OTS Says IndyMac, 4 Thrifts Allowed to Restate Capital Levels

OTS Says IndyMac, 4 Thrifts Allowed to Restate Capital Levels


Jan. 31 (Bloomberg) -- IndyMac Bank and four unidentified U.S. savings and loan associations violated Office of Thrift Supervision policies when revising their capital reports, a disclosure the agency admitted may further erode its reputation.

The agency let IndyMac backdate a capital injection that helped the lender avoid regulatory restrictions, and also found four other cases where lenders failed to follow reporting policies, OTS Director John Reich wrote yesterday to Treasury Secretary Timothy Geithner, his boss, and four U.S. lawmakers.

“Let me assure you that the OTS takes this matter very seriously, and fully appreciates its potential impact on the reputation of the agency and the perception of the quality of OTS bank supervision,” Reich wrote.

The OTS has become a target for lawmakers as the Obama administration and Congress consider an overhaul of U.S. financial regulations. Former Treasury Secretary Henry Paulson in March suggested merging OTS with the Office of the Comptroller of the Currency, which regulates national banks. Lawmakers fault OTS for failing to spot problems at its lenders and sought investigations into the IndyMac backdating.

The federal regulator let IndyMac Bank record $18 million of a $50 million infusion from its holding company, received May 9, as first-quarter capital, the Treasury Department’s inspector general concluded last month. Of the four lenders, only one backdated a capital infusion to a previous quarter, Reich said.

IndyMac’s capital injection was recorded in the 2008 first quarter report, rather than when received in the second, and let the bank avoid slipping below a “well-capitalized” standing, and face an order to raise capital, OTS said in the letter.

Shouldn’t Be Included

“We have concluded that the $18 million capital infusion that occurred on May 9, 2008, should not have been included in IndyMac’s thrift financial report for March 31, 2008,” Reich wrote. The letters were obtained by Bloomberg News through a Freedom of Information Act request.

The backdating was detected in a routine federal investigation into the failure of IndyMac, one of five OTS- regulated lenders to be shuttered last year. The regulator also oversaw Washington Mutual Inc., whose September collapse was the biggest bank failure in U.S. history.

“During our inquiry, we also discovered that OTS had allowed other thrifts to record capital contributions in an earlier period than received,” Eric Thorson, the Treasury Department’s inspector general, wrote in a Dec. 22 letter to U.S. Senator Charles Grassley of Iowa, the top Republican on the Senate Finance Committee.

Reich disagreed with the inspector general that OTS “regularly” permits capital infusions to be posted to prior quarters, saying “an ongoing internal review by the OTS shows this is not the case.”

West Coast Office

The agency is taking steps to ensure its West Regional Office, which has responsibility for IndyMac, is “fully compliant with all OTS supervisory policies and practices,” Reich wrote.

OTS West Region Director Darrell Dochow, who approved the IndyMac backdating, has been placed on administrative leave pending an investigation, Reich wrote. An OTS regional accountant was assigned to conduct a forensic accounting review and an outside expert was hired for an independent investigation of that office’s management, he wrote.

The OTS only identified violations as occurring in its Northeast, Southeast and West regions.

“You don’t know whether this was an agency policy, or whether it was rogue employees in various regions allowing it to occur,” Gilbert Schwartz, a former Federal Reserve counsel and now a partner at law firm Schwartz & Ballen in Washington, said in a telephone interview.

Representative Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee, on Dec. 26 asked lawmakers to investigate why IndyMac was allowed to backdate its capital. Lawmakers “should investigate how and why the OTS permitted IndyMac to backdate capital injections as well as other instances of regulatory flexibility gone bad,” he said in an e-mailed statement.

“It is troublesome to hear so many instances of regulators picking and choosing what they enforce,” Bachus said.

BLOOMBERG