WaMu – A One Trick Pony?

Some time ago I had praised Washington Mutual for their new approach to banking. It just made sense to treat banking more like other businesses in the retail industry and really focus on customer service. Well, now it looks like they haven't done as well (reg. required) as some had hoped.

WaMu's bosses radiated hubris. CEO Kerry Killinger predicted that the bank would become the "nation's leading retailer of financial services" and vowed to grab an incredible 20% of market share in mortgages. The chest thumping peaked a year ago when WaMu ran a startling half-page ad in the Wall Street Journal and other papers touting its stock. The ad showed a Roy Lichtenstein- style cartoon of a woman putting on lipstick, with the message: While lipstick colors are mere fads, owning WaMu stock will "look good on anyone."

But WaMu hasn't fully delivered on its promise to diversify: More than 60% of its business still derives from mortgages. And with the mortgage boom waning, it is becoming evident that the company lacks the skills to match its galloping ambition. On June 28, WaMu issued an extraordinary press release announcing a huge downward adjustment in its earnings forecast. It blamed the bad news on "expectations for a sustained increase in long-term interest rates." Huh? How could one of America's biggest mortgage lenders claim the upward march that everyone knew was coming, that Alan Greenspan had been heralding in neon red, was somehow a surprise?

For the banking world the real surprise is the extent of WaMu's woes. Rising rates have exposed WaMu's shortcomings in the bankerly disciplines it needs to handle the wrenching swings of the mortgage business. Critics like Angelo Mozilo, CEO of rival Countrywide, sees it as a classic case of an acquisition-mad business that forgot about the basics. "WaMu was touted as a world-beater," he says. "But it grew too fast. It didn't have the organizational or intellectual capacity to run a business of that size."

It is common for companies to struggle once they reach a certain size. Most strategies and corporate cultures don't just scale up – they have to be modified to account for larger groups of people, more locations, and a broader product line. I don't know all the details, but I suspect WaMu is suffering from a dot-com-ish bout of overconfidence.

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