FT Falls Down on IndyMac Fraud

by Dollars and Sense

The Financial Times had a rather pithy piece (see below in full) on the fraud at IndyMac, reported in yesterday's New York Times (and re-reported here).

A reminder about what this story is all about: apparently, last May the western regional director/senior regular from the Office of Thrift Supervision, Darrel Dochow, allowed IndyMac "to record $18m of a $50m capital infusion from its holding company as first-quarter capital," which made it possible for the bank to retain its "well-capitalized" status. IndyMac failed in July.

What is most scandalous about this is that Dochow is a veteran of the S&L crisis, and actually served time for the role he played. Here's what the NYT said yesterday:

Mr. Dochow played a central role in the savings-and-loan scandal of the 1980s, overriding a recommendation by federal bank examiners in San Francisco to seize Lincoln Savings, the giant savings and loan owned by Charles Keating. Lincoln became one of the biggest institutions to collapse. Mr. Keating served four and a half years in prison before his fraud and racketeering convictions were overturned. He later pleaded guilty to more limited charges, and was sentenced to the time already served.

Um, how did this guy get a job as a banking regulator again?

If you got your information about all this from the Financial Times, you wouldn't know a thing about Dochow's back-story. And the FT even appears to downplay the fraud: "Bankers say the practice of backdating capital has been relatively common, but backdating is typically limited to a few days or weeks, not six, as in IndyMac's case."

At least they (like the NYT) included the nice quote from Republican Charles Grassley: "The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them."

Here is the whole article:

IndyMac allowed to backdate its capital

By Saskia Scholtes in New York | December 23 2008 19:28

One of the main US banking regulators allowed banks to backdate transactions so as to maintain "well capitalised" status and avoid regulatory restrictions, the Treasury department's watchdog arm has said.

The practice came to light as part of a routine federal investigation into the failure of IndyMac, one of five lenders regulated by the Office of Thrift Supervision to be wound down this year.

IndyMac suffered a run on its $19bn in customer deposits in July after Senator Chuck Schumer, chairman of Congress's joint economic committee, made public a letter he had written to regulators questioning the lender's viability.

In a letter sent on Monday to the Senate finance committee, Eric Thorson, the Treasury's inspector-general, wrote that the OTS allowed IndyMac Bank to record $18m of a $50m capital infusion from its holding company as first-quarter capital, in spite of the fact that the transaction happened on May 9—six weeks into the second quarter.

The infusion meant that IndyMac's capital ratio was recorded as being above 10 per cent, a threshold that marks the difference between a bank being considered "well capitalised" and "adequately capitalised". The capital transaction is not seen as a significant contributory factor to the bank's failure.

Mr Thorson said the inquiry had uncovered other incidents of backdating capital infusions but did not specify which banks had been involved.

"The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them," said Charles Grassley, the top Republican on the Senate finance committee.

The report called into question "the real financial condition of other banks" and "the independence of the Office of Thrift Supervision", he added.

Darrel Dochow, a senior regulator at the OTS, has been removed from his role as director of the West Coast region for permitting the IndyMac transaction to be recorded. An investigation is continuing.

Bankers say the practice of backdating capital has been relatively common, but backdating is typically limited to a few days or weeks, not six, as in IndyMac's case.

"It is unclear what information OTS had at the time and what its basis was for allowing the capital infusion to be recorded for the quarter ending March 31," Mr Thorson wrote.

"A separate inquiry as to a motive for approving and recording this transaction in the manner it was recorded is still ongoing."

Mr Thorson wrote that while there was some support in accounting rules for allowing backdating of capital infusions, that support was limited to instances in which the transaction was both planned and executable at the end of the quarter in which it was booked.

Ernst & Young, IndyMac's auditors, also agreed to acknowledge the $18m infusion as first-quarter capital, according to Mr Thorson.

The OTS also oversaw Washington Mutual, which in September became the biggest bank failure in US history.

Labels: Charles Grassley, Darrel W. Dochow, Financial Times, fraud, IndyMac, New York Times, Office of Thrift Supervision

 

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12/24/2008 03:46:00 PM 0 comments

 

Bill Black on IndyMac/Thrift Fraud

by Dollars and Sense

The article on the fraud at IndyMac in the business section of today's New York Times quotes UMKC professor and D&S author William K. Black. (Black wrote the cover story for our November/December 2007 issue on banking deregulation.) If you haven't been briefed on the situation with IndyMac yet, here are the basics: an official from the Office of Thrift Supervision, Darrel W. Dochow (he is the west coast director), "allowed IndyMac's parent company to backdate an $18 million contribution to preserve its status as a 'well-capitalized' institution," according to the Times. In particular, he allowed IndyMac "to receive $18 million from its parent company on May 9 but to book the money as having arrived on March 31." IndyMac collapsed in July.

Dochow apparently played a role in the S&L scandal of the 1980s. Black was was deputy director of the Federal Savings and Loan Insurance Corporation during that crisis. Here's what he told the Times:

William K. Black, a senior bank regulator during the savings and loan crisis and the author of "The Best Way to Rob a Bank is to Own One," said Mr. Dochow’s lenience highlighted the longstanding unwillingness of the Office of Thrift Supervision to take charge.

"The O.T.S. did nothing effective to regulate any of the specialized large nonprime lenders," Mr. Black said. "So what you got was what the F.B.I. accurately described as early as 2004 as an epidemic of mortgage fraud."

Mr. Black said that the Office of Thrift Supervision had never put IndyMac on its watch list of troubled institutions before the Federal Deposit Insurance Corporation took it over in July and booked a loss of $8.9 billion to its insurance fund.

The Times has found Black in its Roladex several times in recent months, most notably in the incendiary article back in February about John McCain's dalliances with a lobbyist (but as we pointed out at the time, the real meat of the article was about McCain's role in the S&L scandal; the Times quoted Black basically saying that McCain shouldn't even still be a senator). In today's article, though, the Times mentions the title of Black's book--The Best Way to Rob a Bank Is to Own One.

Read the rest of the article.

Labels: bank closures, Darrel W. Dochow, financial crisis, IndyMac, Office of Thrift Supervision, savings and loan crisis, William K. Black

 

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12/23/2008 10:54:00 AM 0 comments