WASHINGTON – The role of the financial regulators’ and their oversight failures is coming under increasing attention by Congress and the public as the debate over financial services reform comes to a head.
During Senate hearings Friday, Carl Levin, chairman of the Senate Subcommittee on Permanent Investigations, called the Office of Thrift Supervision’s oversight of Washington Mutual “feeble” and “pitiful” in monitoring what would become the biggest bank failure ever. The thrift regulator, said the Michigan Democrat, “was more of a spectator on the sidelines, a watchdog with no bite, noting problems and making recommendations, but not trying to correct the flaws and failures it saw.”
The scathing criticism was the latest leveled at regulators by members of Congress, the public and even internal agency watchdogs at the Federal Reserve, FDIC, Office of Comptroller of the Currency and the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac.
The hearing came the same time Friday the Inspector General at the Securities and Exchange Commission was issuing a report saying the SEC suspected financier Allen Sanford of running a massive Ponzi scheme as far back as 1997, but took more than a decade to pursue what is alleged to have been an $8 billion fraud. The report said a comprehensive investigation was thwarted four times by the chief of the SEC’s Texas office, who tried to get a job with Sanford after he left the government.
NCUA also is undergoing growing criticism by its own Inspector General and from credit union executives and volunteers for its role in the corporate credit union meltdown and in the big credit union failures of the last few years.
Numerous credit union executives have called on NCUA to investigate its own role in the corporate meltdown as part of the reform of the corporate system. And a new report issued Friday by NCUA’s Inspector General found substantial evidence that examiners at NCUA and the California Department of Financial Institutions missed numerous opportunities to mitigate losses at Cal State 9 CU, the biggest California credit union failure ever.
Also on Friday, NCUA’s Inspector General issued a report that found NCUA effectively was asleep at the switch while the manager of a small West Virginia credit union, Center Valley FCU, stole every last dime of deposits, and then some, at a cost of more than $16 million to the NCUSIF.
That followed a recent report on the failure of High Desert FCU, which partially attributed NCUA examiners’ failure to assess the risk of a large concentration of member business loans to the demise of that one-time $190 million California credit union.
In one damning passage in the Cal State 9 report, the state regulator attributed some of its actions in the Cal State 9 case to the fact that the Bush administration was “pushing for less regulation” and “NCUA was pushing for lower net worth requirements, which would encourage credit unions to make more loans”
In recent remarks, NCUA Chairman Debbie Matz, who served on the NCUA Board from 2002 through 2005 before returning last year, deflected criticism for the corporate crisis, even while accepting some of the blame on behalf of the agency.
“I know many of you blame NCUA – after all, two examiners were on site at U.S. Central and WesCorp. I understand that. But there’s plenty of blame to go around. NCUA shares some of that blame,” Matz told members of the Missouri CU Association during a March 23 meeting in Jefferson City, Mo. “[But] much of the blame falls outside the credit union industry. Mortgage brokers made questionable loans that led to waves of foreclosures. Rating agencies handed out AAA ratings for mortgage-backed securities that are now known as ‘toxic assets.’ When this mortgage bubble burst, the fallout caused an extraordinary and unforeseen decline in the global economy.”
“But it’s not productive to look back to assess blame,” said Matz. “It’s only productive to look back for the purpose of learning from our mistakes so we don’t repeat them.”
Those remarks came as NCUA is preparing to increase the projected losses for the corporate system to as much as $10 billion from $6 billion, complicating a recently passed law creating a $6 billion corporate credit union bailout fund.
Meantime, the causes of the financial crisis continue to be explored by Congress and by a bipartisan Financial Crisis Inquiry Commission that is scheduled to issue a report later this year. So far, neither Congress nor NCUA has expressed an intent to probe into the causes of the corporate credit union crisis or NCUA’s role in it.
