Fortune Swallows the Banks’ Baloney

I had to read this Fortune story a couple of times to make sure it was really as credulous as I thought it was.

Yup. It is.

The magazine reports that banks are “troubled” about the elimination of one of their regulators, the Office of Thrift Supervision. Red flag there, right? Here’s why Fortune says they’re concerned:

The bankers say eliminating OTS would wipe out a culture that understands the needs of small thrifts, which are obliged to channel most of their lending to housing-related activities…

There are also questions about whether the OCC is the right agency to take over supervising small thrifts (aka savings and loans), given its current brief of overseeing larger national banks.

Oh, and:

Others go even further, noting that the OCC can match the OTS bank for bank when it comes to problems.

And this is embarrassing:

Given OTS’s poor reputation, you wouldn’t think the proposal would stir much interest, let alone opposition. Many outsiders say the OTS typifies the shortcomings of the current setup, in which regulators are “captured” by their subjects.

Yeah, you’d wonder why it would stir opposition if you just read this piece and didn’t know much about the OTS.

For that, let’s switch over first to the LA Times’s excellent reporter E. Scott Reckard, who writes about OTS today, too. He reports on an inspector general’s report on the agency’s actions (more like inactions) on Downey Financial, the busted California thrift:

It was clear by 2002 that Downey was heavily involved in high-risk loans, according to the Treasury report, and examiners began warning Downey’s management that year of potential problems.

Yet despite the warnings, “OTS examiners did not require Downey to limit concentrations in higher-risk loan products,” the report said.

“We believe that in light of the OTS’s repeated expressions of concern and management’s unresponsiveness to those concerns, OTS should have been more forceful, at least by 2005, to limit such concentrations,” the report said.

Even after Downey, operated by parent Downey Financial Corp., was downgraded in the confidential regulatory ratings from a strong institution to an average one in 2006, the OTS took only an informal enforcement action against the thrift. The agency’s guidelines required a formal enforcement action, the report said.

So the OTS was so bad, those it regulated knew they could just ignore its orders. No wonder the banking industry wants to keep them alive. LA Times readers can figure that out from this story. Fortune readers can’t.

But the Fortune piece is worse than that. It glides over the corruption at OTS, which has been widely reported on. Remember the IndyMac scandal where a top OTS official allowed the thrift to backdate its books so it would appear less sick than it was? And that John Reich, the head of OTS, lied to the Treasury about what happened? The bank failed anyway a couple of months after the chicanery, costing taxpayers $11 billion, and it wasn’t the only bank allowed to backdate to cover up its woes.

The guy who encouraged the backdating was involved in the S&L scandal of the late 1980s.

In September 1987 Dochow halted an examination of Lincoln, which was meant to determine whether the bank had an adequate capital cushion, at the request of his then-boss, Federal Home Loan Bank Board Chairman M. Danny Wall, according to a congressional investigation. Attorneys for Lincoln and its chief executive, Keating, had threatened to sue the bank board, OTS’s predecessor, if the exam went ahead.

When the exam finally happened eight months later, it revealed that Lincoln was engaged in unsafe, unsound lending practices, booking inappropriate income and inappropriately sending money to its holding company. The company was placed in conservatorship soon thereafter and taxpayers eventually spent $2.7 billion bailing it out. Dochow was demoted and sent to a regional job.

But there’s more evidence that the culture of OTS was rotten beyond repair. Check out this excellent Washington Post front-page story from November, summed up neatly in its headline, “Banking Regulator Played Advocate Over Enforcer.”

Fortune let banks spin that the OTS was no worse than the other regulators. Here’s what the Post said about that in November:

In the parade of regulators that missed signals or made decisions they came to regret on the road to the current financial crisis, the Office of Thrift Supervision stands out…

OTS adopted an aggressively deregulatory stance toward the mortgage lenders it regulated. It allowed the reserves the banks held as a buffer against losses to dwindle to a historic low.

Fortune doesn’t even mention the agency’s radical deregulation stances of the last several years.

This kind of abject spinning by the industry needs to be aggressively countered by the press.

If you want to really know what’s going on, skip the Fortune poor piece, and head straight to the ones from the Post and the LA Times.

And break out your tiny violin for the banks.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.