April 17, 2010 in Business

Turf war distracted regulators

Senate panel leader blasts WaMu oversight
Drew Desilver Seattle Times

WASHINGTON – Washington Mutual’s primary regulator was so consumed with turf battles that for four months it denied its rival agency a desk in the Seattle office where examiners tracked the troubled thrift’s deteriorating finances, a Senate panel heard Friday.

The Senate panel berated Office for Thrift Supervision officials for taking a hands-off approach toward Washington Mutual while actively fending off tighter scrutiny by the Federal Deposit Insurance Corp.

Sen. Carl Levin, D-Mich., chairman of the Senate’s Permanent Subcommittee on Investigations, read aloud a long list of criticisms of WaMu’s lending practices and risk management expressed over a five-year period by examiners for the Office of Thrift Supervision.

“On and on and on,” Levin exclaimed to John Reich, who headed the OTS from 2005 until 2009. “So what do you do about it? Not one single formal enforcement action against WaMu from 2004 to 2008. You’re the cop on the beat. Not a ticket? Not a fine?”

The hearing was the second of two this week using WaMu, which collapsed in September 2008, as a case study in how loose lending practices, and the failure of regulators to curb them, helped fuel the financial crisis.

The nine current or former regulatory officials who appeared generally agreed with Levin that the riskiest types of home loans should be banned or sharply restricted, and that banks should be required to retain an ownership stake in the loans they package and sell on Wall Street.

But most of the hearing focused on the infighting between the two agencies overseeing banks and thrifts.

FDIC Chairwoman Sheila Bair told the committee that OTS regulators in 2006 and later blocked her examiners from accessing WaMu data.

After WaMu moved into its gleaming new headquarters building, OTS for months delayed making space available in its office there so that an FDIC examiner could access the secure electronic library of the thrift’s financial data, said FDIC deputy regional director George Doerr. “This dragged on and on … I personally think they didn’t want us there.”

The following year, OTS refused to let FDIC examiners review WaMu loan files, said Bair.

She said an operating agreement between the FDIC and the OTS also thwarted FDIC efforts.

“It’s circular in that it requires us to show risk before we can get access. And frequently you need access to prove the risk,” Bair said. “We really need much broader authority.”

Levin called OTS “a watchdog with no bite. At times it even acted like a WaMu guard dog to keep the FDIC at bay.”

The OTS was WaMu’s primary federal regulator, and until February 2008 it assigned the giant thrift a “2” risk rating, indicating satisfactory performance. That month it lowered the rating to a “3,” indicating greater concern.

Even then, instead of publicly putting the bank on notice that it must tighten its standards, the agency allowed WaMu’s board to adopt a nonpublic resolution that “addressed short-term liquidity issues but did not mention taking action to correct systemic problems,” according to a joint report by the Treasury Department and the FDIC.

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