Regulator Let IndyMac Bank Falsify Report
Tuesday, December 23, 2008
A senior federal banking regulator approved a plan by IndyMac Bank to exaggerate its financial health in a May federal filing, allowing the California company to avoid regulatory restrictions only two months before it collapsed, a federal inquiry has found.
The same regulatory agency, the Office of Thrift Supervision, allowed similar legerdemain by other banks, according to a letter sent yesterday to members of Congress by the Treasury Department's inspector general, Eric Thorson. The letter did not provide details about the other incidents.
The finding that OTS on several occasions "blessed a fiction," in the words of one congressional staffer, renews questions about the agency's relationship with the companies it regulates and about its complicity in the collapse this year of several of the nation's largest thrifts, including Washington Mutual and Countrywide Financial.
The Washington Post reported last month that OTS allowed thrifts to lend massively while reserves against future losses dwindled. Even as problems became apparent, the agency continued to prioritize deregulation. The latest findings underscore that OTS failed to enforce its own rules.
"The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them," said Sen. Charles E. Grassley (R-Iowa). "It's good the inspector general has opened a full-blown audit as a result of this case. Everyone ought to be paying very close attention."
The regulator named in Thorson's letter, Darrel Dochow, was removed from his position yesterday as director of OTS's west division, which supervised Washington Mutual, Countrywide, IndyMac and Downey Savings and Loan, among other banks that have been seized or sold this year.
It is the second time Dochow has been removed from a position as a senior thrift regulator. He was demoted in the early 1990s after federal investigators found that he had delayed and impeded proper regulation of Charles Keating's failed Lincoln Savings and Loan.
Dochow did not return calls to his office and home. An OTS spokesman also did not return calls. In a letter to the inspector general, OTS director John M. Reich described Dochow's actions as a "relatively small factor in the events leading to the failure of IndyMac." Dochow has been reassigned to work in Washington on "special projects" and as head of human resources, pending completion of the inquiry, according to a memo sent to OTS staff yesterday.
Thorson's investigation has its roots in a standard review of IndyMac's failure. The review was triggered because OTS is an arm of the Treasury.
During that review, Thorson found the Dochow incident described in documents provided by IndyMac's accounting firm, Ernst & Young. Thorson presented those findings to Treasury Secretary Henry M. Paulson Jr., who urged him to investigate, according to a Treasury spokeswoman.
The core allegation is that Dochow allowed IndyMac to count money it got in May in describing its financial condition at the end of March.
Banks are required to file a report with regulators every three months detailing their financial condition, in addition to the reports filed by all publicly traded companies. IndyMac's initial filing for the first quarter showed that the amount of money it had on hand to cover potential losses was just large enough to meet regulatory requirements. But days after it submitted the filing, IndyMac was told by Ernst & Young that some numbers needed to be adjusted. The changes would drop the company below the capital threshold. Instead of "well capitalized," IndyMac would be categorized as "adequately capitalized," according to Thorson's letter.