WaMu Worry? - More Overlaps Between "Stewards" of Failed Financial Firms and the Leadership of Health Care Organizations

Investigations of the failures of major US financial corporations during the global financial meltdown continue to paint a picture of bad leadership.  The latest failed corporation to get public attention was Washington Mutual (WaMu).  As described by the Los Angeles Times,

Before Washington Mutual collapsed in the largest bank failure in U.S. history, its executives knowingly created a 'mortgage time bomb' by making subprime loans they knew were likely to go bad and then packaging them into risky securities, a congressional investigation has found.

In some cases, the bank took loans in which it had discovered fraudulent activity -- such as misstated income by borrowers -- and rolled them into mortgage securities sold to investors without disclosing the fraud, according to the report released Monday by the Senate's Permanent Subcommittee on Investigations.

The investigation strongly suggested that WaMu leaders ignored questions about their practices:

According to the Senate report, WaMu executives were aware in 2006 of problems at its Southern California subprime unit, Long Beach Mortgage Co. Excerpts of internal e-mails and reports offer a stark and unvarnished view of the warning signs that were dismissed as the bank tumbled toward failure.

The company's chief risk officers called Long Beach Mortgage, the subprime subsidiary the firm used to stage its rapid growth in home lending, 'a real problem for WaMu.' Stephen Rotella, WaMu's former chief operating officer, described the unit as 'terrible.'

The company and its Long Beach unit 'used shoddy lending practices . . . to make tens of thousands of high-risk home loans that too often contained excessive risk, fraudulent information or errors,' according to a subcommittee memo.

Making money in the short-term was more important than long-term consequences:

Internal company documents highlighted the profit pressures. 'In 2007, we must find new ways to grow our revenue. Home Loans Risk Management has an important role to play in that effort,' read a late 2006 message from the unit's chief risk officer to the risk management team.

A June 2008 review by the bank's main regulator, the Office of Thrift Supervision, found a 'culture focused more heavily on production volume rather than quality.'

Top employees could become members of the company's President's Club, which offered lavish, all-expense-paid trips to Hawaii or the Caribbean, the subcommittee found.

A vivid anecdote about this culture of greed was described by Politco,

In the years before it became the largest bank failure in American history, mortgage lenders at Washington Mutual liked to party hearty at the company’s annual retreats.

But a 2006 WaMu retreat produced one of the more cringe-worthy moments of the mortgage meltdown: Lenders, on the eve of their industry’s collapse, singing 'I Like Big Bucks' to the tune of Sir Mix-a-Lot’s 1992 hip-hop hit 'Baby Got Back.'

'I like big bucks and I cannot lie/You mortgage brothers can't deny,' sang the WaMu rappers.

The presentation, which included cheerleaders moving in time to the music, and choreographed moves by the singers, continued:

'That when the dough roles in like you're printin’ your own cash/
And you gotta make a splash/
You just spends/
Like it never ends/
Cuz you gotta have that big new Benz/
All of that bling you're wearin'/
Shining so bright peoples starin'/
It's crazy, I gotta ski Aspen/
That's all I'm askin''

The former CEO of WaMu, Kerry Killinger, was called to testify, but asserted that he was unaware of what was going on, according to a column in the Seattle Times:

Tuesday at the congressional grilling of the Washington Mutual brass on how they ran a respected, 119-year-old bank into the ground, another defense was tried: No one knows anything.

Former CEO Kerry Killinger said his bank's failure wasn't his fault (it was the economy and also the government.) But for a guy who ran the joint for 18 years, he seemed not all that clued in about what his company actually did.

Much of the questioning from a panel of U.S. senators was about WaMu's now well-known history of bundling up crappy, subprime loans, sprinkling them with fairy dust and selling them as investments on Wall Street.

The U.S. Senate Permanent Subcommittee on Investigations said it had evidence that WaMu rushed to unload some of these loans precisely because the bank knew they were rotten.

When asked about this, Killinger said he couldn't recall (they always say that). But he also said something that floored me: He never knew much about WaMu's business of securitizing subprime loans for sale on Wall Street.

Even though WaMu did it to the tune of $77 billion worth from 2000 to 2007.

'I was just simply not involved in any of those,' Killinger shrugged.

They were only the fuel for the fire that burned down the U.S. economy!

OK, well, moving on then. Killinger was asked about how even people inside WaMu considered the subprime securities coming out of WaMu's Long Beach Mortgage to be 'the worst paper in the market.'

Blank look. News to him.

How about how WaMu loan officers in various offices were involved in fraud, cutting and pasting false names on borrowers' bank statements or fabricating assets, just to move more subprime loan product?

Can't remember the specifics, said the guy who was in charge.

On it went, nearly two hours of I-have-no-knowledge or I-can't-recall.

Earlier a lower-ranking risk officer at the bank testified he'd come to Killinger in 2004 and made an 'impassioned argument' to take a stand against rampant fraud in the loan industry.

'Blow the whistle,' the guy said he urged Killinger. 'Say we at Washington Mutual will not participate any further.'

A senator asked Killinger about this. You're the CEO, the senator said. This is your bank. Didn't someone telling you there were serious fraud problems send chills up your spine?

Eh. He answered blandly that he of course tried to fix any problems. But chills? His demeanor was more Alfred E. Neuman: What, me worry?

It turns out that for his allagedly clueless leadership, Mr Killinger was paid enough to make him very rich, as per a quote from the investigation's report, via the Atlanta Journal-Constitution.

WaMu’s CEO (Kerry Killinger) received millions of dollars in pay, even when his high risk loan strategy began losing money, even when the bank began to falter, and even when he was asked to leave his post. From 2003 to 2007, Mr. Killinger was paid between $11 million and $20 million each year in cash, stock, and stock options. That’s on top of four retirement plans, a deferred bonus plan, and a separate deferred compensation plan. In 2008, when he was asked to leave to leave the bank, Mr. Killinger was paid $25 million, including $15 million in severance pay. $25 million for overseeing shoddy lending practices that pumped billions of dollars of bad mortgages into the financial system. Another painful example of how executive pay at U.S. financial firms rewards failure.

It was all gut wrenching, but perhaps the connection with health care iss not obvious. Let me explain.

A question not addressed by the congressional hearings so far was how the people ultimately responsible for the direction and financial health of Washington Mutual, the company's board of directors, allowed a CEO self-described as clueless become rich while a culture of greed produced an enormous number of questionable loans which ultimately drove the company into bankruptcy. Based on the report and testimony so far, on its face the case is strong that the WaMu board must have been one of the most irresponsible groups of supposed corporate stewards yet uncovered.

A list of the 13 board members who presided over the company's final collapse can be found in the company's 2008 proxy report.

Several of them turn out also to have been or be leaders of health care organizations:

- Thomas C Leppert, director since 2005, "the Mayor of Dallas, Texas," is also a member of the board of directors of the Baylor University Health System. (see this link)

- Charles M Lillis, director since 2005, was also on the board of Medco Health Solutions Inc

- Regina T Montoya, director since 2006, then the Chief Executive Officer of the New America Alliance, is now senior vice president and general counsel for the Children's Medical Center in Dallas, Texas. (see this link)

- Margaret Osmer-McQuade, director since 2002, then President of Qualitas International, is a member of the Board of Overseers of Weill Cornell Medical College. (see this link)

- Orrin C Smith, director since 2005, then President and Chief Operating Officer of Starbucks Corporation, is a member of the University of Washington UW Medicine Strategic Initiatives Committee. (see this link)

So, in summary, members of the board of directors of the failed Washington Mutual, which seemingly collapsed in a fog of greed and irresponsibility, currently sit on the boards of a medical school, a teaching hospital, and a pharmacy benefits management corporation, and on a strategic initiatives committee of another medical school, while another is an executive of another teaching hospital. People whose "stewardship" allowed an apparently clueless CEO to become rich while a corporate culture with the theme, "I Like Big Bucks" drove their company into bankcrupty now also lead some of the most prestigious US health care organizations.

Here is yet another example of how the leadership culture that so badly failed the financial sector was tied to the leadership of health care. (We posted here about how the board of the bankrupt Lehman Brothers also leads multiple health care organizations, and here how the leaders of how some of our major universities that house medical schools overlap with the leadership of other questionable financial corporations.)

We have another vivid illustration in the aftermath of the global economic collapse, and in an ongoing health care crisis, how some of the problems of health care, and academic medicine in particular, may have been at least enabled by leadership more used to working in an increasingly amoral marketplace than to upholding the academic mission. All health care organizations, for-profit and not-for-profit, those in the US and those in other countries, need leaders who value their health care and academic missions more than simply the money they may bring in.

Meet the New Boss, Same as the Old Boss? - Health Care Reform to be Lead by a Director of Boston Scientific, Cerner, and Medco

Today we learned that President Obama has announced his new picks for Secretary of Health and Human Services and for Director of the White House Office for Health Reform. The choice of Nancy-Ann DeParle for the latter position raises some issues. The NY Times provides some background:

He also named Nancy-Ann DeParle to coordinate health policy for the administration. Her position, counselor to the president and director of the White House Office for Health Reform, is not subject to Senate confirmation.

Ms. DeParle was commissioner of the Tennessee Department of Human Services from 1987 to 1989. Under President Bill Clinton, from 1997 to 2000, she was administrator of the Health Care Financing Administration, now known as the Centers for Medicare and Medicaid Services.

Since then, she has gained extensive experience in the business world. That experience, though seen as an asset by many, prompted questions from some of the people vetting personnel for Mr. Obama, supporters of Ms. DeParle said.

Ms. DeParle has been a director of large health care companies including Medco Health Solutions, a pharmacy benefit manager; Cerner, a supplier of health information technology, including electronic medical records; Boston Scientific, a medical device company; DaVita, which runs kidney dialysis centers; and Triad Hospitals.

In addition, according to the Washington Post,

DeParle, 52, was previously commissioner of the Department of Human Services in Tennessee. During the Clinton administration, she worked in the Office of Management and Budget and later oversaw Medicare and Medicaid as the administrator of the Health Care Financing Administration.

DeParle currently is managing director of CCMP Capital, a private equity firm. She also serves on the boards of several firms related to health care. A White House spokesman said she is in the process of resigning all those positions.

Administration spokespeople apparently brushed aside any questions about Ms DeParle's conflicts of interest. A separate article in the NY Times noted:

In picking Nancy-Ann DeParle to champion an overhaul of the nation’s health system, President Obama selected someone with deep roots in the Washington bureaucracy, an intimate familiarity with health policy and respect on both sides of the political aisle — not to mention degrees from Harvard Law School and Oxford University.

But in putting Ms. DeParle in charge of an issue that has bedeviled presidents for decades, Mr. Obama also chose to overlook Ms. DeParle’s business ties to companies that have a direct stake in the health care debate.

In announcing her appointment Monday as the director of the White House Office of Health Reform, Mr. Obama expressed 'absolute confidence' in Ms. DeParle, who ran the agency that oversaw Medicare and Medicaid during the Clinton administration. But the White House instantly faced questions about whether her appointment was skirting the spirit, if not the letter, of the president’s tough conflict-of-interest policy.

Since leaving the Clinton administration, Ms. DeParle has been managing director of a private equity firm, CCMP Capital, and a board member of companies like Boston Scientific, Cerner and Medco Health Solutions. White House officials said Ms. DeParle was severing ties with those companies and would recuse herself from participating in any matter that was 'directly or substantially' related to former clients or employers.

'It is our view, and the view of counsel here, that the incidence of that will be very low,' an administration official said of the need for Ms. DeParle to recuse herself from decisions. The official, who was not authorized to speak publicly, said Ms. DeParle would be working mostly with federal agencies and lawmakers, and not directly with companies.

MedInformaticsMD just posted about his concerns specifically vis a vis Ms DeParle's current position as a leader of Cerner.

My main concern here is that Ms DeParle's ties to multiple health care corporations are so strong as to jeopardize her ability to be the new leader of health care reform for the whole country.

To review, Ms DeParle is currently a member of the boards of three health care corporations, Boston Scientific, Cerner, and Medco. As we have discussed many times previously, a corporate director has a legal obligation to advance the profits and financial fortunes of the corporation he or she serves. As Robert AG Monks put it, corporate directors are supposed to "demonstrate unyielding loyalty to the company's shareholders" [Per Monks RAG, Minow N. Corporate Governance, 3rd edition. Malden, MA: Blackwell Publishing, 2004. P.200.] As compensation for that loyalty, corporate directors are usually exceedingly well-paid for the nominal hours they spend in their meetings.

In particular, per the company's 2008 proxy statement, in 2007, Ms DeParle received $160,338 in total compensation from Boston Scientific, and held 62,020 of its shares. Further, per the Cerner 2008 proxy statement, in 2007 she received $195,051 from that company, and held 27,000 of its shares. Ms DeParle was just elected to the Medco board in 2008, so her compensation and stock holdings were not listed in that year's proxy statement, but presumably her total compensation would mirror what other directors received in 2007: a retainer of $50,000, and an annual grant of shares and options worth $175,000 at the time it would be granted.

Given her previous obligation of "unyielding loyalty"to and generous compensation from major health care corporations, it might be hard to suddenly be indifferent to their interests.

Of course, a White House spokesperson pledged that Ms DeParle would "recuse herself from any matter that was 'directly or substantially' related to former clients or employers." The problem is that most of the issues that might come up in discussions of health care reform might be directly and substantially related to the interests of the companies Ms DeParle now leads. For example, one obvious way to control costs in a reformed health care system would be to reduce the current reimbursement system's bias in favor of procedures over cognition. Boston Scientific makes much of its money selling devices that are used during such procedures. Any general shifting of reimbursement more in favor of cognition rather than procedures could reduce Boston Scientific's profits, profits which Ms DeParle is currently sworn to protect. So would Ms DeParle recuse herself from all discussions of reimbursement?

I submit that if Ms DeParle recused herself from discussion of all issues that might affect the interests of Boston Scientific, Cerner, and Medco, let alone the private corporations she directs whose interests might be less easy to define, and let alone the corporations which she used to direct, she would have very little to do in her new position.

On the other hand, were Ms DeParle to be an active Director of the White House Office of Health Care Reform, would the reform be in the interests of all the US people, or in the interests from the large and powerful corporations whose interests she was so recently pledged to protect? Does this new appointment truly reflect President Obama's statement that he did not come to Washington "to work for the powerful and well-connected interests who have run this city for too long?"