ProPublica Advances OTS Story

John Reich’s tenure at The Office of Thrift Supervision was dismal. We’ve known that for a while. The Washington Post wrote at length about its backward approach to regulation under Reich, who resigned on Friday, and the revelation that a top OTS regulator knowingly allowed banks like IndyMac to falsify reports on their capital reserves got wide play.

But it still seems as if there’s more “there” there. So it was nice to see ProPublica come out with some good reporting today on the regulatory turf battles by OTS that have cost the government and depositors tens of millions of dollars.

It turns out that Reich, who’s blamed everyone but himself, lied to the government about the IndyMac scandal.

When Timothy Geithner became Treasury secretary, the director of the OTS, John Reich, sent him a letter explaining what had happened with the backdating. The letter included a chronology where Reich spread the blame. He suggested that a day after the OTS had allowed IndyMac to backdate the $18 million, the agency informed the FDIC, which did not object.

But ProPublica has learned that the OTS did not volunteer information about the $18 million. The FDIC learned of its existence only after it asked the OTS why IndyMac hadn’t finished its financial filings for March. Even then, the OTS didn’t disclose that the $18 million wasn’t available in March, according to the FDIC. The FDIC discovered the truth after IndyMac failed and it took over the bank.

“[W]e were notified by the OTS on May 10th that IndyMac had an $18 million note receivable that was eligible to be included in their capital calculation for the first quarter of 2008,” Andrew Gray, the FDIC’s director of communication, told ProPublica in an e-mail. “The FDIC did not learn that there was in fact no note receivable until after the institution was closed on July 11, 2008.”

So not only did the Reich lie to the newly ascended Treasury secretary, the OTS also lied to the FDIC. And this was not about minor bureaucratic matters. The OTS essentially backdated IndyMac’s capital to allow it to remain above regulatory minimums. Had it not signed off on this, IndyMac would have been listed as a troubled institution earlier and would likely have been seized by the FDIC a couple of months earlier.

That matters because as ProPublica reports, IndyMac was scrambling to take on deposits to shore up its capital against its huge losses. That has resulted in tens of millions of dollars lost by depositors, and ProPublica says Reich doesn’t care:

IndyMac’s net uninsured deposits increased by $91 million between the March 31 reporting period and June 30, the last reporting period before the bank failed. Those who flocked to IndyMac during this period lost most of their money above the $100,000 insured by the FDIC at the time.

Reich didn’t offer much sympathy for those depositors. He told Geithner they were mistaken to look to regulators for guidance.

Which was a key ingredient Reich’s and the Bush Administration’s regulatory (or since that name has a negative connotation in certain circles, think of it as “watchdog”) philosophy. Reich was particularly in cahoots with the banks he regulated, as seen in the headline of the Post’s November front-page story:

Banking Regulator Played Advocate Over Enforcer Agency Let Lenders Grow Out of Control, Then Fail

This one bank failure cost the U.S. taxpayers $10.7 billion. It’s not clear how much of that was caused by OTS’s fraud. Most of it wasn’t. But one dollar is too much.

Good reporting by ProPublica.

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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.