Report Unearths Regulatory Failures in IndyMac Case

JEFFREY BROWN:

As the subprime meltdown cascaded this summer, the government had to step in and seize control of IndyMac, a California bank. But a new investigation finds that, two months before the FDIC stepped in, a different government regulator may have allowed IndyMac to alter its records to appear to be in better financial health than it really was.

For more, we turn to Karen Shaw Petrou, managing partner of the consulting firm Federal Financial Analytics. She advises financial service executives on political and regulatory risk.

And Binyamin Appelbaum, banking reporter for the Washington Post.

Well, Binyamin, first, who was this regulator? And what is he alleged to have done?

BINYAMIN APPELBAUM, Washington Post:

His name is Darrell Dochow. And he was the senior official for the Office of Thrift Supervision in the western United States.

And what apparently happened is that IndyMac Bank Corp., which was a large California mortgage-lender, went to Mr. Dochow in May of this year and said to him, "We would like to alter our financial filings. We would like to include money that we have received in May in a tally of the money that we had in March." And that had the effect of making the company appear healthier than it actually was.

And Mr. Dochow said, yes, you can do that. He told them it was OK to falsify those records. The company did it, gave the appearance that it was healthier than it actually was, and two months later it failed.

This is all according to a new investigative report by the inspector general of the Treasury Department.

JEFFREY BROWN:

The bank went to him and said, "We'd like to do this," knowingly that it was falsifying information? Is that what it looks like?

BINYAMIN APPELBAUM:

According to the inspector general, that's what it looks like. And he went on to say that other banks did the same thing, that this regulatory agency allowed other banks to do the same thing.

JEFFREY BROWN:

Let's come back to the larger issue here, but, Karen Petrou, first, on this case, so if the bank is able to make itself look like it's in better shape than it is, why is that so important in this particular case? What happened?

KAREN SHAW PETROU, Federal Financial Analytics:

It's like any of us saying to the bank, "I really wish I had had my checkbook balanced three months ago, but now I've got some money, so would you please count it towards my January balance?"

It creates a false picture of your safety and soundness. And in IndyMac's case, that was particularly troublesome, because OTS should have known — it was evident from a great deal of public information that this bank was in dire circumstances at the very point at which it was being given a pass on its capital account.