Treasury, FDIC Watchdogs Say OTS Failed to Stop Risky WaMu Mortgages

The Office of Thrift Supervision (OTS), the primary regulator of failed Washington Mutual, “wrung its hands” as the bank took on riskier and riskier mortgage lending practices but failed to stop the toxic and sometimes fraudulent mortgages that ultimately collapsed the bank, according to Sen. Carl Levin (D-Mich.). The Senate Permanent Subcommittee on Investigations is grilling current and former regulators today over the bank’s subprime lending and securitization practices. Levin, who chairs the Subcommittee, noted “feeble oversight by regulators” that reported less than satisfactory underwriting and potentially fraudulent practices and did not take enforcement actions. “Washington Mutual’s collapse is a tale of greed and mismanagement, but it is also a case history of ineffective bank regulators who saw years of unsafe and unsound banking practices, but failed to stop them,” Levin said in opening statements. “Instead of stopping the abuses they saw, OTS regulators stood idly by while WaMu executives loaded up on risk and churned out billions of dollars in toxic mortgages that poisoned not only the bank, but also our financial system.” He said OTS regional officials obstructed efforts by the agency’s own staff to rein in WaMu, while OTS impeded efforts by the Federal Deposit Insurance Corp. (FDIC) to bring enforcement actions and protect the Deposit Insurance Fund (DIF). US Treasury Department inspector general Eric Thorson told the Subcommittee OTS enforcement actions against WaMu were limited and late. “WaMu failed because its management pursued a high-risk business strategy without adequately underwriting its loans or controlling its risks,” he said in prepared statements. Despite the high risk and lax underwriting standards at the bank, OTS relied on WaMu management to track progress in resolving identified weaknesses, he said. Thorson noted that OTS did not take any type of enforcement action against WaMu until 2008 — after the thrift began sustaining significant losses. FDIC inspector general Jon Rymer, also testifying today, said said the FDIC wanted to resolve the issues forming at the bank as quickly as possible, to minimize the risk to the DIF. He noted the FDIC’s challenge of WaMu’s strength ratings set by OTS was met with resistance. Additionally, he said the FDIC elected not to invoke its own enforcement authority against WaMu in 2008 because of procedural road blocks — for instance, the FDIC would have to request the permission of a panel that included an OTS representative. “We … believe that it may not be in the best interest of FDIC to place too much reliance on the ability of the primary regulator to assess risk to the DIF,” he said in prepared remarks. “Ultimately, the DIF, which is backed by the full faith and credit of the United States, and thus the American taxpayer, is responsible for absorbing an institution’s failure, not the primary regulator.” Write to Diana Golobay.

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