Senators blast lax role of regulator in bank collapse

Lawmakers blasted today the lax role of a federal regulator that ignored major problems leading to the failure of one of the nation's largest banks. 

Probing into the catalysts of the 2008 financial crisis, Senators agreed that the Office of Thrift Management didn't do its job to stop the collapse of Washington Mutual, during a hearing Friday of the Permanent Subcommittee on Investigations. 

"Instead of policing the economic assault, OTS was more a spectator on the sidelines, a watchdog with no bite, noting problems and making recommendations but not acting to correct the flaws and failures that it saw," said panel Chairman Carl Levin (D-Mich.). "At times, it even acted like a WaMu guard dog trying to keep the FDIC at bay."

Levin said an investigation into what happened found "an ineffective bank regulatory culture hindered by weak standards, lack oversight and agent infighting."

Washington Mutual failed in 2008 after years of loading its portfolio with nearly $80 billion in high-risk subprime loans. 

Ranking member Tom Coburn (R-Okla.) acknowledged that an investigation found that OTS's employees were aware of the high-risk profit-generating strategy, recommended changes but didn't follow through or hold the thrift accountable for fixing the problems. 

He said 545 separate findings of problems were found at the thrift between 2000 and 2008 and 41 percent of the problems were still outstanding when the bank failed. 

"OTS noted weak risk management, poor underwriting in 2003," Coburn said. "They never even took one informal enforcement action against WaMu until 2008, and that was only after experiencing losses on the products, and they never took a formal enforcement action against WaMu."

Routine practice for OTS was to issue recommendations and then take the bank's word that changes had been made, said Eric Thorson, inspector general of the Treasury Department. Thorson explained that OTS examiners would look at the reports then sign off without any follow up. 

Another witness at the hearing, Jon Rymer, inspector general with the FDIC, said Washington Mutual's situation was unique and it was the only bank that OTS was allowing to track its own recommendations. 

In looking into who failed to follow through, the investigation found though that the examiners on the ground were doing their jobs and the problems came higher up the management chain in OTS. 

"This is a great example of regulatory failure, a huge example of regulatory failure," Coburn said, who called OTS and enabler of the problem. 

"I think the management of the regulatory framework failed miserably in this case," Coburn said. 

Rymer confirmed a case where an OTS regional director overrode decisions of his own people and allowed for a much larger lax resolution that was written by the bank. 

"The culture is set at the top," Levin said. "They are supposed to be regulated by the regulator. They're supposed to be the cop ... when you revise documents which have teeth in them, which they did at the top, and pull those teeth out of the documents, that sets a tone which is transmitted to people below in the field."