Under attack, former WaMu regulator defends oversight, denies he was too cozy with bank execs

Under attack, former WaMu regulator defends role

WASHINGTON — Facing withering attacks for failing to prevent the largest U.S. bank failure ever, a former regulator is defending his actions and pushing back against charges that he was too cozy with bank management.

Questioned about an apologetic and familiar e-mail to Washington Mutual Inc. CEO Kerry Killenger, former Office of Thrift Supervision director John Reich told a Senate panel, “I make no apology for that e-mail whatsoever.”

“I am by nature a humble person, I am a casual person and an informal person,” Reich said. “It is not at all unusual that I address people … by their first name, particularly if I am 10 years older than they are.”

Reich headed OTS, WaMu’s main regulator, in the years before the bank failed. He is testifying before the Permanent Subcommittee on Investigations as it probes the lax oversight that allowed WaMu to flood the financial system with billions of dollars of toxic mortgage investments.

The subcommittee is charging that regulators failed to act for years despite knowing the bank had problems, then argued among themselves as it collapsed.

Panel chairman Sen. Carl Levin, D-Mich., shot back, “It is not only feeble enforcement, it is pitiful enforcement.” He said earlier that OTS “was more of a spectator on the sidelines, a watchdog with no bite, noting problems and making recommendations, but not trying to correct the flaws and failures it saw.”

Reich said he regretted some decisions, but would not apologize despite lawmakers’ invitations.

Levin said officials’ chummy relationships with bank executives made OTS a toothless regulator. In an e-mail released by the 18-month probe, Reich referred to WaMu CEO as “my largest constituent assetwise.”

Reich said he picked up the term “constituent” during 12 years working on Capitol Hill. He said it is not “intended to reflect any sort of sinister or inappropriate relationship” with a regulated bank.

Fees from WaMu made up about 15 percent of the agency’s budget — more than any other single bank.

Addressing the toughness of OTS’ oversight, Reich pointed to failures of supervision at Citigroup Inc. and elsewhere.

Reich bristled at the panel’s statements that WaMu was the biggest financial failure in U.S. history, saying, “In fact, the largest failure in U.S. history was Citi.”

Citi received government support of $45 billion. Officials arranged for WaMu to be purchased by JPMorgan Chase & Co. for $1.89 billion. They did not believe WaMu’s downfall would upend the broader financial system.

A Treasury Department watchdog earlier told the panel that regulators trusted the executives of Washington Mutual to correct risks at the bank but did little to force a change — leading to the bank’s failure.

Treasury Inspector General Eric Thorson said that OTS officials “accepted assurances from WaMu management and its board of directors that problems would be resolved,” but “OTS did not ensure that WaMu corrected those weaknesses.”

WaMu engaged in increasingly risky lending starting in 2002. The bank originated some of the highest-risk mortgages — those that allow borrowers to pay so little their debt level actually increases over time.

It also bought loans from outside mortgage brokers, often without ensuring the loan applications were complete and accurate, the Senate panel charges.

Thorson emphasized that the problem at WaMu was not unique. He said other regulators had made the same mistakes elsewhere.

The mortgages had high rates of default but WaMu nevertheless packaged them into investments and resold them through the financial system.

“Together, WaMu and (its mortgage lender) Long Beach dumped hundreds of billions of dollars of toxic mortgages into the financial system like polluters dumping poison in a river,” Levin said.

The panel will hear later Friday from OTS acting director John Bowman and Sheila Bair, chairman of the Federal Deposit Insurance Corp.

The hearing is part of a series of probes into the causes of the financial crisis. The panel sparred with WaMu executives Tuesday.

Documents released by the panel show OTS officials found glaring problems with WaMu’s lending and risk management starting in 2002 but relied on the bank to correct the issues voluntarily. WaMu repeatedly failed to do so, but the OTS never forced a change, documents show.

Fueled by the housing boom, Washington Mutual’s sales to investors of subprime mortgage securities leapt from $2.5 billion in 2000 to $29 billion in 2006. The 119-year-old thrift, with $307 billion in assets, was sold for $1.9 billion to JPMorgan in a deal brokered by the FDIC.

The FDIC administers the fund that insures regular bank deposits and has backup oversight of all insured banks. Like the OTS, the FDIC recognized problems with WaMu years before the bank’s failure. FDIC officials pressured OTS to take more aggressive action but did not invoke their enforcement authority.

FDIC officials have said they were constrained by a 2002 agreement under which FDIC examiners could enter banks only after they were deemed to be unhealthy. FDIC wanted OTS to downgrade WaMu’s rating but OTS refused to do so, documents show.

But the FDIC’s own watchdog said the agency could have done more.

“FDIC could have taken enforcement action to remedy or prevent unsafe or unsound practices” given OTS reluctance to crack down, FDIC inspector general Jon Rymer said.

The agency was critical of WaMu’s practices and pressed the OTS to take tougher action, the report said. It said OTS blocked the FDIC’s efforts to perform its own examinations.

A separate report issued jointly by Thorson and Rymer faulted the two agencies for infighting that delayed action. But it said OTS bears more blame because it blocked the FDIC’s examiner from accessing information needed to assess the bank’s strength.

“OTS’ supervision did not adequately ensure that WaMu corrected those problems early enough to prevent a failure of the institution,” the inspectors general wrote.