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SEATTLE-Washington Mutual is busy fixing what shareholders and bank regulators have deemed inadequate. The company’s board of directors said Monday morning it has replaced its longtime chief executive Kerry Killinger and entered into a “memorandum of understanding” with the Office of Thrift Supervision.

Killinger is leaving the nation’s largest thrift after months of pressure from shareholders who are upset that the company’s share price has fallen approximately 90% over the past year. The 59-year-old ended a 17-year term as the company’s chairman in June and had watched the same fate befall his peers at Citigroup Inc., Merrill Lynch & Co. and Wachovia Corp. Killinger’s replacement is Alan Fishman, 62, who last year left the nation’s second-largest thrift, Philadelphia-based Sovereign Bank, to become chairman of the New York City-based commercial mortgage broker Meridian Capital Group.

With regard to its regulatory issues, a source with the OTF says the MOU is “an agreement on actions to correct some situations we have found to be inadequate or less than optimum” but declined to provide any additional information. WaMu said the regulatory warning is related to its risk management and compliance functions and that it will provide regulators with a current multi-year business plan and forecast for its earnings, asset quality, capital and business segment performance.

Federal banking regulators have increased the number of struggling banks they have effectively put on probation for inadequacies in the business practices, and also has been issuing more guidance. Last week, the OTS issued guidance about managing programs offering home equity lines of credit in response to an increase in banking institutions curtailing, suspending or terminating customers’ home equity line of credit.”[The] guidance emphasizes that institutions taking such actions must comply with federal laws and rules designed to protect customers,” states the OTS. “While sound underwriting and effective risk management systems are essential, associations must employ these strategies in a manner that complies with applicable consumer protection laws and regulations.”

One year ago today, the company’s share price stood at $35.02. In early afternoon trading Monday, shares of Washington Mutual stood at $3.60, down 15% on the day and down nearly 90% over the past 12 months. Analysts have described WaMu’s financial position as among the worst of any major U.S. financial institution. The company has laid off some 3,000 workers this year and more layoffs are possible as the company looks to weather the credit storm.

Killinger built WaMu into a mortgage lending and consumer banking powerhouse through a series of mergers in the 1990s. His tenure also included an aggressive retail expansion that ultimately needed to be reined in, questionable mortgage-hedging decisions that limited profits during a boom in mortgage issuance and, lastly, a move into subprime mortgages that included many ill-qualified borrowers.

WaMu board chairman Stephen Frank says Fishman “is the ideal executive to succeed Kerry Killinger and lead WaMu through its current challenges…at this critical juncture.” Fishman says he intends “to hit the ground running here in Seattle with a focus on building on WaMu’s strengths, addressing its weaknesses, and returning the company to profitability as quickly as possible.”

Fishman joined Sovereign in 2006 when it acquired Independence Community Bank, a leading community bank and multifamily lender in the New York area for which Fishman had been president and chief executive since 2001.

With regard to its MOU with the Office of Thrift Supervision, WaMu said one of the deficiencies identified has to do with its Bank Secrecy Act compliance program. Congress passed the Bank Secrecy Act in 1970 as the first laws to fight money laundering in the US. The BSA requires businesses to keep records and file reports that are used by law enforcement agencies, both domestic and international to identify, detect and deter money laundering whether it is in furtherance of a criminal enterprise, terrorism, tax evasion or other unlawful activity. The general rule has been that you must report cash payments over $10,000 but the rules have been expanded and are being enforced more readily since the passage of the USA Patriot Act in October 2001.

WaMu’s headquarters are located at 1301 Second, Ave. in Downtown Seattle. Its 944,000-sf headquarters office tower and attached 700-stall parking garage were completed in 2006. At that time the company also leased an additional 243,000 sf of contiguous office space from the Seattle Art Museum, a joint venture partner in WaMu’s headquarters project, and let some other leases lapse. As of the start of the year, the company leased an additional 697,000 sf in other downtown Seattle locations for administrative functions, owned or leased 2,490 retail banking and lending centers, and owned or leased 290 administrative offices in 36 states. The breakdown of the non-Seattle administrative operations includes 2.6 million sf in California, 1.1 million sf in Texas, 825,000 sf in Florida and 463,000 sf in Illinois.

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