf of investors who purchased Washington Mutual common stock on the open market from July 19, 2006 through October 31, 2007 (the "Class Period"). This is the first action filed against Washington Mutual and alleges claims for securities fraud. The case has been assigned Civil Action No. 07 Civ. 9801.

The complaint charges that during the Class Period Washington Mutual improperly exerted pressure on a third-party appraisal firm, eAppraiseIT (a division of the First American Corporation), to inflate the appraised value of homes used as collateral for loans originated by Washington Mutual. Washington Mutual failed to disclose this scheme, which violated federal and state laws and regulations requiring an independent appraisal process. The inflated appraisals caused Washington Mutual's financial results to be misstated, including causing its loan assets to be overstated while its provision for doubtful accounts and reserves for loan losses were materially understated.

As regular readers understand, I usually have the same regard for class action attorneys as I do for members of Al-Qaeda. I admit that's based purely on the personal prejudices of a bank lawyer whose career has been spent on the other side of the firing line. Therefore, I reserve the right to change my mind in any specific instance where the evidence reveals that the bank's conduct was clearly improper. The civil lawsuit should at least complement the investigations of the State of New York, the OTS and the OFHEO in uncovering any such evidence, just in case the federal and state agencies get into a not-so-untypical hissy fit over turf-protection and "You think you have a big one, well, let me show you mine!" We'll see what develops.

Perhaps even more interesting is word of a lawsuit that alleges wrongful termination by WaMu of an employee and that was filed over a year ago. The plaintiff is a former internal credit analyst for WaMu.

Washington Mutual Inc. (WM) is the target of a wrongful-termination suit filed in the Superior Court for the Orange District-Central Justice Center. The law office of Joseph M. Lovertovich, which is representing the former employee, alleges the Seattle-based financial-services company terminated a staff internal analyst who reported supposed internal Bank of Code Conduct violations to upper management.

[...]

The law office specifically alleges the analyst was directed not to downgrade a loan by a senior officer at the company to enable the bank to continue doing business with a large mortgage client, which the employee refused. The law firm claims that another credit officer employed by the bank was then told to misrepresent the loan value. The firm said the alleged manipulation by the bank employee prevented the $5-million commercial loan transaction's risk rating from being downgraded. The terminated analyst also said the bank carried a $6 million investment on its books that was actually worthless.

It's my understanding that the former employee's suit has been converted to an arbitration proceeding, which will be conducted later this year. Obviously, until all the evidence is in you have to give WaMu the benefit of the doubt. Nevertheless, as I observed yesterday, my personal experience with pressures exerted by large lenders on residential real estate appraisers who tried to render honest appraisals, and my experience with similar pressures faced by internal credit analysts at commercial banks and other financial institutions whose delivery of bad news is often taken poorly by managers whose oxes are being gored, lead me not to dismiss these allegations out-of-hand. I'll be following them closely.My ire was raised by Cuomo's (and his big brother Spitzer's) grandstanding and, I think, their less-than-effective tactics, not by the underlying merits of the investigation.

WaMu is by far the largest federal thrift, and, if the evidence that is revealed supports the contention that WaMu retaliated against honest appraisers and credit analysts, and that these allegations have been around for some time, an additional question will be asked as to what the OTS knew and when did it know it. If it didn't know about it, why was it ignorant? Remember, the OTS is trying to sell itself as the primary federal regulator of previously unregulated mortgage lenders. I've already received snarky comments via e-mail from certain state banking regulators about the OTS in this regard, and if these proceedings support the allegations made against WaMu, the OTS may be next in the hot seat, with a lot more critics than a few state banking regulators.