Washington Mutual was a conservative savings and loan bank. In $2008,$ it became the largest failed bank in U$.$S$.$ history. By the end of $2007,$ WaMu had more than $43,000$ employees, $2,200$ branch offices in $15$ states, and $$188\mathrm{.}3$ billion in deposits$\mathrm{.}1$ Its biggest customers were individuals and small businesses. Nearly $60\%$ of its business came from retail banking and $21$ percent came from credit cards. Only $14\%$ were from home loans, but this was enough to destroy the rest of its business. By the end of $2008,$ it was bankrupt$\mathrm{.}2$ Why WaMu Failed Washington Mutual failed for five reasons. First, it did a lot of business in California. The housing market there did worse than in other parts of the country. In $2006,$ home values across the country started falling. That's after reaching a peak of almost $14\%$ year$-$over$-$year growth in $2004.$ By December $2007,$ the national average home value was down $6\mathrm{.}5\%$ from its $2006$ high$\mathrm{.}3$ Housing prices hadn't fallen in decades. Nationally, there was about $10$ months' worth of housing inventory$\mathrm{.}4$ In California, there was over $15$ months$$ worth of unsold inventory. Normally, the state had around six months$$ worth of inventory$\mathrm{.}5$ By the end of $2007,$ many loans were more than $100\%$ of the home's value. WaMu had tried to be conservative. It only wrote $20\%$ of its mortgages at greater than $80\%$loan$-$to$-$value ratio$\mathrm{.}6$ But when housing prices fell, it no longer mattered. The second reason for WaMu's failure was that it expanded its branches too quickly. As a result, it was in poor locations in too many markets. As a result, it made too many subprime mortgages to unqualified buyers. The third was the August $2007$ collapse of the secondary market for mortgage$-$backed securities$.$ Like many other banks, WaMu could not resell these mortgages. Falling home prices meant they were more than the houses were worth. The bank couldn't raise cash. In the fourth quarter of $2007,$ it wrote down $$1\mathrm{.}6$ billion in defaulted mortgages. Bank regulation forced it to set aside cash to provide for future losses. As a result, WaMu reported a $$1\mathrm{.}9$ billion net loss for the quarter. Its net loss for the year was $$67$ million$\mathrm{.}7$ That's a far cry from its $2006$ profit of $$3\mathrm{.}6$ billion$\mathrm{.}8$ A fourth was the Sept. $15,2008,$ Lehman Brothers bankruptcy. WaMu depositors panicked upon hearing this. They withdrew $$16\mathrm{.}7$ billion out of their savings and checking accounts over the next $10$ days. It was over $11$ percent of WaMu's total deposits$\mathrm{.}9$ The Federal Deposit Insurance Corporation said the bank had insufficient funds to conduct day$-$to$-$day business$\mathrm{.}10$ The government started looking for buyers. WaMu$$s bankruptcy can be better analyzed in the context of the $2008$ financial crisis timeline. The fifth was WaMu's moderate size. It wasn't big enough to be too big to fail. As a result, the U$.$S$.$ Treasury or the Federal Reserve wouldn't bail it out like they did Bear Stearns or American International Group. Who Took Over Washington Mutual On Sept. $25,2008,$ the FDIC took over the bank and sold it to JPMorgan Chase for $$1\mathrm{.}9$ billion$\mathrm{.}11$ The next day, Washington Mutual Inc., the bank's holding company, declared bankruptcy$\mathrm{.}12$ It was the second$-$largest bankruptcy in history, after Lehman Brothers$\mathrm{.}13$ On the surface, it seems that JPMorgan Chase got a good deal. It only paid $$1\mathrm{.}9$ billion for about $$300$ billion in assets. But Chase had to write down $$31$ billion in bad loans$\mathrm{.}11$ It also needed to raise $$8$ billion in new capital to keep the bank going. No other bank bid on WaMu. Citigroup, Wells Fargo, and even Banco Santander South America passed on it$.$ But Chase wanted WaMu's network of $2,239$ branches and a strong deposit base. The acquisition gave it a presence in California and Florida. It had even offered to buy the bank in March $2008.$ Instead, WaMu selected a $$7$ billion investment by the private equity firm, Texas Pacific Group$\mathrm{.}14$ Who Suffered the Losses Bondholders, shareholders, and bank investors paid the most significant losses. Bondholders lost roughly $$30$ billion in their investments in WaMu. Most shareholders lost all but $5$ cents per share. Others lost everything. For example, TPG Capital lost its entire $$1\mathrm{.}35$ billion investment. The WaMu holding company sued JPMorgan Chase for access to $$4$ billion in deposits. Deutsche Bank sued WaMu for $$10$ billion in claims for defunct mortgage securities$.$ It said that WaMu knew they were fraudulent and should buy them back. It was unclear whether the FDIC or JPMorgan Chase were liable for any of the claims. A$.$Explain credit risk from an individual and a loan portfolio management perspective and discuss how they relate to this case $(10$ marks$).$

B$.$ Demonstrate how the credit risk management issue$($s$)$ in the Washington Mutual case can be resolved through the application of a risk management model $(15$ marks$)$

C$.$ Discuss how this model can mitigate future credit risk issues for Washington Mutual.