Banking Law

When we last checked in with the Inspector General of the Treasury Department, he'd sent a letter to Representative Charles Grassley stating that the supervision of IndyMac Bank by the Office of Thrift Supervision was less than stellar. That sent ABC "investigative reporter" Brian Ross in frantic pursuit of ex-OTS Regional Director Darrel Dochow, who allegedly allowed IndyMac to backdate a capital contribution. When last seen, Ross was nipping at Dochow's heels and yipping and yapping like a Pekingese in heat. At least he was when he and Dochow, on a dead run to retirement, disappeared over the horizon.

Last Thursday, the I.G.'s report on IndyMac was issued and it makes it clear that the performance of Dochow and others at the OTS was as poor as it seemed at first blush.

The Treasury Department's inspector general said in a report that the Pasadena, Calif., savings and loan pursued an overly aggressive growth strategy that included failing to verify borrowers' income and relying on expensive deposits to fund its operations.

The Office of Thrift Supervision, IndyMac's regulator, recognized the red flags but did nothing to stop them, the Treasury inspector general said.

"We found that OTS identified numerous problems and risks, including the quantity and poor quality of nontraditional mortgage products," the report said. "However, OTS did not take aggressive action to stop those practices from continuing to proliferate."

The report suggests OTS examiners put faith in IndyMac's management because the firm was turning profits and growing. Auditors found that OTS examiners didn't always report all the problems identified by its examiners, and "did not ensure that the thrift took the necessary corrective actions" when it did bring problems to IndyMac's attention.

"The thrift's high-risk business strategy warranted more careful and much earlier attention," the report said.

IndyMac is only one of the colossal failures and "too-big-to-be-failures", and they appear to be scattered about the regulatory landscape like bird droppings on an interstate highway. Thus, it will be hard to single out the OTS for special excoriation without, in fairness, recognizing the "failures" of all of the federal, and many state, bank regulators. I've received e-mails from ex-regulators from banking agencies other than the OTS who have alleged that their agencies looked the other way and ignored those Cassandras within their ranks who shouted that the sky would fall, one day soon.

Surprisingly, the OTS took the cuffing like a man (if that's not too politically incorrect to state; if it is, then we'll rephrase it as "the OTS took the cuffing like a mature adult of indeterminate sex.").

OTS officials didn't dispute the findings, instead promising "aggressive action" to address shortcomings cited by auditors. OTS Director John Reich said the agency is establishing a "large bank" unit to improve oversight of thrifts with assets exceeding $10 billion.

OTS Senior Deputy Director Scott Polakoff sent an email to agency employees Thursday urging them to read the IndyMac report and heed its lessons.

"It is critical for all of us to understand the factors that contribute to any bank failure so that we can constantly improve our examination techniques," Mr. Polakoff, who will become acting director once Mr. Reich steps down Friday, said in the email.

As you would expect, Chuck ("Loose Lips Sink Thrifts") Schumer used the occasion of the IG's report to claim vindication in the face of allegations that his intemperate public remarks precipitated a run on deposits at IndyMac and its premature failure.

The report also rejected much of the blame targeted at Sen. Charles Schumer (D., N.Y.). Mr. Schumer came under fire last year for making public a letter he sent to regulators questioning IndyMac's ability to stay afloat as a business.

The Treasury inspector general found that the letter was a "contributing factor" in the timing of IndyMac's collapse, but that "the underlying cause of the failure was the unsafe and unsound manner in which the thrift was operated."

"Also, the thrift was already on a course for probable failure by the time Mr. Schumer's letter was made public," the report said.

Schumer spokesman Brian Fallon said the report was an "83-page case study in why our regulatory system needs to be rebuilt from scratch." The OTS has long been a target for abolition by lawmakers who want to revamp financial oversight.

At the time of the run on IndyMac, the criticism of Schumer wasn't that he was the sole cause of IndyMac's failure, but that his public fear-mongering prevented a more orderly resolution of the thrift by precipitating the panicked run on the bank by depositors (the vast majority of them insured depositors) that forced the closure, and that it was boneheaded for him, as a US Senator, to do what he did. Others have disagreed, and continue to disagree, with me on that point. Nevertheless, if we're going to rebuild the financial regulatory system "from scratch," let's pray that bozos like Schumer are scratched from the rebuilding team.