IndyMac Fun Continues For OTS

When in early October, I discussed the "spreading stain" of criticism over the OTS's former Western Regional Director Darrell Dochow and his alleged mishandling of busted federal savings bank IndyMac, I warned that the drumbeat would get louder and louder. Today, the drumbeat got a whole lot louder: like the late Buddy Rich on speed. Via The Washington Post:

A senior federal banking regulator has been removed from his job after government investigators concluded that he knowingly permitted IndyMac Bancorp to present a misleading picture of its financial health in a federal filing only months before the California thrift was seized by regulators.

The Office of Thrift Supervision removed Darrel Dochow as director of its western region, where he was responsible for regulating several of the largest banks that failed or were sold in the past year, including Washington Mutual, Countrywide Financial, IndyMac and Downey Savings and Loan.

Dochow allowed IndyMac to count money it got in May in a report describing its financial condition at the end of March, according to an investigation by the Treasury Department's inspector general, Eric Thorson, which was described in a letter from Thorson.

Thorson wrote that OTS, one of four federal agencies that regulates banks, allowed other companies that it oversees to perform a similar legerdemain, though he did not name those companies.

While neither Dochow nor the OTS was immediately available for comment, OTS Director Reich previously stated in a letter to the Inspector General that Dochow's actions played only  a "relatively" small part in IndyMac's faiure. That's non-responsive to the issue at hand, since it's not the cause of the failure that's being questioned, but rather the potential backdating of capital infusions that permitted the thrift to operate with fewer regulatory restrictions, and the alleged complicity of the OTS in aiding IndyMac in such backdating. As I said a couple of months ago, the FDIC doesn't want the OTS propping up a dead horse, which only increases the ultimate loss to the insurance fund.The FDIC also doesn't want a less-than-adequately capitalized bank using brokered deposits without strict supervision and limits, and federal law requires such restrictions and limitations.

Senator Charles Grassley, whose office released the letters that are the basis for the linked article, isn't happy with the OTS.

"The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them. Capitalization requirements are there for a reason, and the failure of IndyMac cost the federal deposit insurance system $8.9 billion," said Sen. Charles Grassley (R-Iowa), who was briefed on the findings by Thorson. "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."

Expect Chuck Schumer to come piling on very soon, as he did in October. The OTS blamed him (rightly) for the run on deposits that was the immediate (although not long-term) cause of IndyMac's seizure by the FDIC, and he will have his payback.

Here's the heart of the matter, as explained by the Post:

Thrifts are required to file a report with regulators every three months detailing their financial condition. IndyMac's initial filing for the first quarter showed the company's capital cushion was just large enough to meet regulatory requirements. But days after it submitted the filing, IndyMac executives were told by the company's accountants, Ernst & Young, that some of the 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 the inspector general's report.

The downgrade threatened IndyMac's survival. Thrifts classed as "adequately capitalized" need special permission from regulators to gather deposits through third-party brokers. At the time, 36 percent of IndyMac's $18.7 billion deposit base had been gathered through brokers, according to the report.

On May 9, Dochow met with IndyMac executives. The executives said they wanted to inject $18 million from the holding company into the thrift subsidiary, and to count that money as if it was already in hand at the end of the first quarter, according to the inspector general's report. It said that Dochow agreed.

On May 12, IndyMac filed its revised documents, showing the company was still well capitalized.

Thorson noted such a revision could be permissible if the company had intended to make the infusion as of the end of March.

"In our work thus far, we have neither found nor been shown any indication that this intent existed," he wrote.

Thorson's office is continuing to investigate why OTS allowed the revision, and planned to issue a report when the work is completed.

The investigation is ongoing and the Inspector General has not reached a final conclusion. Nevertheless, it doesn't look good for the OTS. It's not only that this state of affairs doesn't pass the smell test, it is as ripe as roadkill left for the month of August on the asphalt of I-40 just east of Amarillo. Whether or not it contributed to the ultimate failure of IndyMac, unless the Inspector General ultimately clears IndyMac and the OTS of any mishandling of the reporting of the capital contribution in question, this incident will be another nail in the coffin of the OTS.