Banking Law

This public flogging is only the beginning (hat tip to a regular West Coast reader who prefers anonymity).

The Los Angeles Times took off after Darrell Dochow, the Director of the Western Regional Office of the Office of Thrift Supervision, over the failure of IndyMac. The LA Times is also bothered by the fact that Mr. Dochow played a role in the savings and loan fiasco of the 1980s.

As the mortgage crisis deepened in California last year, officials in Washington put the fate of thrifts in the West in the hands of a veteran regulator who had a memorable role in the last major crisis in the savings and loan industry.

Darrel W. Dochow was the head of supervision and regulation at the Federal Home Loan Bank Board in Washington when Lincoln Savings & Loan of Irvine failed in 1989, at the time the largest and costliest thrift failure ever.

Dochow and other regulators in Washington balked at recommendations from their regional counterparts that it be shut down two years earlier. Its collapse added billions to the taxpayer-funded bailout of the S&L industry, and its victims included thousands of elderly investors who had bought bonds from the troubled thrift.



Eventually he was relieved of his high-level duties and demoted. Now, Dochow is back on the beat as the top U.S. banking cop in the West amid another financial crisis, one that was underscored by last month's seizure and sale of Washington Mutual Bank, the biggest bank failure in U.S. history.



Critics are complaining that Dochow's approach to the mortgage meltdown as Western region director of the Office of Thrift Supervision evokes the industry-friendly treatment he and other regulators a generation ago were scored for in the Lincoln case.

[...]

Dochow and other regulators have been criticized for how they handled the July 11 collapse of IndyMac Bank of Pasadena, one of the signature events in the latest crisis, which came after a run on the bank by depositors.

The immediate reason for the closure of IndyMac Bank was a run on the bank by depositors caused by, according to the OTS and many other observers, a letter about IndyMac to regulators from Senator Charles Schumer of New York, which was made public by Schumer. The leak was a boneheaded publicity ploy by Chaz, but we expected nothing less from a member of a US Congress that has a 13% public approval rating. The ultimate cause of the failure was the fact that IndyMac had made a boatload of lousy loans and was surely heading straight into that iceberg that sunk the Titanic. Critics of the OTS, and Dochow, wonder why the OTS was rearranging the deck chairs instead of just pulling the plug and limiting the ultimate loss to the FDIC.

The bank is now expected to cost the federal insurance fund nearly $9 billion, up from initial government estimates of $4 billion to $8 billion. Had the regulators intervened sooner, that price tag would probably have been substantially less.



"Clearly, it is an unfortunate example of regulatory failure," said James R. Barth, a former chief economist of the bank board who calls the cost associated with the IndyMac failure "outrageously high."

[...]

"It obviously was based on questionable accounting and inflated asset values," said Richard E. Newsom, a retired California savings and loan regulator who has studied the IndyMac bailout. Dochow and the OTS "turned a blind eye" to the true condition of the bank, which was deeply insolvent and facing a liquidity crisis long before it was closed, he said. "The $8-plus-billion loss to the FDIC was obviously building for months."



The hands-off approach also appeared to violate the spirit of changes in federal law after the S&L crisis of the 1980s that required regulators to take "prompt corrective action" against shaky banks and thrifts. The approach taken with IndyMac was such that the bank was never hit with formal enforcement action or found to be a "problem bank" until days before it failed.



"There were classic signs that the institution was deeply troubled," said Barth, currently a professor at Auburn University and a senior fellow at the Milken Institute in Santa Monica. "This is why you have these different regulatory tools. If you are not going to use them, or use them in a timely manner, what good are they?"

Mr. Dochow refused to comment, but another OTS spokesperson defended the agency's actions by asserting that the OTS was working with IndyMac "on a new business plan." Although the OTS said that the business plan included shrinking the bank and getting into the conventional loan business, that plan seems like a non-starter. How can you shrink without imploding if the assets you have to offload are a bunch of "liar loans" and other assorted trash, the value of which has been "overbooked" on your "overcooked" books? You can shrink that way, certainly, but your capital should quickly reach levels where it will be seen only with the aid of an electron microscope.

True, Schumer's still a bozo, and second-guessing by bloggers like this one is generally worth no more than what you pay to read it, but still...The OTS is sounding more than a bit lame. Even if Schumer's bloviating caused the liquidity crisis, IndyMac does not sound like the institution most likely to win the next season of "Survivor: Mortgage Meltdown."

The stain from IndyMac's failure and Dochow's presiding over it now seems to be spreading to Agency head John Reich. Critics question his judgment for appointing Dochow to the position he's now in, given his track record. Naturally, Schumer piled on, which is expected in light of the bitter denunciation of him by the OTS.

"We've watched this movie before," Schumer said in a statement to The Times. As a House member in the late 1980s, he was involved in investigating Lincoln's collapse, including Dochow's role. "Then and now, the banking regulators' refusal to act caused these kinds of problems to not only go ignored, but grow worse."

Yep, just like all those Wall Street sharks who contributed mightily to this crisis, and who you've been catering to all along the way, Chuckie. When it comes to looking the other way where your vested interests are involved, Schumer is the pot calling the OTS kettle black. Of course, the kettle still remains black.

With the presidential election only weeks away, The Times doesn't miss the chance to regurgitate John McCain's connection to Charles Keating. The fact that it also acknowledges that "the Senate Ethics Committee cleared him of misconduct after an investigation," seems beside the point. The casual reader might come away from the article with the buzz words "another S&L scandal" and "John McCain" inextricably linked in his or her mind, and if so, The Times will declare: "Mission Accomplished."

Expect this drumbeat about the failures of the OTS to grow louder and louder. Everyone's looking for whipping boys, and the OTS is a fat, weak target.