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As the FDIC files more lawsuits against former directors of failed banks, a common theme has emerged from the defendants’ legal arguments: the FDIC is to blame for the failures. Industry observers are divided as to whether the defense will hold water in court.
September 19 -
"We should not be penalized because we were not on the favored list of institutions that were deemed 'too-big-to-fail,' " Mike Perry says in a public campaign rarely seen from an executive of a failed bank.
September 16 -
The Office of the Comptroller of the Currency definitely got the better end of its merger with the Office of Thrift Supervision. But among the downsides: The OCC is now on the legal hook for closing a thrift it never regulated.
July 25
A growing list of failed thrift reports is helping the Office of the Comptroller of the Currency learn how to avoid the mistakes made by the Office of Thrift Supervision.
The post-mortem reports, filed by the Treasury Department's Office of Inspector General, or OIG, may also shed light on how Treasury views the role of the OCC, which inherited hundreds of OTS-regulated thrifts in late July. Among the criticisms: the OTS should have used a swifter, heavier hand dealing with struggling thrifts.
The reviews "force on-site examiners to go overboard and implement harsher exam reports than they would otherwise," said Walter Moeling 4th, a partner at the Bryan Cave law firm in Atlanta. The reports "are something George Orwell would have loved to write about because they're really that bad."
The Office of Inspector General, or OIG, blames the OTS for some form of regulatory inadequacy in 18 of 23 material-loss reviews of failed thrifts issued this year through Sept. 20. Most concerns relate to how long the OTS took to enforce a formal action after identifying a problem. In contrast, only one of the 13 reviews of failed banks regulated by the OCC mentions a lack of timeliness from the regulator, based on American Banker research.
"It does look like the OIG is more critical of the OTS on average than other regulators," said Kip Weissman, a partner at Luse, Gorman, Pomerenk & Schick.
Whether the OTS is partly at fault for a majority of the thrift failures is heavily debated among observers, including former and current regulators. Still, the timing of the criticism stands out in two ways.
For one, the OTS can no longer defend itself after dissolving on July 21 — the same month that the Treasury ramped up reviews, releasing 10 reports compared to an average of three in prior months. The volume has stayed higher ever since. Also, the OCC takes into account all of the reports when regulating banks and thrifts.
"We take them very seriously and we study them very hard because we want to learn from the lessons identified within these reviews," said an OCC official who asked not to be identified.
For instance, some of the criticisms in the reports fault the OTS for not taking further action in making sure a thrift lowered concentrations of certain assets, usually residential real estate loans or mortgage-backed securities. This has caused the OCC to put into place tools to require higher capital levels when a bank has certain loan concentrations.
"There's never been a real presence in requiring additional capital for specific types of concentrations" such as commercial real estate or land development loans, the OCC official said. "We need to be more prescriptive on higher capital buffers when we have these types of concentrations."
This has a big influence on thrifts because they were originally chartered to support the housing market and, therefore, have higher concentrations of loans in residential real estate.
"This crisis started out with a tremendous housing dislocation," and "that drove the thrifts to be on the first wave of the failures," said C.K. Lee, a managing director at Commerce Street Capital LLC and a former regional director at the OTS.
Weissman agreed. "Personally, I did not find the OTS being any more lenient than the other regulators," he said. "Their institutions were more invested in real estate and residential mortgages … so you could argue that it's not an agency failure, it's a charter failure."
The OTS received a lot of flak after the massive failures of IndyMac Bank and Washington Mutual Bank in 2008. The OCC new oversees 639 thrifts once regulated by the OTS.
"The OCC is going to have to figure out how to do a credible job in supervising and regulating thrifts, and that will pose a challenge to them," said Kevin Jacques, a professor at Baldwin-Wallace College in Cleveland and a former economist at the Treasury.
Richard Delmar, counsel for the OIG, cautioned in an emailed response not to derive any conclusions from the failed thrift reviews until the office gets through its backlog. He said the OIG gave first priority to the OTS reviews because they were trying "to get as many in their hands as possible before the transfer" of the OTS into the OCC.
The OCC official, who was also a former OTS official, said the OTS regulated both a thrift and its holding company. The official said one of OTS' biggest faults was that it did not immediately document formally in writing the problems it identified at thrifts. "That was a lesson learned and something that we're not going to let happen again," the official said.
Such was the case with United Western Bank in Denver, Colo. that failed in January. The OIG review released Sept. 2 found that the OTS "should have acted sooner to address unsafe and unsound concentrations" in certain loans, among other concerns. The report said the OTS did note its concerns in a 2007 examination but did not follow up with a corrective action until March 2009.
The regulators can't "rely on management and the board of directors to tell you they're going to fix things," the OCC official said. "We have to put it in writing and make sure it's done."
Moeling, who advises community banks and thrifts, said the OTS had spent its finals months using a very heavy hand "teeing up" some of the thrifts and examiners. "It's like the OTS was saying, 'We were told we're too soft so we'll show you. In the meantime, we're trying to get jobs with the OCC'," he said.
Still, Moeling argued that about 90% of the reports are "worthless" because the Inspector General mostly criticizes regulators for not taking action on bad loans made in 2006 to 2007, when those loans were actually written several years earlier.
"Anyone familiar with what has happened in the world will tell you that it was too late," he said. "It was the loans made in 2003, 2004 and 2005 that brought down the real estate focused banks. So the fundamental premise that most OIG reviews would have made a difference has no basis in fact at all."
The rhetoric and repetitive nature that observers say exists in the reports has caused many to also state that the reports are not forward-thinking enough to help stop another financial meltdown.
"The thing I noticed about the reports over time is how repetitive they became" particularly "in citing policy issues the agency had long since addressed," Lee said. The Inspector General "missed an opportunity to talk about ways to improve the agencies."
Still, the OCC official said that the reports are not meant to change policies and rules. Rather, they are meant to ensure the regulators followed the rules in taking the "appropriate action."
"As a regulator, I hope our memories are long and the lessons we learn are deep," the official said.
