Regulator Let IndyMac Bank Falsify Report
Agency Didn't Enforce Its Rules, Inquiry Finds
By Binyamin Appelbaum and Ellen Nakashima
A senior federal banking regulator approved a plan by IndyMac Bank to exaggerate its financial health in a May federal filing, allowing the California company to avoid regulatory restrictions only two months before it collapsed, a federal inquiry has found.
The same regulatory agency, the Office of Thrift Supervision, allowed similar legerdemain by other banks, according to a letter sent yesterday to members of Congress by the Treasury Department's inspector general, Eric Thorson. The letter did not provide details about the other incidents.
The finding that OTS on several occasions "blessed a fiction," in the words of one congressional staffer, renews questions about the agency's relationship with the companies it regulates and about its complicity in the collapse this year of several of the nation's largest thrifts, including Washington Mutual and Countrywide Financial.
The Washington Post reported last month that OTS allowed thrifts to lend massively while reserves against future losses dwindled. Even as problems became apparent, the agency continued to prioritize deregulation. The latest findings underscore that OTS failed to enforce its own rules.
"The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them," said Sen. Charles E. Grassley (R-Iowa). "It's good the inspector general has opened a full-blown audit as a result of this case. Everyone ought to be paying very close attention."
The regulator named in Thorson's letter, Darrel Dochow, was removed from his position yesterday as director of OTS's west division, which supervised Washington Mutual, Countrywide, IndyMac and Downey Savings and Loan, among other banks that have been seized or sold this year.
It is the second time Dochow has been removed from a position as a senior thrift regulator. He was demoted in the early 1990s after federal investigators found that he had delayed and impeded proper regulation of Charles Keating's failed Lincoln Savings and Loan.
Dochow did not return calls to his office and home. An OTS spokesman also did not return calls. In a letter to the inspector general, OTS director John M. Reich described Dochow's actions as a "relatively small factor in the events leading to the failure of IndyMac." Dochow has been reassigned to work in Washington on "special projects" and as head of human resources, pending completion of the inquiry, according to a memo sent to OTS staff yesterday.
Thorson's investigation has its roots in a standard review of IndyMac's failure. The review was triggered because OTS is an arm of the Treasury.
During that review, Thorson found the Dochow incident described in documents provided by IndyMac's accounting firm, Ernst & Young. Thorson presented those findings to Treasury Secretary Henry M. Paulson Jr., who urged him to investigate, according to a Treasury spokeswoman.
The core allegation is that Dochow allowed IndyMac to count money it got in May in describing its financial condition at the end of March.
Banks are required to file a report with regulators every three months detailing their financial condition, in addition to the reports filed by all publicly traded companies. IndyMac's initial filing for the first quarter showed that the amount of money it had on hand to cover potential losses was just large enough to meet regulatory requirements. But days after it submitted the filing, IndyMac was told by Ernst & Young that some numbers needed to be adjusted. The changes would drop the company below the capital threshold. Instead of "well capitalized," IndyMac would be categorized as "adequately capitalized," according to Thorson's letter.
Such a downgrade would threaten IndyMac's survival. Thrifts classified as "adequately capitalized" need special permission from regulators to gather deposits through brokers who funnel money from investors around the country. The use of brokers is restricted to healthy institutions because the money is seen as "hot," meaning that investors are quick to move money around, which can destabilize a weak institution.
At the end of March, 36 percent of IndyMac's $18.7 billion deposit base came through brokers, according to the company's regulatory filings.
IndyMac executives, who learned about the problem in early May, wanted permission to inject $18 million into the company's capital cushion. But that would solve the problem only if the bank could pretend the money was injected at the end of March.
Thorson wrote that Dochow gave his permission during a May 9 conference call, and the company submitted the new numbers.
The company's first-quarter earnings report, filed on May 12, includes the same numbers sent to banking regulators, apparently repeating the overstatement of the company's actual capital cushion as of March 31. The filing goes on to describe the company as "well capitalized."
Securities experts said the filing could raise legal issues because it is a crime to knowingly make false statements in the financial records of a public company.
The new numbers also averted an intervention by the Federal Deposit Insurance Corp., which could have acted to limit the eventual cost of IndyMac's failure. The FDIC now estimates the cost at about $8.9 billion. The agency is funded by the banking industry.
"It is their job to be a cop," said Bart Dzivi, a lawyer who represents financial services institutions in Northern California. "But Darrel Dochow and senior management take the view, 'We're working with these institutions to help them with their problems.' They see themselves as consultants, not cops."
A spokesman for Thorson declined to expand on his statement that other banks were allowed to make similar revisions to financial statements. Asked at a briefing with members of Congress whether he would describe the problems as "systemic," Thorson responded, "Yes," according to a congressional aide who attended the briefing.
Dochow was appointed regional director in September 2007 after serving as the No. 2 in the western region. Dochow got the job shortly after playing a leading role in persuading Countrywide to move under OTS supervision, a major coup for the agency, which is funded by fees from the companies it oversees. He was paid $230,000 in 2007, according to government records.
Dochow's efforts to help IndyMac extended beyond his support for the bank's revised financial filings.
At another point last spring, Dochow limited the scope of a review by OTS regulators of IndyMac's portfolio of loans and other assets, overruling the advice of others in the agency, according to a source with knowledge of the incident.
The current episode echoes Dochow's involvement in the collapse of Lincoln Savings and Loan.
In September 1987 Dochow halted an examination of Lincoln, which was meant to determine whether the bank had an adequate capital cushion, at the request of his then-boss, Federal Home Loan Bank Board Chairman M. Danny Wall, according to a congressional investigation. Attorneys for Lincoln and its chief executive, Keating, had threatened to sue the bank board, OTS's predecessor, if the exam went ahead.
When the exam finally happened eight months later, it revealed that Lincoln was engaged in unsafe, unsound lending practices, booking inappropriate income and inappropriately sending money to its holding company. The company was placed in conservatorship soon thereafter and taxpayers eventually spent $2.7 billion bailing it out. Dochow was demoted and sent to a regional job.
Then-Rep. Charles E. Schumer (D-N.Y.) said at hearings in November 1990 that Dochow had been carrying out the will of his superiors. Schumer noted that Dochow said in a statement that he got the impression the bank board "would like to see the Lincoln matter resolved amicably."
"In a sense, it's difficult to blame Mr. Dochow, because he apparently was simply carrying out orders, the desires of his superior, to resolve this amicably," Schumer said. "Unfortunately, that desire cost us billions of dollars. And I think it's that attitude that's the real problem here."