The Federal Deposit Insurance Corp. (FDIC) sued three top executives of Washington Mutual Bank, alleging their "extreme and historically unprecedented risks" in the bank's mortgage lending operations helped cause the biggest failure in U.S. history.

The lawsuit — filed late Wednesday in U.S. District Court in Seattle — targets former chief executive officer Kerry Killinger, chief operating officer Stephen Rotella and David Schneider, who ran the bank's home loans division. The suit also names Killinger's and Rotella's wives for alleged property transfers before and after WaMu's September 2008 failure.

The court documents indicate an exact of amount of damages sought has not yet been set, but damages could exceed $900 million. The suit is at least seeking damages equal to the amount of properties that the agency alleges were "fraudulently transferred" by the Killingers and the Rotellas, and an order freezing such assets.

The court complaint says the three men committed "negligence, gross negligence and breaches of fiduciary duty," causing "Wamu to lose billions of dollars."

"They focused on short term gains to increase their own compensation, with reckless disregard for Wamu's longer term safety and soundness," the lawsuit said.

The suit said the thrift's high-risk lending strategy was developed by Killinger, and put into practice by all three. The home loans division "recklessly made billions of dollars in risky single family residential … loans, dramatically increasing the risk profile of loans in Wamu's held-for-investment … loan portfolio," the suit alleges.

The portfolio included payment-option adjustable rate mortgages, home equity lines of credit and subprime mortgages, the FDIC said. The strategy also included use of stated-income and state-asset loans, documents say, and loans were pushed in real estate areas where housing prices had grown so quickly that they were "most at risk for significant decline."

"Defendants thus gambled billions of dollars of WaMu's money on the prospect that the bank somehow would manage to avoid losses on higher risk loans to high-risk borrowers in high-risk areas, despite their own awareness of the inevitable decline in the overheated housing market," the FDIC said.

The suit alleges WaMu took those risks even though the defendants knew the institution lacked the infrastructure to handle so many risky loans. "The bank could not adequately track and analyze its loans, measure or price for its risks, or timely adjust to changes in the market," it said.

In response, a long statement emailed by lawyers for Killinger called the suit "baseless and unworthy of the government."

"The factual allegations are fiction. The legal conclusions are political theater. Trial in a courtroom that honors the rule of law—and not the will of Washington, D.C. — will confirm that Kerry Killinger's management, diligence and commitment to Washington Mutual responsibly and consistently served the interests of its depositors, customers and shareholders," said Brendan Sullivan Jr. of Williams & Connolly, and Barry Kaplan of Wilson Sonsini Goodrich & Rosati.

Echoing Killinger's own congressional testimony regarding the failure, the defense attorneys cited the federal assistance — including Troubled Asset Relief Program funds — that went to other large institutions suffering losses from the housing crisis, but not to WaMu.

"Had the benefits extended to Wall Street institutions within weeks of the seizure — e.g., increases in insurance limits, guarantees of bank debt, TARP purchases and capital injections, and added liquidity by the Federal Reserve — been extended to Washington Mutual, it too would have weathered the global financial crisis," they said.

With the filing, the FDIC has now commenced six lawsuits pinning the blame for failures on former officers and directors. But the action against Wamu's former management is by far the most significant. The thrift, failing with more than $300 billion in assets, was the biggest ever to be seized by the government. However, the FDIC's transfer of WaMu's operations to JPMorgan Chase & Co. cost the Deposit Insurance Fund nothing.

An FDIC spokesman said the agency does not comment on pending litigation, but said the agency "as receiver will initiate lawsuits against former officers, directors and other professionals of failed institutions when the case has merit and is expected to be cost effective. This is done on behalf of creditors of the failed institution. The FDIC investigates every failure to determine whether there is a solid basis for legal action, and a sound source for recovery."

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.