The Office of Thrift Supervision
just might need some supervision for itself. The Treasury Department's independent investigator revealed Monday that OTS allowed IndyMac Bancorp
, formerly one of the nation’s largest Alt-A mortgage lenders, to backdate an $18 million capital infusion to maintain its status as a "well-capitalized" institution -- hence, escaping regulatory restrictions -- just two months before the bank's collapse in July.
OTS's West Coast director Darrel Dochow allowed IndyMac to post $18 million of the $50 million infusion received from its parent company on May 9, as having arrived on March 31, according to the Treasury Department’s inspector general, Eric Thorson. Backdating the infusion allowed the bank to mend a deficit its auditors, Ernst & Young LLP
, found in first quarter's fiscal reports, and kept the thrift off the FDIC's list of at-risk banks.
To investors, there was no sign that IndyMac’s capital ever fell below what was required to qualify for well-capitalized status. And in fact, the revised first quarter report slightly increased the capital ratio above what the bank had originally reported.
The routine investigation -- which uncovered a "workpaper" drawn up by Ernst & Young that detailed a conversation involving IndyMac's CEO, Ernst & Young auditors and Dochow, in which they discussed the capital contribution -- revealed what some may see as all too cozy relations between banks, particularly subprime lenders, and their federal regulators. Investigators reported that similar officially approved backdating appears to have also occurred at other financial institutions, though they didn't name them.
“It is unclear what information OTS had at the time and what its basis was for allowing the capital infusion to be recorded for the quarter ending March 31,” Thorson wrote yesterday in a letter to U.S. Senator Charles Grassley (R-IA) of the Senate Finance Committee. “A separate inquiry as to a motive for approving and recording this transaction in the manner it was recorded is still ongoing.”
John Reich, director of the OTS, said the $18 million transaction was “a relatively small factor” in the demise of IndyMac, according to a New York Times report
-- after all, IndyMac held $32 billion in assets. If IndyMac had lost its well-capitalized status, however, it would not have been allowed to take "brokered deposits" from other financial institutions, which the Times said accounted for 37 percent -- or a whopping $6.8 billion -- of its total deposits last spring.
Grassley, ranking member of the Senate Finance Committee, said the regulator’s behavior raised new doubts about the Office of Thrift Supervision -- critics have long said the OTC is too lenient and should be lumped with existing banking regulators. “The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them,” Grassley said in a statement. “If the Office of Thrift Supervision is turning a blind eye to capitalization requirements, Congress needs to know.”
A "stain in the government's response to IndyMac" may also unfortunately cast a negative light on all thrift regulators, suggests a MarketWatch report
. Even if the OTS was at fault, concerns exist as to why IndyMac did not "show up on FDIC's radar," the report said -- and rightfully so, as the bank was dangerously close to minimum standards. Federal Deposit Insurance Corp.
chairman Sheila Bair, who has been seen as of late leading the charge to have lenders modify loans in an effort to pull the nation out of the housing mess, has not been directly involved in the $18 million maneuver, according to various published reports.
In recent months and weeks, Bair and her team have touted their program's success in modifying IndyMac loans after the agency took over the bank in July. Since the program’s launch, she has urged other lenders to use it as a template. “To date, we’ve verified incomes and completed modifications for over 7,500 loans with thousands more in the pipeline,” she said last week.
Dochow, who authorized the backdating, has been removed from his job pending the results of a separate inquiry. Interestingly, Dochow played a central role in the savings-and-loan scandal of the 1980s, as well, overriding a recommendation by federal bank examiners in San Francisco to seize Lincoln Savings, the giant savings and loan owned by Charles Keating. Lincoln became one of the biggest institutions to collapse, according to a report in the New York Times.
Kelly Curran at email@example.com
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.