Regulator takes heat over IndyMac
As the mortgage crisis deepened in California last year, officials in Washington put the fate of thrifts in the West in the hands of a veteran regulator who had a memorable role in the last major crisis in the savings and loan industry.
Darrel W. Dochow was the head of supervision and regulation at the Federal Home Loan Bank Board in Washington when Lincoln Savings & Loan of Irvine failed in 1989, at the time the largest and costliest thrift failure ever.
Dochow and other regulators in Washington balked at recommendations from their regional counterparts that it be shut down two years earlier. Its collapse added billions to the taxpayer-funded bailout of the S&L; industry, and its victims included thousands of elderly investors who had bought bonds from the troubled thrift.
Eventually he was relieved of his high-level duties and demoted. Now, Dochow is back on the beat as the top U.S. banking cop in the West amid another financial crisis, one that was underscored by last month’s seizure and sale of Washington Mutual Bank, the biggest bank failure in U.S. history.
Critics are complaining that Dochow’s approach to the mortgage meltdown as Western region director of the Office of Thrift Supervision evokes the industry-friendly treatment he and other regulators a generation ago were scored for in the Lincoln case.
Dochow declined to be interviewed for this story, but the Office of Thrift Supervision strongly defended him as a seasoned professional.
“The OTS has the highest confidence in Regional Director Darrel Dochow,” spokesman William Ruberry said. “Any attempt to draw any parallels between the events of 2008 and 20 years ago is a stretch, at best. There is no valid comparison.”
Dochow and other regulators have been criticized for how they handled the July 11 collapse of IndyMac Bank of Pasadena, one of the signature events in the latest crisis, which came after a run on the bank by depositors.
Regulators at the Office of Thrift Supervision, the successor agency to the federal bank board, have blamed Sen. Charles E. Schumer (D-N.Y.) for pushing the bank over the edge by disclosing a critical letter he had written that may have triggered the run on deposits and derailed an effort by regulators to arrange a private sale or bailout.
But a closer look also shows that officials ignored warning signs, former regulators say, allowing IndyMac to continue operations despite growing questions about its viability. The bank is now expected to cost the federal insurance fund nearly $9 billion, up from initial government estimates of $4 billion to $8 billion. Had the regulators intervened sooner, that price tag would probably have been substantially less.
“Clearly, it is an unfortunate example of regulatory failure,” said James R. Barth, a former chief economist of the bank board who calls the cost associated with the IndyMac failure “outrageously high.”
IndyMac was rocked more than a year ago when the market for “no documentation” mortgage loans collapsed.
Its main business was making the loans and bundling them for sale to Wall Street, a lucrative practice for a time. The market collapse, however, left the bank with a broken business model and $11 billion in loans it couldn’t sell.
Analysts soon began questioning IndyMac’s survival. Its stock lost much of its value; investor lawsuits began piling up.
In contrast, Dochow and the Office of Thrift Supervision considered IndyMac “well-capitalized” and as recently as January rated the bank a more-than-respectable 2 on a five-point scale used to rank the health of institutions. (A ranking of 1 is the strongest.)
But critics say that was only because regulators looked the other way while IndyMac greatly overstated the value of the $11 billion in loans on its books after the market evaporated. That gave a misleading impression of its financial condition and prevented stronger regulatory action, critics say.
“It obviously was based on questionable accounting and inflated asset values,” said Richard E. Newsom, a retired California savings and loan regulator who has studied the IndyMac bailout. Dochow and the OTS “turned a blind eye” to the true condition of the bank, which was deeply insolvent and facing a liquidity crisis long before it was closed, he said. “The $8-plus-billion loss to the FDIC was obviously building for months.”
The hands-off approach also appeared to violate the spirit of changes in federal law after the S&L; crisis of the 1980s that required regulators to take “prompt corrective action” against shaky banks and thrifts. The approach taken with IndyMac was such that the bank was never hit with formal enforcement action or found to be a “problem bank” until days before it failed.
“There were classic signs that the institution was deeply troubled,” said Barth, currently a professor at Auburn University and a senior fellow at the Milken Institute in Santa Monica. “This is why you have these different regulatory tools. If you are not going to use them, or use them in a timely manner, what good are they?”
The agency’s current head of examinations and supervision, Timothy T. Ward, said regulators closely monitored the bank and took strong action when appropriate. The agency, he said, was helping the bank develop a new business plan, which included shrinking staff and getting into more conventional lending, and had pressured the bank on other occasions to raise capital.
“We took what we feel is prompt action, and ongoing and timely action, to address the institution’s problems,” Ward said in an interview with The Times. “Always, when you look at an institution that fails, in retrospect, people ask, ‘Could you have done something sooner?’ ”
Some former regulators who came to know of Dochow during the Lincoln case say they were stunned to learn that he was again in a position of influence, and they are urging Congress to investigate why he was appointed by John Reich, director of the OTS.
Newsom, who helped unearth fraud in the Lincoln case, called the decision “a chilling reflection on director Reich’s judgment,” in a recent letter to the Senate Banking Committee.
“We’ve watched this movie before,” Schumer said in a statement to The Times. As a House member in the late 1980s, he was involved in investigating Lincoln’s collapse, including Dochow’s role. “Then and now, the banking regulators’ refusal to act caused these kinds of problems to not only go ignored, but grow worse.”
Lincoln’s former chairman, Charles H. Keating Jr., was a prime figure in the earlier S&L; crisis. It failed in 1989 at a cost of $2 billion; Keating served time in prison on a fraud conviction that was later reversed.
The affair also gave rise to a political scandal when Sen. John McCain and a group of lawmakers that became known as the Keating Five approached regulators on behalf of the Arizona-based developer. McCain later acknowledged poor judgment in the affair; the Senate Ethics Committee cleared him of misconduct after an investigation.
The case was also marked by fierce regulatory in-fighting. Examiners with the Federal Home Loan Bank of San Francisco who had direct responsibility for Lincoln proposed shutting down the S&L; two years before it was taken over.
But regulators in Washington, including Dochow, who had just been appointed head of the federal bank board’s regulatory affairs office, balked at the strong action.
With lawyers for Keating threatening to sue the agency, the San Francisco team, in an unprecedented move, was pulled off the case. Dochow headed a committee that recommended that action.
Lincoln was eventually closed, but the delays had disastrous consequences. Thousands of elderly investors, including many Californians, who sank their life savings in bonds issued by Lincoln’s parent company were wiped out. Many testified later that they had believed, wrongly, that the bonds were federally insured.
“Keating conned Dochow, but Dochow made the task simple by shutting down his critical reasoning abilities,” wrote William K. Black, one of the San Francisco-based regulators, in a book on the S&L; crisis, “The Best Way to Rob a Bank Is to Own One.”
Contacted about Dochow and his current position, Black, now a professor of law and economics at the University of Missouri in Kansas City, said in an e-mail, “It is astonishing that even this administration would return him to power.”
The collapse of Lincoln spurred a series of congressional hearings in which Dochow and other officials were called to account for their actions. Much like the current crisis, it led to reform legislation and proposals to overhaul bank regulation.
Dochow was transferred to Seattle, where he became a bank examiner, later rising again through the ranks. He was the deputy regional manager in the West for the OTS before being elevated last year.
“Darrel’s background and experience were important factors in his selection,” Scott M. Polakoff, the OTS’ senior deputy director and chief operating officer, said in a news release at the time. “We are fortunate to have such an outstanding individual as Darrel assume this position, particularly given his familiarity with many of the institutions in the OTS West region.”
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