The Orange County Register’s Mathew Padilla has an item about a newly released FDIC inspector general’s report saying the agency’s bank examiners were not only concerned, but camped out at the thrift as early as 2001 (h/t Calculated Risk).
I know regulatory failure at IndyMac, which is expected to cost the FDIC’s insurance fund $10.7 billion, is considered old news. But this report is another reminder that we’re only beginning to understand the culture of corruption that overtook the financial-services industry of the ’00s. Note to reporters: keep digging.
For instance, the FDIC drafted its first “internal problem bank” memo for IndyMac management, the first of many, in September 2001. It boggles the mind to think what went on afterward.
The report breaks the history of regulatory failure into three periods, 2001-2003, when the FDIC is “actively engaged” in monitoring the bank; 2004 to mid-2007, during which the FDIC leaves, returns, and shuffles three FDIC case managers through the bank in an 18-month period; and the end, when a liquidity crisis at Countrywide Financial sends shockwaves through the system, leading regulators to finally seize the bank a year later.
As it happens, my study of national business press coverage before the meltdown, Power Problem, broke the mortgage mania into the same periods. In the first older subprime players, Associates First Capital, First American Mortgage Co., Household International, stumbled or ran into regulatory trouble (and news coverage was surprisingly good) while sub and nonprime lenders, like IndyMac gathered steam; the second phase is what I call the mortgage boom’s Baroque period, 2004-2006, when regulatory and press failures were most pronounced. The last phase, from mid-2007 forward, was merely the whirlwind; the seeds had already been sown.
It’s worth recalling that on-site regulators spotted serious problems at IndyMac during the first phase of their examinations (with my emphasis):
The LIDI [Large Insured Depository Institution] reports prepared during this phase indicated that IMB [IndyMac] had less than adequate capital to support its high-risk profile and aggressive growth, excessive levels of underwriting and documentation deficiencies, high levels of subjectively valued assets, subprime lending [etc]….
In all, FDIC employees spent 8,096 hours in a “back-up capacity” at Indymac, the report says. (The FDIC was not the bank’s primary regulator; that was the Office of Thrift Supervision, then headed by a chainsaw wielding Bush administration appointee [h/t Brad Delong]). It makes you wonder what IndyMac have done had regulators not been on the scene—developed a nuclear bomb?
We often say at The Audit that the lending industry’s radicalization during this period, together with Wall Street’s role in enabling it, has been the great under-explored theme of the financial crisis, a press failure that has distorted the debate over what to do now about everything from bailouts and mortgage fixes to financial and regulatory reform.
Indeed, the best journalistic work on IndyMac was done by a nonprofit, the Center for Responsible Lending, which last year issued a report by staffer and Audit Interviewee Mike Hudson that fleshes out with journalistic fact-gathering what the inspector general refers to as “underwriting and documentation deficiencies”:
Ben Butler, an 80-year-old retiree in Savannah, Georgia got an IndyMac loan in 2005 to build a modular house. IndyMac okayed the mortgage based on an application that said Mr. Butler made $3,825 a month in Social Security income.
One problem: The maximum Social Security benefit at the time was barely half that. Mr. Butler
had no idea his income had been inflated by IndyMac or the mortgage broker who arranged the
deal, his attorney maintains.
In federal court in Pennsylvania, William and Emma Hartman claim a mortgage broker manipulated them into taking out an IndyMac loan by falsely promising their interest rate and monthly payments would decrease in a year or less
Wesley E. Miller, who worked as an underwriter for IndyMac in California from 2005 to 2007,
says that when he rejected a loan, sales managers screamed at him and then went up the line to a
senior vice president and got it okayed. “There’s a lot of pressure when you’re doing a deal and
you know it’s wrong from the get-go….