Late in the afternoon of September 25, 2008, the phone rang in Steve Rotella’s 33rd floor office in downtown Seattle.

The wide bay windows, once part of a conference room, commanded a sweeping view of Puget Sound, befitting the president of the nation’s largest savings and loan.

On a credenza behind his desk, one of his computer monitors quietly streamed ticker symbols.

Washington Mutual’s closing price: $1.69, down 25 percent.

For the past few days, a handful of big financial institutions had been poring over WaMu’s books, trying to decide whether to make a bid and rescue it from potential failure.

Suddenly, they had stopped.

Rotella wanted to know why. He had asked WaMu’s head of regulatory relations, John Robinson, to see what he could learn from the bank’s chief regulator, the federal Office of Thrift Supervision.

Now, Robinson was calling back. “Steve, it’s over,” Robinson said, according to people familiar with the call. “They’re coming in to close us this afternoon.”

Shortly after Rotella hung up the phone, government officials strode through the marble lobby of the newly built WaMu Center and ended the 119-year life of a vast financial enterprise once considered among the strongest and most promising in the country.

Within two hours of the call, regulators took control of a company with $307 billion in assets and sold it to rivalJPMorgan Chase & Co. for $1.9 billion, a fraction of what the New York powerhouse led by Jamie Dimon had offered just months earlier.

With these swift actions, tens of thousands of shareholders and bondholders lost billions of dollars, and Washington Mutual became known as the largest bank failure in U.S. history — nearly eight times larger than the Federal Deposit Inurance Corp.’s previous record failure, set during the savings and loan crisis of the 1980s.

Yet despite the size and significance of this event, much of what happened to WaMu has never been reported.

“It was dealt with so surgically and so quickly that in comparison to all of the other things going on, I think this one almost became a non-issue,” said Lewis Mandell, a professor of business and finance economics at theUniversity of Washington’s Foster School of Business.

To recreate WaMu’s final days, the Puget Sound Business Journal examined hundreds of pages of documents obtained through the Freedom of Information Act and interviewed dozens of former WaMu executives and employees, as well as government regulators and outside observers. Many sources would only speak on condition of anonymity. These sources, including insiders who lived through WaMu’s downfall, paint a picture of panic, confusion and futility as events spiraled out of control.

These interviews show that WaMu suffered through not one but two bank runs in its final months. The first run was many times larger than the run that felled California lender IndyMac in July 2008, though neither shareholders nor the public knew about it. WaMu survived that run, and the second run was tapering off when regulators moved in and shut the bank, citing the run as the reason.

In addition, WaMu’s top executives, led by CEO Alan Fishman, were trying to sell the bank after federal regulators imposed a deadline, only to discover that they were being undermined by those same regulators, executives say. The government’s plan to seize the bank, if it became known beforehand, would cause potential buyers to immediately cool their heels, because buying after a government takeover would be a lot cheaper than even the desperate private purchase deal that Fishman was seeking.

The takeover of WaMu prevented a potentially catastrophic hit to the deposit insurance fund. In that sense the seizure was a success: Not a dime of the FDIC’s then $45 billion fund went to reimburse WaMu depositors because JPMorgan Chase had taken over.

Yet even a year later, fundamental questions remain unanswered. And in part because regulators have said so little about their actions, there remains a voracious appetite to get to the bottom of why WaMu failed.

A slew of inquiries is under way. The Federal Bureau of Investigation and the U.S. Attorney’s Office in Seattle launched a large-scale investigation last October that is ongoing. The bankrupt holding company was recently given permission to subpoena hundreds of pages of documents from JPMorgan as part of its discovery process. The purpose of that investigation, which could take months, is to shed light on JPMorgan’s actions in the weeks leading up to its purchase of the bank, according to a spokesman for WaMu’s holding company.

Recently, the Inspector General’s office at the U.S. Treasury, the department that houses the Office of Thrift Supervision, launched a “post mortem” investigation jointly with the FDIC’s inspector general, “to see if there was anything that could have been done” to save WaMu, said Rich Delmar, counsel to the Treasury department.

The First Panic

In early July 2008, hundreds of people lined up outside the headquarters of IndyMac Bank in Pasadena, Calif. News reports had made clear that IndyMac had a large exposure to troubled subprime loans. Fearing the bank was on the verge of failure, customers were pulling out their money. The line stretched down the block. That image, which appeared on newspaper front pages and TV stations nationwide, depicted the first major bank run since the savings-and-loan crisis in the 1980s.

Two blocks away, managers at a large, white-columned WaMu branch watched the commotion. Soon, their own customers began asking, “Is my money safe?”

On the evening of Friday, July 11, just after the FDIC seized IndyMac, a top WaMu retail bank executive in Seattle sent an email to other retail bank executives across the company with a simple question: “IndyMac has failed—How are we going to respond?”

Through a flurry of sometimes heated emails, managers across WaMu’s network of 2,239 branches worked out a rough plan. WaMu’s deposit team would forecast the potential size of a run, based on daily data about cash outflows. Branch managers would try to reassure anxious customers. Tellers, who usually just cashed checks and dispensed rolls of quarters, now would recite details to show WaMu had more than enough money to meet regulatory minimums.

“We had tellers who knew our capital ratios and our liquidity ratios,” said George Kaye, who managed more than 200 WaMu branches in Southern California. “We were educating everyone.”

Despite these efforts, WaMu suffered a $9.4 billion run—seven times bigger than IndyMac’s. Southern California became the epicenter, although customers all around the country pulled out cash. Unlike IndyMac, however, WaMu executives kept the five-alarm fire under wraps. No lines formed down the block. No TV cameras splashed the news. Shareholders never knew, either. This first run happened after the start of the third quarter, and WaMu collapsed three business days before the quarter ended, following the second bank run. It never reported those financial results.

The Moody’s Meeting

At the end of August, Rotella and WaMu Treasurer Robert Williams boarded a leased private jet in Seattle and flew to meet with Moody’s Investors Service in New York. Typically, WaMu executives met with Moody’s senior credit officer, Craig Emrick. This time, however, the powerful rating agency greeted the WaMu executives with a team of people, an ominous sign.

“We don’t know exactly why that was,” said Peter Freilinger, WaMu’s assistant treasurer who flew out separately to attend the meeting. “Moody’s might have felt that the action was so important that they wanted everyone to hear the facts before they did anything.”

The bank run had calmed in August. To entice customers to make deposits, WaMu offered a special certificate of deposit paying 5 percent interest—extremely high at the time. It worked, and new money flowed in. But now, at Moody’s, WaMu executives had to face another challenge: the repercussions of the bank’s foray into risky mortgage lending.

Under former CEO Kerry Killinger, WaMu had written subprime and option-ARM loans to hundreds of thousands of home buyers with shaky credit, particularly in California. The loans generated healthy fees, and the bank could offload the risk by selling them to firms that turned them into mortgage-backed securities. But when the market for those securities crashed along with the housing market in mid-2007 and borrowers were foreclosed on, WaMu and other banks were left holding large numbers of bad loans. WaMu all but stopped writing these sorts of loans in late 2007, but it was too late. At the end of June 2008, there were still $69 billion of them on WaMu’s books—58 percent of all its home loans.

At Moody’s office, a few steps from Ground Zero, Rotella and other WaMu executives squared off across a conference table from the rating agency’s team. Led by Emrick, the analysts fired questions for an hour and a half, Freilinger said. Is the high-priced CD really bringing in stable customers? Does WaMu have any further strategy to bring in deposits? How is the bank dealing with its ailing mortgages and home equity lines of credit?

Rotella, who usually sent lower-level exectives to these meetings, tried to convince the analysts that WaMu had sufficent capital and deposits, despite the July bank run. Helped by a $7.2 billion private equity infusion in the spring of 2008, WaMu was easily in the range of a “well-capitalized” institution, by regulatory standards. Still, its recent second-quarter loss totaled $3.3 billion and it had just set aside $5.9 billion to cover bad loans.

The stakes of the meeting were high. A Moody’s downgrade would tag WaMu as a poor credit risk, making it difficult for the bank to borrow funds and further eroding public confidence. Moody’s declined to comment on the meeting.

The Next Dominoes

On Sunday, September 7, Washington Mutual’s board ousted Killinger, who had served as CEO for 18 years, and named a New York banker, Alan Fishman, to succeed him. The announcement came two months after the board stripped Killinger of his chairman title and amid vocal shareholder unrest at WaMu’s plunging share price. Many thought the move came too late.

The next day, Fishman flew to Seattle to rally management, according to several former WaMu executives. According to one executive, Fishman came on board with the intent of “evaluating the team and evaluating the strategy.” But he soon learned that WaMu might be past the point of saving itself, according to executives who were there at the time.

In addition, within days the FDIC gave him a deadline: Find a buyer for the ailing bank by September 30, the end of the third quarter, according to a high-level executive familiar with the FDIC’s actions. Fishman and several other WaMu executives quickly flew to New York City to begin trying to sell WaMu.

On September 11, Moody’s issued its rating: It downgraded WaMu’s debt to junk status, rated the company’s financial strength at D+ and issued a negative outlook on the company, citing its asset quality and the potential for future losses. Freilinger, WaMu’s assistant treasurer, fielded the call from Emrick, and had the thankless task of checking the accuracy of Moody’s forthcoming press release. Freilinger’s heart sank. “No bank of our size anywhere in the world survives without an investment grade rating,” he recently said.

The downgrade roared across the country. WaMu customers, reminded once again that their money might not be safe, pulled $600 million out of WaMu that day. “That’s when we thought, ‘Oh, crap, here we go again,’” said one WaMu manager who monitored deposits.

Soon, other rating agencies followed suit, sparking another massive bank run that would ultimately become the reason FDIC officials gave for closing WaMu.

In the next three days, customers pulled another $2.3 billion out of WaMu. On Tuesday, September 16, Fishman, the bank’s new chief executive, flew from New York City to Washington, D.C. He had a morning meeting with OTS Director John Reich, WaMu’s chief regulator, and OTS deputy director Scott Polakoff.

Fishman Meets Bair

Fishman wanted to brief the regulators on WaMu’s efforts to find a buyer and to give an update on the bank’s liquidity position, according to people familiar with the meetings. By then, WaMu’s regulators were watching the bank more closely than they ever had before, and were receiving deposit reports daily—sometimes several times a day. That day, customers pulled out another $2.4 billion.

At the meeting, Fishman said he had approached Wells Fargo, JPMorgan Chase and Citigroup, according to several high-level WaMu executives. All three banks declined comment for this story.

“We’d been talking to a number of banks, some had kind of fallen off the plate and some were still plausible as potential acquirees, but it was going to require some time,” one high-level executive told the Business Journal.

Reich and Polakoff encouraged WaMu executives to keep pursuing potential suitors as well as follow up on efforts to raise more capital, according to executives familiar with the meeting.

After the meeting ended, Fishman and John Robinson, in charge of WaMu’s regulatory relations, walked the block and a half to the FDIC’s headquarters, near the White House, for a brief meeting with FDIC Chairman Sheila Bair. Bair doesn’t typically get involved in the details of bank closures, said David Barr, a spokesman for the FDIC. But, “a Washington Mutual doesn’t come around but once every 75 years.”

For his part, Fishman wanted to find out more about the September 30 sale deadline the FDIC had imposed several days earlier: What would happen if WaMu failed to find a buyer or raise additional capital by that time?

Bair told Fishman and Robinson that if WaMu was unable to sell the bank by the end of September it would be placed on the FDIC’s list of “troubled banks,” according to people familiar with the meeting. The list is like a scarlet letter: While it leaves out a financial institution’s name, WaMu’s asset size would clearly identify it in the financial community. The placement would damage the bank’s reputation far more than even rating-agency downgrades or the persistent news reports, according to several people familiar with the meeting. The list was scheduled to come out in less than a month.

The message to WaMu executives in that half-hour meeting was clear: Sell the bank, and fast.

“If WaMu had gone on the list, it would have been obvious to everybody that WaMu was being characterized as a troubled bank and that could have precipitated an additional run on the bank,” said one high-level executive familiar with the meeting.

Bair also told Fishman another intriguing piece of information: She said more than one bank had called the FDIC to ask whether there would be an opportunity to buy WaMu as a distressed asset, according to people familiar with the meeting. In other words, was the government planning to seize and sell the bank? If so, potential buyers would rather wait, for the price was sure to be lower in a government sale.

Bair said she had directed those banks to contact Fishman. The executives left the meeting believing the FDIC was indeed helping WaMu find a buyer. Yet in less than a week, regulators would seize the bank and sell it for less than a quarter of the $8 billion that JPMorgan Chase had previously offered.

What Bair might have said to the banks remains unclear, and is likely to be a focus of at least some of the ongoing investigations. Bair declined repeated requests to be interviewed about her role and decisions. The FDIC released Bair’s emails regarding WaMu. They were almost completely redacted.