Virginia bank under congressional scrutiny, the Federal Deposit Insurance Corp. has gone on the offensive.

In a letter to the chairman of the House Banking Committee, the FDIC politely yet firmly pointed a finger of blame at the Office of the Comptroller of the Currency, which had primary responsibility for supervising First National Bank of Keystone. The $1.1 billion-asset bank was closed Sept. 1 at an estimated cost of $750 million.

The FDIC's detailed, seven-page letter told Rep. Jim Leach of Iowa that the agency had consistently downgraded First National's performance faster than the OCC, was excluded from important exams and meetings, and was the first to spot certain problems at the troubled bank.

After disagreeing with the Camels 3 rating that the OCC gave the bank in July 1997, the FDIC downgraded First National to a 4 and asked the OCC if FDIC examiners could participate in the next exam, according to the letter.

"The OCC denied this request, indicating that capital was not threatened by operational and managerial deficiencies, corrective actions were ongoing, and the FDIC participation would be unnecessarily burdensome to the bank," the FDIC told Rep. Leach.

In May 1998 the FDIC asked if its examiners could attend a meeting that the OCC scheduled with bank officials about an enforcement order. "The OCC declined this request, saying that the bank's board might not sign the formal agreement if the FDIC were in attendance," the FDIC wrote.

The letter also listed two occasions when the FDIC "was not informed or invited" to meetings the OCC held with First National officials. And the FDIC claimed its examiners -- not the OCC's -- discovered that the bank had bought brokered deposits after being classified as undercapitalized, which was illegal.

The FDIC was responding to questions Rep. Leach posed in Sept. 27 letters to both agencies. "At this point, he is just asking questions," Rep. Leach's spokesman, David Runkel, said. "He hasn't made any judgments."

In her cover letter with the responses, FDIC Chairman Donna Tanoue agreed with Rep. Leach that numerous "red flags" were apparent in the years preceding First National's failure.

"Events that occurred during our monitoring of Keystone indicate that the FDIC's communication and coordination with the OCC could be improved," she added. "We believe Keystone will be seen, in retrospect, as being instrumental in prompting valuable interagency initiatives.''

For its part, the OCC is directing blame at Grant Thornton, the accounting firm that in May gave First National's 1998 financial statements an unqualified opinion. (Grant Thornton has refused to comment on its involvement.)

First National had many problems, but the disappearance of half its assets was its biggest. The bank claimed to own the assets, which were being serviced by third parties. However, when the OCC asked the servicers, they said they had bought the assets from First National.

"Grant Thornton was required to perform direct confirmations with the servicers," the OCC said. "The audit firm did not detect, and did not report, any fraud in this confirmation process."

Both the OCC and the FDIC said they plan to reconsider whether they rely too heavily on internal and external audits to detect fraud.

The OCC did not mention any problems with the FDIC in its letter to Rep. Leach. Asked to comment on the FDIC's assertions, OCC spokesman Robert M. Garsson said the two agencies never disagreed about the essential problems facing the bank or the strategy for supervising it.

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