WASHINGTON — This week will be a crucial week for the Office of Thrift Supervision.
It faces what will probably be a grueling hearing Thursday on the takeover of IndyMac Bancorp, the biggest thrift failure in history; its largest institution — Washington Mutual Inc. — could be acquired soon; and more savings and loan collapses could be around the corner.
The confluence of events could not come at a worse time for the agency, whose extinction has been recommended by the Treasury Department, which oversees the OTS.
The loss of Wamu — which holds 20% of the assets under the agency's purview and generates a significant chunk of its income — could force the OTS to restructure and feed the momentum for its demise. The drubbing it is expected to take on Capitol Hill for the supervision of IndyMac, meanwhile, could also help persuade lawmakers that it is time for the agency to go.
"It's clearly a time where the spotlight is on" the OTS, said L. Richard Fischer, a partner in the Morrison & Foerster law firm and a former Federal Reserve Board official.
The hearing in the Senate Banking Committee will also feature Federal Deposit Insurance Corp. Chairman Sheila Bair and Comptroller of the Currency John Dugan, but it is OTS Director John Reich who is expected to field most lawmakers' questions.
"I have no doubt Reich will have the stuffing beat out of him," said Bert Ely, a banking consultant in Alexandria., Va. "It will be like shooting fish in a barrel."
The OTS has tried to pin the $32 billion-asset IndyMac failure on Sen. Charles Schumer, a member of the Banking Committee who requested Thursday's hearing. After the thrift's collapse on July 11, Mr. Reich said letters made public by the New York Democrat raising concerns about IndyMac's viability spurred a depositor run that drained $1.3 billion from the thrift in 11 days.
Sources close to the OTS say Mr. Reich will probably lay out a timetable for how the agency had planned to help IndyMac, including mention of two investors interested in helping the thrift before Sen. Schumer's letters.
But going after Sen. Schumer again, in committee, may be risky, observers said.
"It's a mistake because [Sen. Schumer] will always have the last word," a former regulatory official said. "It's hard. They have a failure on their watch, and there's not going to be a lot of sympathy on their side. Obviously they didn't make all the right calls along the way if the outcome is the failure of a $32 billion banking organization. It's hard to defend what happened there. Schumer is going to have the upper hand."
Questions persist about the agency's supervision of IndyMac. It took no enforcement action against the thrift and only designated it as a troubled institution in June — shortly before its failure.
"I don't think the record indicates that OTS dealt with IndyMac in a timely manner," said James Barth, the Lowder Eminent Scholar in Finance at Auburn University and a senior fellow at the Milken Institute and former OTS economist.
"OTS took actions and took them too late, and the actions were not stringent enough, given the deteriorating condition of IndyMac."
Lawmakers could also probe OTS supervision of other large troubled thrifts.
BankUnited, the 24th-largest U.S. thrift and Florida's largest depository institution, with $14.2 billion of assets, has embarked on a plan to raise $400 million of capital and convert distressed, adjustable-rate credits into fixed-rate loans, but some observers doubt it can succeed.
Likewise, Downey Savings and Loan in Newport Beach, Calif., the 25th-largest in the nation, with $12.6 billion of assets, was the target of a recent OTS cease-and-desist order covering a host of problems tied to its concentration in troubled payment-option loans.
The OTS is "first on the firing line," said Karen Shaw Petrou, managing director of Federal Financial Analytics Inc.
"By virtue of the concentration of large thrifts into higher-risk mortgages, thrifts are higher-risk institutions facing a much more problematic future. How they got that way is a critical question. It's not that these assets were opaque. The higher-risk mortgage structures were problematic from both a prudential and consumer point of view."
A Wamu purchase would only complicate OTS' future. The Seattle thrift company was in serious discussions with JPMorgan Chase & Co. Friday about a possible buyout (see related story on page 1), though it remained possible the talks could fall apart or another bidder could enter the stage.
Without Wamu, the OTS would regulate 828 thrifts — but its largest would be the $116 billion-asset Countrywide Financial Corp., which was bought by Bank of America Corp. this year. So far, B of A has opted to retain Countrywide's thrift charter, but the Charlotte-based banking company could decide to dissolve the charter, putting more pressure on the OTS, which is funded by fees paid by its institutions.
Any buyer of Wamu could also opt to retain its thrift charter, but even the prospect of a budget crunch could spur lawmakers to merge the OTS with the Office of the Comptroller of the Currency, observers said. The Treasury Department recommended such a move in March when it outlined a blueprint for financial regulation.
Merging OTS into the OCC "is certainly going to be a prime piece of conversation in those discussions," Mr. Fischer said. "When you lose major institutions for whatever reason, and when there is a substantial restructuring of oversight responsibilities, then you have to say as you're readdressing assignments: Is there still a purpose for this organization?"
Not everyone agreed. Some said the OTS has a chance to prove its mettle if it can help find a buyer for Wamu that does not require massive government assistance.
"This probably puts the OTS in a much better position because it provides an opportunity for the OTS to demonstrate the ability [that] they can facilitate an institution in a crisis," said Kevin Petrasic, a lawyer at Paul, Hastings, Janofsky & Walker LLP and a former OTS official.
Others said it was unfair to blame OTS for the thrift industry's problems.
"It's natural that there would be more serious thrift problems than bank problems because what we're dealing with is a real estate crisis," said William Isaac, a former FDIC chairman. "The bottom has fallen out of real estate. That's what thrifts specialize in, so they're going to get hit proportionally much harder, but I don't believe that anybody could make the claim that they are the only institutions that have had pretty massive problems. There are a lot of commercial banks that have had big problems."
