The Office of Thrift Supervision (OTS) was delivered a damaging one-two punch last week with the release of findings from two separate government investigations into the collapse of Washington Mutual Bank. OTS served as the primary government regulator for WaMu until the bank's failure in 2008 — the largest bank failure in U.S. history.
In a report released on Friday, the Inspectors General (IGs) of the Department of Treasury and Federal Deposit Insurance Corporation (FDIC) found that OTS consistently rated WaMu's asset quality as "satisfactory" despite the fact that OTS examiners had repeatedly identified issues and weaknesses in asset quality. The IGs also determined that OTS could have done more to compel the bank to implement OTS's recommendations. Relying on WaMu's own tracking system for implementing corrective actions and issuing a pair of informal, non-substantive enforcement actions, the IGs wrote, was not sufficient.
Congressional investigators drew harsher conclusions about OTS's regulatory effectiveness. In a press release last week, the Senate Permanent Subcommittee on Investigations partially attributed WaMu's demise to "Feeble oversight by regulators," along with "weak regulatory standards and agency infighting."
Perhaps of greater concern, the subcommittee identified a more fundamental problem with the OTS: an ineffective and demoralized culture.
The Washington Mutual case history exposes the regulatory culture at OTS in which bank examiners are frustrated and demoralized by their inability to stop unsafe and unsound practices, in which their supervisors are reluctant to use formal enforcement actions even after years of serious bank deficiencies, and in which regulators treat the banks they oversee as constituents rather than arms-length regulated entities.
I can't help but be reminded of FINRA, the broker-dealer industry's self-regulatory organization, which POGO sharply criticized earlier this year for having a similarly cozy relationship with the industry it is tasked with regulating. Like FINRA, OTS is funded by the firms it oversees. Could this funding structure reinforce a culture that allowed regulators and entities like Washington Mutual to, as Subcommittee Chairman Carl Levin put it, walk "arm-in-arm"?
Senate Banking Committee Chairman Chris Dodd's (D-CT) newly proposed bill, by the way, proposes eliminating OTS altogether.
-- Bryan Rahija