The OTS was Wamu's chief regulator. Documents provided by Levin showed that the regulator knew about the bank's risky investments and shoddy loan practices but failed to shut them down until depositors essentially made a run on the bank and withdrew $16.4 billion from their accounts.
Friday's hearing will examine how federal regulators saw WaMu's questionable actions, but failed to stop them.
According to Levin, OTS regulators authorized WaMu to participate in high risk lending practices, but repeatedly criticized the bank for inadequate controls that would have warned interested parties about the bank's risky behavior.
Over a 5 year period, OTS examinations cited "less than satisfactory" underwriting standards, "higher than acceptable" underwriting errors, and weak risk management controls. Regulators also spotted a high number of loans where borrowers either provided false information or failed to comply with the bank's credit requirements.
Despite these findings, the OTS took no enforcement action, but rated the bank fundamentally sound from 2003 to 2007 - a year before it collapsed.
Levin surmised that lack of oversight stemmed from WaMu paying a large percentage of the fees that funded the OTS, which created a conflict of interest.
"One wonders if the agency would have existed had Washington Mutual failed," Levin said.
Email exchanges seized by the senator's committee showed OTS Director John Reich referring to WaMu CEO Kerry Killinger as a "constituent." Levin deemed this to be a "disturbing approach" to running an agency.
"The OTS is supposed to work for us, the people," he said, adding, "Regulations only work if the regulators stay at arms length from those they regulate. In this case, the regulator was not at arms length; they were arm in arm."
The Treasury Inspector General's report also found that OTS's supervision did not adequately ensure that WaMu corrected its problems early enough to prevent the bank from failing. The Treasury IG will testify at tomorrow's hearing.