WASHINGTON — With one major thrift company falling into a national bank's arms and the housing crisis threatening the independence of another, it is becoming harder to justify a separate regulator for the industry.
Bank of America Corp.'s deal for Countrywide Financial Corp. and word that Washington Mutual Inc. may sell to JPMorgan Chase & Co. raised the specter that the Office of Thrift Supervision could lose two of the three largest thrifts under its purview.
Thrift earnings are at a six-year low, and nine of the top 25 federal ones — holding 37.5% of thrift assets — have reported significant problems related to the housing crisis. Coupled with a shrinking OTS work force, many are wondering if the agency has the resources to deal with the ongoing problems.
With the Treasury Department about to issue recommendations on regulatory restructuring, plenty of observers are already writing the OTS' obituary.
"Historically, what happens when policymakers learn from an unpleasant experience, they then try to correct the regulatory apparatus so that doesn't repeat itself," said Alfred DelliBovi, the president of the Federal Home Loan Bank of New York. "This problem goes beyond the traditional kinds of thrift institutions that the OTS was set up to regulate."
A former OTS executive said losing Wamu, which generates 21% of the agency's budget, and Countrywide would force the agency to pare down expenses dramatically or raise fees on other thrifts. In either case, the calls to eliminate the agency would only grow.
"If they lost enough institutions, it could become a significant struggle," the former OTS official said. "That impacts morale, impacts recruiting. They can adjust their expense base to continue along, but is it the best thing from a policy standpoint? Probably not."
Other current and former OTS officials argue that the agency and the industry are in good shape.
"There's no surprises from what we're seeing," said OTS Deputy Director Scott Polakoff. "Yes, we're seeing increased delinquencies, and we're seeing increased classifications, but as a general rule, management's identifying these problems."
The OTS has been defending its existence since the Treasury began a regulatory restructuring review last year, the results of which are expected to be released soon. The OTS was the only bank regulator to send a comment letter to the Treasury on the issue, and the agency devoted a portion of its 2007 annual review backing its authority as a regulator.
Ellen Seidman, a former OTS director and now the director of the New America Foundation's Financial Services and Education Project, said discussion of the agency's demise only hurts its effectiveness.
"You better hope the OTS is a damn strong institution, because they have a lot of work to do, and this kind of debate does not help," she said.
But the debate is being driven by a number of factors, including a possible wave of acquisitions and the general poor performance of thrift companies during the housing crisis.
Even if Countrywide and Wamu were to keep their thrift charters under a bank holding company umbrella, the changes would raise doubts about the agency's purpose, observers said. If those two companies were acquired, the country's top three thrifts would be under the purview of national banking companies. Wachovia Corp. bought Golden West Financial Corp., owner of the second-largest thrift, in 2006.
"It takes away from the standing and stature of OTS if a thrift continues to exist but it is just the subsidiary of a much larger national bank," the former OTS official said. "It's a tail-wagging-the-dog kind of thing. OTS would not have a big role to play."
Tim McTaggert, a partner at Pepper Hamilton LLP, said such an arrangement would require the OTS to coordinate more with the Federal Reserve Board.
"The Fed continues to be the umbrella regulator of acquiring institutions," he said. The OTS "still would have a supervisory role, but they would probably need to coordinate more with the Fed on their supervisory findings."
But Mr. Polakoff downplayed the impact of having thrifts operate under banking companies.
"To me, what that says is the financial industry understands the benefit of the thrift charter and the benefit of the commercial bank charter," he said. "Because of those benefits, what we're seeing is a greater opportunity for a bank holding company to have bank subsidiaries of different charters."
Several analysts said they expect other thrift acquisitions in the near future as savings and loans struggle during the housing crisis. In the year that ended Sept. 30 the thrift industry earned $11.292 billion, the lowest total since 2001. Among the agency's largest institutions, at least nine have suffered as a result of the housing crisis, including two units of Wamu, Countrywide, E-Trade Bank, IndyMac Bank, Flagstar Bank, and BankUnited.
Some industry insiders cite a limitation on diversification as a source of strain for the OTS and thrifts in general. By law, thrifts must have at least 65% of their assets in mortgages and mortgage-related items. This has left savings and loans particularly vulnerable during the crisis.
Ron Glancz, a partner of Venable LLP, who supports the OTS, said the current crisis raises concerns about those limitations. "If the administration is going to focus on restructuring, it should also focus on thrift powers," he said. "Thrifts have been successful, but whenever you limit the powers a financial institution has in the financial area, it does create some market effects."
While BB&T Corp. announced recently that it has acquired a thrift charter, the overall number of thrifts has been declining. At the end of 1994 there were 1,543 thrifts with $774.1 billion of assets. The OTS now oversees 831 thrifts with $1.57 trillion.
Though thrifts have steadfastly defended the need for a separate regulator, that situation could change as the number of thrifts decline.
Mr. DelliBovi drew a parallel between the fight more than a decade ago over the plan to merge the bank and thrift deposit funds, which was seen as a proxy battle over merging the charters.
Though at first the plan was controversial, by the time the funds were merged in the 2006 deposit insurance reform bill, everyone was supportive.
"Ten years ago you couldn't talk about merging" the funds, he said. "At some point that became no debate. That was the result of the economics of the situation. That could happen here."
But other powerful forces are likely to defend the charter. Bert Ely, an independent analyst in Alexandria, Va., said that major investment banks and insurance companies have used the thrift charter to enter the banking business without coming under the Fed's supervision.
"Merrill Lynch, Goldman Sachs, Lehman Brothers? They do not want to register as bank holding companies. They are going to make sure OTS stays there," Mr. Ely said.
But most acknowledge the debate is not likely to go away soon. "The debate is cyclical, and when real estate is down, the debate is up," Ms. Seidman said. "If you weren't asking me this question, I'd be surprised."
