WASHINGTON — The former CEO of Washington Mutual, the biggest U.S. bank ever to fail, on Tuesday defended the bank’s actions to reduce risks from the looming housing bust.

Kerry Killinger, who led the thrift, also argued that WaMu had adequate capital and shouldn’t have been seized by the government and sold for a “bargain” price of $1.9 billion in September 2008. The bank “should have been given a chance to work its way through the crisis,” Killinger testified at a hearing by a Senate panel.

The panel’s 18-month investigation found that WaMu’s lending operations were rife with fraud and that management failed to stem the deception despite internal probes.

Killinger rejected that conclusion. He argued that even before the crisis struck with force, the government treated Seattle-based WaMu unfairly. He noted it was excluded from a list of large financial firms whose stock couldn’t be sold short under a temporary government ban in July 2008. In short-selling, traders bet a stock price will drop and use borrowed shares to profit from any decline.

“For those that were part of the inner circle and were ‘too clubby to fail,’ the benefits were obvious,” Killinger said. “For those outside of the club, the penalty was severe.”

Sen. Carl Levin, D-Mich., head of the panel investigating WaMu’s failure, asked two other former senior executives why they failed to act when they were aware of loan fraud at the bank.

David Schneider headed WaMu’s home loans division. And David Beck was in charge of selling mortgages packaged into securities to Wall Street investors.

“You knew all this,” Levin told Beck. “You’re telling us you didn’t notify the investors” that loans with a high chance of default were being sold to them as securities, he said.

Beck replied that while he didn’t notify the investors of problems with the loans, it’s possible the loans weren’t as risky as company officials had indicated in e-mails.

Two former chief risk officers of Washington Mutual said they tried to curb risky lending practices by the bank. But they said they met resistance from top management when they brought their concerns to them.

Fueled by the housing boom, Washington Mutual’s sales to investors of packaged subprime mortgage securities leapt from $2.5 billion in 2000 to $29 billion in 2006. The 119-year-old thrift, with $307 billion in assets, failed in 2008. JPMorgan Chase & Co. bought it for $1.9 billion in a deal brokered by the Federal Deposit Insurance Corp.

The former WaMu executives appeared before Congress for the first time since the bank’s collapse.

As the housing bust deepened in late 2007 and early 2008, “I was increasingly excluded from senior executive meetings and meetings with financial advisers when the bank’s response to the growing crisis was being discussed,” Ronald Cathcart, who helped oversee risk until April 2008, testified at the hearing. By January 2008 he was “fully isolated” and was fired by Killinger a few months later, Cathcart said.

The other risk officer, James Vanasek, testified that he tried to limit loans to those who were unlikely to be able to repay and the number of loans made without verifying borrowers’ income. But his efforts fell flat “without solid executive management support,” Vanasek said.

Levin has said the panel won’t decide until after the hearings Tuesday and Friday whether to make a formal referral to the Justice Department for possible criminal prosecution. 

WaMu’s pay system rewarded loan officers for the volume and speed of the subprime mortgage loans they closed on. Extra bonuses even went to loan officers who overcharged borrowers on their loans or levied stiff penalties for prepayment, according to a report released Tuesday by the Senate panel.