Investigations Probe Office of Thrift Supervision's Role in WaMu Collapse

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

Comments

[nazila]

you should find out about the fraud between regulators and JP Morgan, it seems they give all the WMI information to them and when they should buy the WMI. why don't the government investigate and examine JP Morgan to find out more about how they have bought it so soon, who was behind of this transaction, why the regulators did not advise to sell the 8$ per share to the JP Morgan in June ,if they knew the bank would have insufficient deposit to do the transactions . how do they let withdrew of 16 billion happens in September 2008 during 8 days.

[Jay]

I agree with the comment above... Why arent you asking yourself which were the reasons for this way of acting??? The FDIC did very strange things and JPM is after the crisis the most powerful bank in USA. WHY??? EASY TO KNOW, JUST THINK HONESTLY.

[L Aris]

Its interest how you people lay blame on one entity(OTS) and forget the other culprit (FDIC). It appears that the FDIC was in such a hurry to sell Wamu that no others were invited in the bidding. Why is that and why can't you people (journalist) see this?