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OTS HIGHLY CONFIDENTIAL

Office of Thrift Supervision

Department of the Treasury

Pacific Plaza 2001 Junipero Serra Boulevard Suite 650 Daly City CA 940141976

PO Box 7165 San Francisco CA 94 1 207 1 65 Telephone 650 7467000 Fax 650 7

PRIVILEGED AND CONFIDENTIAL

MEMORANDUM FOR Scott M Polakoff Senior Deputy Director and

Operating Officer

THROUGH Timothy T Ward Deputy Director

Examinations Supervision and Consumer Protection

FROM Darrel W Dochow Regional Director

West Region

DATE September 25 2008

SUBJECT Recommendation for Appointment of the Federal Deposit

Insurance Corporation FDIC as Receiver for

Washington Mutual Bank Henderson NV OTS No 08551

1 RECOMMENDATION AND SUMMARY

The West Regional Office recommends that the Director of the OTS appoint the FDIC as

receiver for Washington Mutual Bank Henderson Nevada WMB or the Bank We believe that

grounds exist for the appointment pursuant to Section 5d2 of the Home Owners Loan Act

HULA 12 USC § 1464d2 and Section 11c5 of the Federal Deposit Insurance Act

FDIA 12 USC § 1821c5

As explained below we believe the following grounds exist for the appointment of a receiver

1 The Bank is likely to be unable to pay its obligations or meet its depositors demands in

the normal course of business and

2 The Bank is in an unsafe and unsound condition to transact business

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HIGHLY CONFIDENTIAL

Restricted For Use in Connection with Plan Confirmation Only


West Region Receivership Recommendation

Washington Mutual Bank Henderson NV 08551tember 25 2008

II KEY FINANCIAL AND SUPERVISORY INFOR•MIATION

e ecte ounce tote 30 208 F •1 PCA Capital Cate o Well Ca italzed June 30 2t08Tier I Core CapitalAdjusted Total Assets FDICIA Cap Adequacy 7 07

Total RiskBased CapitallRisk d Assets FDICIA Cap Adequacy 2

Selected Supe rvisory Information

Date of Most Recent Safety and Soundness Examination 191102007

CAMELS Ratings Ratings Date September 19 2008 Report

Composite C A M E L S4 3 4 3 4 4 2

YIN Comments if applicable

Consent Agreement YN N

Open Issues or Applications YN YDenied Capital Plan YN N

Capital Disputes YIN NEnforcement Issues YIN yPCA Directive YN N

III OVERVIEW AND KEY FINANCIAL INFORMATION

Corporate Structure and General Background

WMB is a stockform federally chartered savings association The FDIC insures the Banks

deposits through its Deposit Insurance Fund WMBs home office

is in Henderson Nevada

while its primary executive and business segment headquarters are in Seattle Washington As of

June 30 2008 The bank had 2239 retail branches operating in 15 states WMB operates

primarily in major metropolitan areas on both coasts and in selected middle states with four

primary business lines 1 Home Loans 2 Card Services 3 MultifamilyCommercial Loansand 4 Retail BankingProduction and Operations

WMBs toptier holding company Washington Mutual Inc WMI is a unitary thrift holding

company It

is mainly a shell Washington Mutual Bank fsb WMBfsb is the BanksOTScharteredoperating subsidiary and it holds WMBs investment portfolio

CAMELS = Capital Asset Quality Ma agement Earnings Liquidity and Sensitivity to Market Risk

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Washington Mutual Bank Henderson NV 08551

September 25 2008

Pare 3 of 10

Senior management of the Bank consists of Chairman of the Board Stephen E Frank Chief

Executive Officer Alan Fishman Chief Operating Officer Steve Rotella and Chief Financial

Officer Tom Casey

The following table contains additional information about the Bank

Home Office Address 2273 North Green Valley Pkwy Ste 14 Henderson NVAdministrative Office Address 1301 Second Avenue Seattle WA 98101

Administrative Office Telephone 206 5008779 CEOs Administrative Assistant

Date on which Charter was Issued December 27 1988

Date of Federal Deposit Insurance December 27 1988

In 2005 the Bank began a strategy to remix assets liabilities and capital Management began to

portfolio higher yielding higher risk assets while diversifying liabilities and equity via preferred

stock and hybrid issuances During late 2006 and early 2007 as the credit environment started to

deteriorate management began tightening credit standards with respect to credit card and

subprime lending In the first half of 2007 management shrank the balance sheet by selling

certain loweryielding loans Total assets shrank to $3111 billion by June 30 2007 In July

2007 given the disruption of the secondary mortgage market management cut back on loans

originated for sale and began transferring held for sale loans to the held for investment portfolio

at a mark to market loss The lack of loan sale activity along with the transfer of loans into the

held for investment portfolio resulted in total assets increasing to $3288 billion at September 302007 Since 4Q07 management has discontinued the former strategy to focus on a more retail

oriented lending strategy through the branches At June 30 2008 total assets declined to $3070

billion and are projected to continue to decline due to a severe curtailment in singlefamily

residential SFR related lending

FW 1B `SM 63010$ 63007Total Assets $307022

33208 123107M

$317824 $325809

Significant operational changes since Q307 include

$328805 1 $311053

33107

$318295

Exiting all subprime SFR lending

Discontinuation of WaMu Capital Corp and its associated conduit loan purchasesale

operation

Continued wind down of the Mortgage Banker Finance warehouse lending unit

Tightened underwriting of all portfolios including a program to contractually limit

outstanding home equity lines in instances where collateral or borrower financial

condition has deteriorated

Closing all remaining freestanding home loan offices and exiting the wholesale broker

lending channel

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September 25 2008

of 10

Increasing reliance on FHLB advances by using classes of assets for collateral not

previously used February 2008

Releasing an estimated $300 billion in available collateral from REIT reorgan

the second quarter of 2008

issuance of $30 billion in perpetual convertible preferred stock in December 2007

0 billion infused into WMBReducing the WMI dividend from $056 to $001 per quarter and discontinuance of

WMB dividends to WMIWM issuance of $70 billion in common stock in April 2008 with $30 billion infused

into WMBCeasing option ARM and stated income lending

A WMI infusion of an additional $20 billion to raise capital levels at WMB in July 2008

A WMI infusion of $5000 million in September 2008

Current Condition

Asset Quality

Notwithstanding the numerous operational changes undertaken by WMB management asset

quality has deteriorated significantly Nonperforming assets NPA rose to 38percent

of total

assets as of June 30 2008 compared to 14 percent for the same period in 2007 The increase in

NPAs is concentrated primarilyin permanent SFR loans primesubprime option ARM and

home equity lines of credit HELOCs Loans secured by SFRs are WMBs primary asset

representing approximately 600 percent of total assets at June 30 2008

Problem assets have also increased significantly The ratio of classified assets to core capital

plus loss allowances increased to 433 percent at June 30 2008 an 85 percent increase in the

ratio from the same period one year earlier The absolute level of classified assets has steadily

increased over the last several years from $26 billion 08 percent of total assets as of December

31 2005 to $129 billion as of June 30 2008 42 percent of total assets

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September 25 2008

5 of 10

The following table

June 302008

WUS

hts W MBs problem asset trend

12131105 1 12131106

8000s

•m Decembe

1213107

Delinquent Loans 3389 days 1793237 071 2836771 105

Nonperforming Loans 2880054 087 2740081 079

Repossessed Assets 239485 007 578385 017

Nonperforming Assets 3119539 094 331 8466 096

Special Mention Assets 863090 026 2064002 060

Classified Assets 2591527 078 3615955 105Class AssetsCore Cap + ALjL 1143 1481

4741615 189

6431861 197

1015127 031

7446988 229

2309424 071

8177767 251

3274

CE 06130108

5441790

10025164

1531807

11556971

2485122

12873646

WMB reported total chargeoffs of $381 billion through yeartodate YTD June 30 2008

$146 billion for 1Q08 and $235 billion for 2Q08 or 24 percent of average assets annualized

This compares unfavorably to the $241billion 075 percent of average assets annualized

reported for the year ended December 31 2007 and the $106 billion 030 percent of average

assets reported for theyear ended December 31 2006 As with problem loans most of the

chargeoffs are in the SFR portfolio which accounted for $32 billion of YTD chargeoffs

through June 30 2008

The Bank predicts a high loss case of $19 billion in residential mortgages before lost interest and

foreclosure costs Current performance tracking is in line with the high end of the Companysestimates at the time of the April capital raise At $1894 billion the residential mortgage

exposure includes $525 billion in option ARMs $607 billion in HELOCs and $174 billion insubprime loans

WMBs asset quality problems have materially affected the Banks earnings and they are

projected to have a continuing negative impact at least through the second quarter of 2009

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September 25 2008

of 10

iings

Primarily because of the asset quality trends in the SFR mortgage loan portfolios net income for

the Bank has declined considerably with nominal income reported for 2007 and significant net

losses reported through June 2008 The following table illustrates the affect of the decline in

credit quality on the earnings of the Bank The table displays key financial performance figures

for 2006 2007 and YTD June 30 2008

2006

°I°

2007

°lo

YTD 613008

°lo

lEA Yield 641 684 611

Cost of Funds 372 388 275

Net Interest Spread 269 296 337

Net Interest Mar in 257 280 313

Loss Provisions avg assets 023 096 755

Noninterest Income 242 225 074

Noninterest Expense 321 382 307

ROAA 100 008 407ROAE 1192 099 5219Note Except for yieldspread information and ROAE above ratios are expressed as annualized percentage

of average assets

Source OTS Uniform Thrift Performance Report U TPR

In the first and second quarter of 2008 the Bank recorded a net loss of $11 billion and $32

billion respectively The most recent earnings projection by the Bank forecasts an annual total

net loss of approximately $60 billion for 2008 While actual credit losses through the second

quarterof 2008 remained within the forecasted range a decline in housing prices beyond the

levels assumed could produce a material increase in credit losses further depressing the

projected negative earnings

Management predicts a return to profitability in the third quarter of 2009 In the meantime the

Bank continues to report core operating earnings of approximately $16 billion per quarter This

amount is insufficient to fully offset projected increased loan losses provide sufficient funds to

meet significant deposit outflows and supplement capital

Liquidity

Recent events have significantly limited the Banks ability to meet its operating liquidity needs

As of September 25 2008 the Bank projected that it had $134 billion to meet liquidity

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September 25 2008

Pate 7 of 10

obligations A review of the sources that make up that total reveals that the Banks liqut

position is far less than the projected number suggests

The Bank estimated having $38 billion in cash and investments to meet liquidity obligations as

of September 25 2008 Core earnings are insufficient to supplement its cash base In addition

most of the Banks assets are not readily saleable Accordingly the Bank is dependent upon

borrowings from the Federal Home Loan Banks of San Francisco and Seattle FHLBSF and

FHLBSEA and Federal Reserve Bank of San Francisco to meet funding needs The Bank

projected that it

had borrowing capacity of $29 billion from the FHLBSF and the FHLBSEA

on September 25 2008 Also as of that date the Bank projected that it

had $67 billion available

for borrowing from the Feds discount window

Given the Banks current ratings and the uncertain value of the collateral supporting its

borrowings from both the FHLBs and the Federal Reserve Bank there is no assurance that the

projected funds will be available in the amounts and in the timing needed by the Bank to meet its

obligations The Federal Housing Finance Agency notified OTS that FHLBSF has agreed to

fund $05 billion on September 25 2008 but there is no guarantee that it will provide further

funds The Federal Reserve lowered the Bank to secondary credit status on September 25 2008

which resulted in an additional reduction of $1 billion in borrowing capacity Under secondary

status the Bank is subject to increased haircuts and pricing The Bank will also likely lose

access to the 28day term auction facility TAF program

Moreover even if available borrowings from the FHLBs are subject to system funding

constraints Under those constraints the FHLBSEA is limited to providing approximately $05

to $10 billion maximum advances per day on the remaining line Similarly should theFHLBSFdetermine that the collateral is adequate to supportcontinued borrowing by the Bank it is

limited to providing approximately $20 to $30 billion per day At this time it is uncertain what

if any additional advances the FHLBSF will make2

In addition marketbased funding sources are not immediately available to supplement liquidity

Sales of new unsecured debt and securitizations are generally unavailable Moreover most of

the Banks unpledged assets ie that are not now collateralizing the borrowings at either the

FHLBs or the Federal Reserve Bank are of either insufficient quality or lack documentation to

make them readily saleable Those that may be saleable require time to arrange financing and

sale

2For example the FLHBSF has informed the OTS that as of September 23 they will advance $ t billion to the Bank

for September 24 but will not commit to any further advances The FHLBSF subsequently agreed to advance $5CO

million on September 25 The FHLBSF also stated that they have received additional data on the loan cools

collateralizing the borrowings and are in the process of evaluating it for future lending decisions

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Washington Mutual Bank Henderson N 08551

September 25 2008

8 of 10

Significant deposit outflows are compounding the liquidity challenge facing the Bank The first

significant deposit outflow occurred after the closure of IndyMac Bank W 1B lost

approximately $91 billion in interest bearing and small business deposits from July 14 2008

through August 6 2008 Thereafter the Bank had a net inflow of approximately $43 billion in

deposits through promotional deposit pricing at relatively high rates

Starting with the Banks disclosure on September 8 2008 that it entered into an enforcement

action Memorandum of Understanding with the OTS a more significant deposit outflow

started This outflow gained momentum following media speculationabout the future of the

company disclosures that the company was considering a sale adverse events in the financial

sector as a whole and further rating agency downgrades of the company and the Bank resulting

in a net deposit loss of approximately $187 billion between September 8 and September 24

2008

While the current outflow rate has declined from its peak itwill deplete the Banks available

cash resources and eliminate the Banks total projected liquidity in the short term absent

additional extraordinary events Given the Banks limited sources of funds and significant

ongoing deposit outflows it is highly unlikely that it

will be able to meet its operating liquidity

needs including paying interest on deposits

IV DESCRIPTION OF MAJOR PROBLEMSGROUNDS FOR TRANSFER

The OTS Director is authorized to appoint the FDIC as receiver for any savings association if the

Director determines that grounds exist under 12 USC § 1821c5 See 12 USC §

1464d2A The specific grounds applicable include

A The Bank is likely to be unable to pay its obligations or meet its depositors demands in the

normal course of business

As described above giventhe continuing significant deposit outflows from the Bank and the

limited and diminishing available sources of liquidity it is highly likely that the bank will not

meet its funding needs in the very near future As a result the Bank is likely to be unable to pay

its obligations or meet its depositors demands in the normal course of business Therefore in

accordance with 12 USC§ 1821c5f the Director may appoint a receiver for the Bank

B The Bank is in an unsafe and unsound condition to transact business

Pursuant to 12 USG § 1821c5C the Director may appoint a receiver for the Bank if it is in

an unsafe and unsound condition to transact business For all of the reason detailed above

including the Banks severe liquidity strain deteriorating asset qualityand conti

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September 25 2008

Pafle 9 of 10

551

earnings the Bank is in an unsafe and unsound condition to transact business Therefore in

accordance with 12 USC § 182Ic5C the Director may appoint a receiver for the Bank

V ENFORCE ME l EIt ORY ACTIONS

OTS has taken the following supervisory or enforcement actions formal and informal with

respect to WMB

Cease and Desist Order CD On October 17 2007 OTS issued a CD order related to

weaknesses in WMBs Bank Secrecy ActAntimoney Laundering BSAJAML programs

Management has submitted a plan for compliance with the CD which OTS monitors as part of

the continuous exam process

Civil Money Penalty CMP On October 17 2007 OTS issued an order for CMPs totaling

$60448 related to WMBs violation of flood insurance regulations in its Commercial Loan

pup

Board resolution In response to a supervisory ratings downgrade letter from the Regional

Director on February 27 2008 the Board resolved on March 27 2008 to undertake strategic

initiatives to improve weaknesses related to asset quality earnings and liquidity

WMI Memorandum of Understanding OU On September 7 200$ WMI entered into an

MOLT Action items include 1 submission of a consolidated 3year business plan within 30

days for OTS review and nonobjection followed by quarterly variance reports and 2 a

contingency capital plan within 90 days

WMB Memorandum of Understanding On September 7 2008 WMB entered into a separate

MOLT Action items include 1 submission of a 3year business plan both base case and

stressed scenarios within 30 days for OTS review and nonobjection followed by quarterly

variance reports 2 a contingency capital plan within 90 days 3 a classified asset reduction

plan incorporated into the business plan 4 engaging an outside consultant to review risk

management practices 45 days and submitting a report to OTS 75 days 5 engaging an

outside consultant to review the underwriting process for the Home Loans Group 45 days and

submitting a report to OTS 75 days 6 submitting a report to OTS to address the consultants

recommendations within 30 days of receipt of the consultants reports 7 reviewing alerts for

the period April 1 2006 through June 30 2008 and filing SARs where required no later than

October 31 2008 and 8 ensuring that management corrects all OTS findings specified in the

Report of Examination and Findings Memoranda Within 55 days of the end of each quarter the

Board shall certify compliance with the MOU and submit a certified copy to the OTS

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September 25 2008

Paae 10 of 10

CQNCLUSIO AND CONTACTS

Statutory grounds exist for the appointment of a receiver for the Bank We believe that the

appointment of a receiver for the Bank under these circumstances will protect the interests of the

Banks depositors and the Deposit Insurance Fund Therefore we recommend that the Director

take action to appoint the FDIC as receiver for WMB as soon as possible

The following personnel available to answer any additional questions

Name Title Phone

Benjamin D Franklin Regional Examiner 909 827 0066

James A Hendriksen Regional Counsel 650 746704I

Darrel W Dochow

Regional Director

Exhibit List Attached

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