Irony dropped in for a visit to the banking world last week with the news J.P. Morgan Chase’s CEO Jamie Dimon is now a billionaire. Mr. Dimon, who famously told Wall Street banking analyst Mike Mayo on an earnings call, “That’s why I’m richer than you,” is neither a successful entrepreneur nor trust fund baby, just a working stiff–a highly paid one. He’s earned millions in salary each year, been granted more than a few stock options, and now he’s in, what Russ Hanneman of HBO’s “Silicon Valley” calls “the three comma club.”

Meanwhile, about 70 former employees of Washington Mutual (two in particular) are making the case they are owed “golden parachutes” from the corpse of the largest failed bank in U.S. history.  According to The Wall Street Journal, former COO Stephen Rotella believes he’s due $15.7 million and David Schnieder, former president of the home-loans group, figures he’s owed $7.4 million.

These parachutes were triggered, say the former employees, when J.P. Morgan Chase was handed the banking assets of the company by then-FDIC Chairwoman Sheila Bair. Of course Ms. Bair, completely smitten with Mr. Dimon, describes it differently in her book, Bull By the Horns,

The smartest was Jamie Dimon, the CEO of J.P. Morgan Chase… Dimon was a towering figure in height as well as leadership ability. He had forewarned of deteriorating conditions in the subprime market in 2006 and had taken preemptive measures to protect his bank before the crisis hit. As a consequence, while other institutions were reeling, mighty J.P. Morgan Chase had scooped up weaker institutions at bargain prices. Several months earlier, at the request of the New York Fed, and with its financial assistance, he had purchased Bear Stearns. A few weeks earlier he had purchased Washington Mutual, a failed West Coast mortgage lender, from us in a competitive process that had required no financial assistance from the government.

Oh sure, competitive. But don’t take Bair’s word for it, Kirsten Grind’s The Lost Bank chronicles what happened to WaMu in excruciating detail. Ms. Grind’s account of the failure isn’t a numbers story as much as a story of personalities and egos.

WaMu CEO Kerry Killinger wanted his company to grow, grow, grow. His ambitions were in the right place (mortgages) at the right time (housing boom). Until they weren’t. American Banker Magazine named him “Banker of the Year” in 2001.  One Wall Street analyst called him the “Alexander the Great of the Thrift Business.”  His “credibility on Wall Street is unquestioned” said another. By 2003, WaMu had 3,000 branches and ATMs plus 50,000 employees.  The company’s stock traded at $45 a share.

The WaMu CEO then started dying his hair, spiffed up his wardrobe, and worked out constantly.  After soberer days of only flying commercial, he began to insist traveling on private planes.  He dumped his old wife and his new one started spending his money on new houses and boats.

The WaMu home division’s annual sales meeting was held in a large convention hall  decorated like a huge revival tent.  A gospel choir sang between speeches and an evangelist worked the crowd of into frenzy, shouting “WaMu-lujah!”

Company training seminars didn’t have anything to do with credit underwriting.  Instead, managers were required to read, Who Moved My Cheese? and prepare book reports.

At the end of 2005, nearly half of WaMu’s $70 billion in Option ARMS were negatively amortizing,  WaMu customers had avoided paying $316 million in interest, but per accounting standards, WaMu booked that interest (that borrowers didn’t pay) into income.

Eighteen months later the bank held $1.7 billion of delinquent subprime loans and another $750 million in mortgages that had gone into foreclosure.

By 2008 the bank began circling the drain. Jamie Dimon and J.P. Morgan Chase began sniffing around, but Killinger turned them down, twice.

It’s in the last quarter of the book that Bair profoundly impacts the WaMu story. Those in the banking industry and other regulators “viewed Bair as out of her league,” writes Grind. Tim Geithner and Hank Paulson “thought she was more of a showboater than a team player.” Grand quotes one of her critics as saying, “She has quite an ego and she loves praise,” but at the same time “there’s almost a certain insecurity on her part.”

Bair’s counterpart at the Office of Thrift Supervision (OTS) was John Reich, who was described by a fellow regulator as “one of these guys who loves to be loved by the people.”

The OTS was WaMu’s primary regulator, but the FDIC insured the bank’s deposits. As primary regulator, Reich would, by law, call the shots regulating the big Seattle bank (except, as it turns out in the end). As early as 2006, Bair’s FDIC asked to participate in WaMu’s annual safety and soundness exam. The OTS declined. Several months later the deposit insurer asked again to participate and the OTS, again, said no.

The spat would continue nearly to the day WaMu failed. A failure could wipe out the FDIC’s insurance fund and it did put the OTS out of business. After IndyMac failed and Countrywide was rescued by being purchased, WaMu was the only sizable institution the OTS regulated. Dodd-Frank would prove to be the death knell for the thrift regulator.  It ceased to exist October 19, 2011.

Banks live and die with how regulators grade them with what’s called a CAMELS rating (Capital, Asset quality, Management, Earnings, Liquidity, Sensitivity). Banks and thrifts are rated 1 through 5, with 1 being hardly ever awarded; 2, being satisfactory; 3, material weaknesses; 4, one foot in the grave; and 5, the bank is toast.

First, the FDIC and OTS fought over whether WaMu should be a “2” or “3” and later the FDIC would insist the bank was a “4” while Reich insisted it was still a “3.” Chairwoman Bair began pressuring WaMu to find a buyer in early 2008. Jamie Dimon coveted all those west coast branches and was connected politically, even calling government relations JP Morgan’s “seventh line of business.”

JPM lobbied both the FDIC and the Treasury Department, wanting the regulators to pressure WaMu to sell. The OTS was kept out of the loop, infuriating Reich.  Dimon then offered $5 per share for WaMu with an additional $3 a share if the mortgage portfolio performed better than JP Morgan expected.

WaMu was insulted, and then secured $7.2 billion in private equity at $8.75 per share from private equity firm TPG.  The OTS was satisfied with the additional equity. The FDIC, not so much.

When IndyMac failed in July, with plenty of scary bank run TV footage, WaMu depositors began to get nervous as did the FDIC. The regulator pressed the bank to raise more capital. The OTS thought their fellow regulators were out of line.

Reich and Bair even engaged in a near shouting match while in a meeting with WaMu executives. “Suddenly, it seemed, WaMu was the child of a divorce, pulled between two warring parents,” writes Grind.

When the SEC banned naked short selling on 19 financial stocks, Kerry Killinger called Hank Paulson, hoping WaMu could be protected as well. Paulson said no. Washington clearly wanted WaMu to be in Dimon’s hands. “You should have sold to JPMorgan in the spring, and you should do so now,” Paulson told Killinger. “Things could get a lot more difficult for you.”

Killinger, just before he was fired, finally got the hint and a handful of banks looked at their numbers to consider bidding. However, Bair didn’t think WaMu would last and began soliciting bids for a failed WaMu. Again, the OTS’s Reich was outraged, sending an email to Bair that included, “This is a 3-rated institution. Are you also trying to find buyers for Citi, Wachovia, Nat City and others?”

Alan Fishman took over at WaMu and naively believed he could turn it around. “I’m not here to sell the company,” he told WaMu executives. “I’m here to turn it around. It’s salvageable.” But then he called Ms. Bair. She told him he wasn’t the problem, but, “I hate this thing. You’ve got to sell it.”

A few days later she told Fishman he had until the end of the month (September) to peddle the bank or raise capital before WaMu would be rated a “4” and be included on the deposit insurer’s bad bank list.

Reich was again annoyed. “I cannot believe the continuing audacity of this woman.” At the same time Bair was meeting with Charlie Scharf and Michael Cavanagh from JPMorgan. The Morgan team refocused its efforts from negotiating an open market purchase with WaMu to preparing a bid to buy WaMu from the FDIC.

As Washington was taking over Fannie and Freddie, bailing out AIG, letting Lehman Brothers fail, and attempting to pass TARP, WaMu was bleeding cash.  The San Francisco and Seattle Hoime Loan Bank’s looked on nervously, as they had lent WaMu billions against the bank’s mortgages.

Fishman met with Bair to get more time. The chairwoman told him that potential bidders were now asking her if she was closing WaMu. “It was the equivalent of a customer calling a department store to ask if a particular item was about to be marked down,” writes Grind.

Bair likely lied when she said she was directing potential bidders to Fishman. Grind writes that Bair called Dimon himself and, “asked him if he would be interested in buying WaMu if the bank failed, in a way that wouldn’t cost the FDIC’s deposit insurance fund anything.”

Dimon told her maybe. The same afternoon the Fed’s Donald Kohn told Fishman, “Why do you think you’re going to be able to sell the bank? The market has spoken.” When Fishman pleaded for an increase in deposit insurance amounts, Kohn interrupted and said, “I’m not sure that this is a company that deserves to survive.”

On September 17th Bair called Fishman and moved up the deadline. He had until the weekend to find a buyer. However, no one would bid for WaMu on the open market. Banks that had been talking to them enthusiastically, suddenly went quiet. The following Tuesday the FDIC sent out an email to potential bidders for a failed WaMu. Bids were due the very next evening (the 24th).

Wells Fargo took a pass because it wasn’t allowed time to fully analyze WaMu. CitiCorp also wanted more time. That left JPMorgan. The company faxed its bid in nearly an hour after the government’s 6:00pm cutoff. Dimon offered $1.888 billion (8 being lucky in Chinese and Japanese cultures) to the FDIC. “Congrats,” Bair wrote Dimon, “You are the high bid.”

In reality, he was the only bid. Bair and the rest of Capitol Hill got what they wanted.

Because the Wall Street Journal was going to break the story Friday morning, the FDIC uncharacteristically closed the bank on Thursday evening. The largest bank failure in U.S. history was done with 9 FDIC employees. Because the bank had a large charter in Nevada an FDIC official went to one of the bank’s tiny shopping center branches in Henderson and “delivered the paperwork to a distraught and confused young employee,” who nervously signed her name “to a document indicating the government’s monumental decision to take over her company.”

Booms and busts seem to happen in a flash, but the subsequent lawsuits drag on for years. Here we are nearly 7 years later and the corpse of WaMu, the FDIC and JPMorgan continue to battle in court. It’s hard to imagine the ex-WaMu employees winning. Legally, JPMorgan purchased WaMu after it failed, from the FDIC, even if it was failed for only a day.

But again, ironically, the FDIC may be rooting for the payouts. The WSJ reports, “Messrs. Rotella and Schneider would have to turn over all but $4.3 million and $1.6 million respectively of their payments to the FDIC.”