OCC Makes Legal Case for United Western's Failure

If United Western Bank painted the Office of Thrift Supervision to look like a hysterical short-timer, the Office of the Comptroller of the Currency has made the failed bank look like a stubborn teenager who never listens.

The OCC on Friday filed its motion for summary judgment in the case of United Western's January 2011 failure, repeatedly asserting in the 82-page filing that it warned the thrift about the potential for a liquidity crisis given its concentration of depositors. The OCC also said that efforts to recapitalize the thrift were not only unfulfilled, but had too many strings.

Shortly after the failure of the Denver thrift, United Western executives sued the OTS with the intent of reversing the failure, claiming that the regulator acted in an arbitrary and capricious manner in closing the thrift. The OCC became the defendant when it absorbed the OTS last July. The plaintiff filed its motion for summary judgment in the U.S. District Court in Washington, D.C., in April. The OCC and lawyers for United Western declined to comment.

The motions are each side's attempt to make its best and most holistic argument. In laying out its position, the OCC gave rare insight into the regulators' point of view in dealing with a troubled institution. The filing detailed United Western's declining Camels rating — a confidential rating examiners use to assess an institution's health. In 2007, United Western was rated a 2 on the 1-to-5 scale, with 1 being the best. It was downgraded to a 5 just three weeks before its failure.

"If it was an open bank, you wouldn't have seen that kind of disclosure, litigation or no litigation," says Frank Bonaventure Jr., a partner at Ober, Kaler, Grimes & Shriver and a former OCC lawyer. "The ratings are confidential because they allow examiners to talk freely without causing an adverse action against the bank like a run. You obviously can't have a run on a closed bank, but you still don't see them disclosed often even after a failure."

At the heart of the squabble was the $2 billion-asset thrift's deposit structure. Its deposits largely consisted of relationships with large depositors like clearing firms and trust companies.

The executives claim that the regulator's attitude toward the structure abruptly changed in 2009. The OCC says in its motion that regulators began addressing concerns over the deposit concentration — four clients represented 73% of the deposits — in 2007 and repeatedly so until its failure.

The regulator's basic argument for the thrift's failure rests on three grounds: it was operating in an unsafe and unsound manner; it was undercapitalized and had failed to submit an acceptable capital restoration plan; and it likely would be unable to meet depositors' demands for its money.

The court may dispose of the plaintiff's argument that the OTS "imagined" that the thrift's reliance upon a few large institutional depositors posed an immediate threat," the motion reads. "The threat was very real, and the OTS's concerns regarding the bank's deposit concentration was of long standing."

The bank's capital was eroded largely by writedowns in a large book of private-label mortgage-backed securities. The regulator argued that its warnings of a liquidity crisis manifested as the capital levels dropped because those firms were barred from keeping deposits related to employee benefits at undercapitalized banks.

In December 2010, two big institutional investors withdrew $215 million of deposits, or 13% of the thrift's deposits at Sept. 30, 2010. Two other large depositors agreed to short-term forbearance agreements that hinged on the thrift's recapitalizing itself.

The executives argued that they had a formidable capital plan in place. The OCC's motion describes the plan as incomplete and laden with contingencies. The deal was initially hinged on the thrift's ability to buy a clearing firm that hadn't turned a profit in three years and had anti-money-laundering infractions. "The OTS, therefore, objected to the incorporation of this money-losing brokerage into a money-losing bank," the motion says.

The executives' motion, filed in April, slung just as much mud. "This relatively well-capitalized bank was seized, in one of the last acts of a discredited bank regulator soon to have its own doors shut," the motion said.