Senate panel: Lax oversight contributed to Washington Mutual collapse
Botched oversight and a turf war between federal bank regulators contributed to the failure of Washington Mutual in 2008 and fueled a broader unraveling of the U.S. mortgage market, according to a Senate probe to be detailed at a hearing on Friday.
The Senate permanent subcommittee on investigations found that the Office of Thrift Supervision repeatedly reprimanded the bank for shoddy underwriting, poor risk management and erroneous borrower information from 2004 through 2008.
Yet the agency failed to take action to stop these practices, the subcommittee concluded, figuring that the Seattle-based thrift would thrive as long as it kept selling its increasingly risky loans to investors -- something it was no longer able to do after credit markets froze. In September 2008, the OTS seized WaMu in the largest bank failure in U.S. history and sold it to J.P. Morgan Chase.
Sen. Carl M. Levin (D-Mich.), the subcommittee chairman, criticized the OTS for shedding its proper "cop on the beat" role in favor of a more collaborative relationship with WaMu, once the nation's sixth-largest depository institution, which paid fees to the OTS that amounted to nearly 15 percent of the agency's budget.
The agency "stood by and did very little while all these loans flooded and poisoned" the financial system, Levin said Thursday.
The OTS also impeded efforts by the Federal Deposit Insurance Corp., another regulator, to examine Washington Mutual by denying access to FDIC examiners for nearly two months, Levin said, citing internal documents that the subcommittee collected from the OTS, the FDIC and Washington Mutual. The OTS also dismissed the FDIC's more critical view of the bank's financial soundness, Levin said.
A separate investigation by the inspectors general of the OTS and the FDIC, which is also due out Friday, reached similar conclusions about the OTS's handling of Washington Mutual.
An OTS spokesman declined to comment on the subcommittee's findings. In a written response to the report by the inspectors general, the agency said that it is "committed to strengthening its supervisory process" and that it has embraced a recommendation to keep track of whether the lenders it supervises heed corrective actions from the agency.
The inspectors general found that the OTS largely relied on the bank to track its own progress in correcting problems identified by the agency and that it ultimately cracked down on the thrift too late.
Their report also said that the FDIC, which insures bank depositors against losses, had identified risks at Washington Mutual and challenged the OTS's safety and soundness ratings of the thrift in 2008. That disagreement was not resolved until seven days before the bank's collapse.
Although the FDIC has the power to act when the OTS does not take action against a risky lender, it was hampered by an interagency agreement that required it to show that a risk existed, the report said. The logic was "circular" because it demanded that the FDIC "show a high level of risk to receive access, but FDIC needs access to information to determine an institution's risk."
The report recommended that the FDIC revisit the interagency agreement, and in a written response, FDIC Chairman Sheila C. Bair said her agency has been working with other federal regulators to modify it.
The interagency "turf warfare," as Levin described it, dated to at least 2006 and extended to the top echelons of the agencies.
"I cannot believe the continuing audacity of this woman," former OTS executive director John Reich wrote in a September 2008 e-mail to another senior official after Bair informed Washington Mutual that her agency was going to downgrade the bank before informing the OTS.
A string of earlier e-mails captures the strife at other levels of both agencies.
In a January 2006 e-mail, OTS senior official Michael Finn wrote to two members of his staff instructing them that the FDIC should not be allowed in banking examinations of a highly rated thrift like Washington Mutual, which the OTS had rated a 2 on a scale of 1 to 5. "The message was crystal clear today. Absolutely no FDIC participation on any OTS 1 and 2 rated exams," Finn said.
In an October e-mail from FDIC senior official John Carter to regional director George Doerr, Carter wrote that the "OTS must be really afraid of what we might come across, but bottom line is we need access to the information. . . . This is the second access issue that has come up on WaMu in a relatively short period of time." In another e-mail from Doerr to Carter later that month, Doerr said the OTS was not giving FDIC access to space and information. "The situation has gone from bad to worse," he said.
Other documents gathered by the subcommittee also capture simmering frustrations and a sense of helplessness among examiners and officials at both agencies during the bank's heyday.
In a May 2007 draft memo obtained by the subcommittee, OTS compliance officer Susie Clark voiced concern about the "unusual" turnover of chief compliance officers at the agency and questioned why nine managers left that job during a seven-year period.
"If you would like my opinion, just ask. (HINT: It has to do with top management not buying into the importance of compliance and turf warfare and Kerry not liking bad news," Clark wrote, in an apparent reference to Kerry Killinger, Washington Mutual's chief executive at the time.
Clark went on to describe the office that deals with regulators as "a joke." The group's purpose, she said "seems to be how can we give the regulators the bare minimum without them raising a fuss."