Mortgage Daily

Published On: June 9, 2009
OTS at Heart of Bank CrisisRegulator oversaw failures of IndyMac, BankUnited and WaMu

June 9, 2009

By MortgageDaily.com staff

BankUnited, IndyMac Bank F.S.B. and Washington Mutual Bank had one thing in common; they were all failed institutions overseen by the Office of Thrift Supervision. The agency admitted it was asleep at the wheel in its role as lead regulator for American International Group Inc.

Last year, four OTS-regulated financial institutions including IndyMac, WaMu and Downey Savings and Loan Association, F.A., failed. Through last month, the OTS — which regulated only 810 thrifts as of Dec. 31, 2008 — had already seized four institutions this year including BankUnited.

The agency also was the lead regulator for AIG — which has received $170 billion so far in help from the U.S. government as a result of losses from its financial services division, according to an episode of This American Life.

AIG opened a small savings bank in 2000. Even though the thrift represented only 1/1,000 of the company’s business, the move enabled AIG to establish the OTS as its lead regulator.

Interim OTS director Scott Polakoff admitted to Congress that his agency was responsible for the lack of oversight at AIG.

“It’s time for OTS to raise their hand and say we have some responsibility and accountability here,” Polakoff said in U.S. Senate testimony played on the episode entitled The Watchmen. “This entity was deemed a savings and loan holding company.

“We were deemed an acceptable regulator for both U.S. domestic and international operations.”

Polakoff was placed on leave earlier this year as the U.S. Department of the Treasury investigated OTS complacency in the backdating of capital contributions in August 2008.

This American Life went on to report that the OTS is the successor to the Federal Home Loan Bank Board — which was abolished after the savings and loan debacle. But the OTS operated out of the same location with the same employees as its defunct predecessor.

Staff and management at the regulator feared the potential loss of their agency as regulated institutions which fed its revenues were dwindling, according to the story. So they attracted prospective institutions with the promise of lower regulation.

But despite the OTS admission, the show went on to point to other culprits, such as ratings agencies and the Commodities Futures Modernization Act passed in 2000 — which prevented regulation of the derivatives like those that sank AIG.

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