Wamu Vanishes, So May OTS and the Thrift Charter

WASHINGTON — The failure of the largest thrift in the nation has sealed the fate of the Office of Thrift Supervision, observers said Friday.

Washington Mutual Inc. accounted for about 20% of the assets overseen by the agency and 12% of its budget. Its collapse and subsequent sale to JPMorgan Chase & Co., which said it would not keep Wamu's thrift charter, heightens concerns about the OTS' viability and spurred staunch defenders to rethink its future.

"I don't know how anyone can't be questioning the viability of the OTS," said Lawrence Kaplan, a lawyer at Paul, Hastings, Janofsky & Walker LLP and a former OTS official.

Even Ellen Seidman, a former OTS director and longtime advocate of the agency's independence, said Wamu's collapse changes things.

"You can't just say the status quo is acceptable," she said, though she stopped short of supporting a regulatory merger. "Whereas my previous position on the subject was, you are not going to gain a whole lot by getting rid of one agency … , I think there are more things to think about. The future of the OTS is firmly on the table now."

To be sure, the OTS is safe for the short term. The agency said it has a contingency plan in place to ensure funding through 2009.

It would also take legislation to eliminate or merge the agency. Lawmakers have committed themselves to taking up a financial regulatory restructuring early next year. Some parts of this are sure to be controversial, but eliminating the OTS is not — particularly since Wamu's demise, observers said.

"Obviously OTS is fighting for its life, and [Wamu] going down doesn't help it any in its fight to save its existence," said L. William Seidman, a former FDIC chairman and now a CNBC commentator.

The Treasury Department has already recommended that the OTS be merged with the Office of the Comptroller of the Currency. It has also recommended killing the thrift charter.

This prospect has also grown more likely with Wamu's collapse, some said.

"The thrift charter is a specialization and concentration, and obviously that was thought to be a very safe one because it was in housing," Mr. Seidman said. "I doubt if we will have, within a few years, any thrifts. Everything will be a bank. Too bad, I like the OTS, but unfortunately they're in the dying end of the business."

Jim Barth, a Lowder Eminent Scholar in Finance at Auburn University and a former OTS economist, agreed.

"It makes no sense to me to have a separately regulated thrift industry any longer," he said. "It would be far better to consolidate the OTS and the Comptroller of the Currency. It seems to me [the Wamu loss] ought to make it more likely."

On Friday, OTS Director John Reich defended the value of multiple federal banking regulators.

"We make each other better agencies," he said. "It's always better when there are more people at the policymaking table than a consolidation situation where one person, one agency director, is in charge without input from other agency heads."

But the OTS may have less credibility after Wamu's collapse. It had already lost $32 billion-asset IndyMac Bancorp, which failed July 11, and several other thrifts are troubled.

Many have raised questions about the OTS' supervisory performance.

In a conference call Friday, Mr. Reich acknowledged that the agency did not want Wamu to be bought. "We wanted to keep the institution alive," he said. "The last thing we wanted to do was put the institution in a situation where it had to transfer the ownership, so it was a full-time effort the last several weeks to do everything possible to keep the institution alive."

The thrift was not put on the problem bank list until a week before its failure. That will likely raise questions, observers said. But the overall problem is likely to be the agency's budget, some said.

"There are two issues: One's a political issue, and whether they did their job properly," said William Isaac, a former FDIC chairman. "The more serious issue has to do with the ability of the OTS to fund itself and maintain proper levels of staffing" with Wamu and IndyMac no longer members.

"They're going to have a hard time funding themselves," he said.

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