Washington Mutual Case Study

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Washington Mutual Bank Big Dreams…. Poor Implementation

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Financial Risk Management
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Prepared By:
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Rafia Hanif Butt
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Syeda Saba Zaidi
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Submitted to:

Acknowledgement:

All the thanks to Allah for giving us the courage to complete this report. We would like to express our special thanks to gratitude to our teacher, Sir Mohsin Adhi, who gave us the golden opportunity to work on this project of Financial Risk Management. This project has helped us in exploring and knowing several practical facts of Financial Risk Management. We are thankful to our parents and friends who helped us with their knowledge in completing our project within the limited time period. The purpose of this project is not only to secure marks but also to increase our knowledge regarding the course.

Contents
Acknowledgement:2
Executive Summary3
Washington Mutual Inc.5
Overview of the Case study5
What Made Washington Mutual Bank Collapse?6
Key Players Contributing to WaMu’s Bankruptcy:7
The Risks faced and mishandled by WaMu:9
Suggested Risk Management Techniques;10
Credit Risk Management10
Figure out the credit exposure10
Provision as well as the analysis of credit risk scores10
Operational Risk Management:10
Active role playing by Regulators:10
Market Risk Management:11
Liquidity Risk Management:11
Clear and communicable liquidity risk management policies:11
Some regulatory wisdom11
Bibliography12

Executive Summary

“We hope to do to this industry what Wal- Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”----Kerry K. Killinger, Chief Executive of Washington Mutual, 2003. Yes, Kerry K. Killinger’s dream came true. Five years from 2003, Washington Mutual, Inc., the largest U.S’s saving and loan association, lost its standing in the U.S. banking system. It was sold off to JPMorgan Chase on September 25th 2008, which was the biggest failure in the. This report is based on a case study of Washington Mutual Incorporation, which was once America`s 6th largest saving and loan association. Washington Mutual hoped to be a financial supermarket for retail and commercial consumers. In an attempt to improve slow growth WaMu acquired Long Beach that provided mortgages for people with poor credit history. In 2005 WaMu acquired Providian, a lender of credit cards to customers who could be termed subprime. Providian used a mathematical model, wherein it issued cards to customers who could pay the monthly charges, but not the high rate of interest on the total debt. In the event of slowing sales, they doled out cards to lower than subprime customers who in normal circumstances would not be eligible for any debt. Providian sold to WaMu after a host of claims of falsely deceiving and overcharging its customers were made against it. WaMu was seeing a slowing of its home loan business and wanted to enter the credit card business, hoping to gather at one stroke Providian’s 9.5 million customers. WaMu aimed at lowering the cost of funds by using its retail deposit base. WaMu continued to see a decline in the mortgage sector. It saw its traditional sources of revenue such as deposits; loan advancement and fee based services reduce. Its assets were increasingly funded by the market or Federal home rates. 20% against the prescribed 15% were funded in this manner. In 2008 WaMu reported losses in April of $12 billion...
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