Senate subcommittee staff report faults OTS in Washington Mutual collapse.
In a 650-page report released on April 13, 2011, the staff of the Permanent Subcommittee on Investigations in the U.S. Senate Committee on Homeland Security and Governmental Affairs chronicled the recent financial crisis and singled out the Office of Thrift Supervision (OTS) for special criticism. The report found that OTS, which regulates savings and loan associations like Countrywide Financial and IndyMac, had long promoted the interests of these regulated entities, a phenomenon known as regulatory capture.
According to the report, OTS did not adequately regulate Washington Mutual and even actively resisted regulation of it by the Federal Deposit Insurance Corporation (FDIC), the thrift’s secondary regulator. In September 2008, the thrift collapsed, accelerating the financial crisis.
Between 2004 and 2008, OTS detected over 500 “serious deficiencies” in Washington Mutual’s operations. For example, OTS found that the thrift’s investment portfolio was stocked with billions in high-risk mortgage assets. However, OTS pursued no formal enforcement proceedings against Washington Mutual.
The thrift, which was the largest one under OTS’s supervision and the country’s eighth-largest financial institution, paid at least $30 million in annual fees to OTS from 2003 to 2008. This accounted for 12 to 15 percent of the agency’s revenue. According to the report, this dependence caused “regulators [to] treat the banks they oversee as constituents rather than arms-length regulated entities.”
OTS also repeatedly attempted to stop the FDIC from downgrading Washington Mutual’s safety and soundness ratings. When FDIC Chair Sheila Bair told the thrift that the FDIC would probably downgrade its rating, FDIC Director John Reich, who had wanted to break the news to the thrift himself, reportedly wrote to his deputy that “I cannot believe the continuing audacity of this woman.”