John M. Reich
Encyclopedia
John M. Reich was sworn in January 15, 2001, as Director of the Federal Deposit Insurance Corporation
(FDIC) following an appointment by President of the United States Bill Clinton
and served on the FDIC Board for eight years. Reich served as Vice Chairman of the Board of the FDIC from November 2002 until he was nominated on June 7, 2005 by President George W. Bush
to be Director of the Office of Thrift Supervision
(OTS), and the U.S. Senate confirmed his nomination on July 29, 2005. He also served as Acting Chairman of the FDIC from July to August 2001. As Deputy Chairman, 2001–2005, Reich served as the Chair of FDIC's Audit Committee during a time when the General Accounting Office issued reportable conditions regarding information security at the Corporation.
Reich took the oath of Director of OTS on August 9, 2005 and continued in that capacity as well as serving as a member of the FDIC Board of Directors until he resigned on February 12, 2009 and stepped down February 27, 2009.
, AIG
, Washington Mutual
, Downey Financial and Countrywide Financial
. These constituted some of the largest financial failures in modern history to that point. OTS later acknowledged that in the case of AIG it failed to take regulatory actions it should appropriately have taken as early as 2004. In the case of IndyMac, after Director Reich and OTS both denied responsibility for the failure, the Office of Inspector General of the United States Treasury found that OTS both inappropriately failed to act and inappropriately and knowingly allowed regulatory misconduct.
On June 17, 2009, President Barack Obama announced his intention to disband the Office of Thrift Supervision as part of a program of regulatory reform, citing "loopholes that have allowed important institutions to cherry-pick among banking rules".
, Reich spent 23 years as a community banker in Illinois
and Florida
, including 10 years as President and CEO of the National Bank of Sarasota, in Sarasota, Florida
, which he led as it grew from a two-office, $17 million institution to a $450 million institution with 19 offices.
Reflecting on his community banking experience, Mr. Reich, then Director of OTS, said in remarks to the New York Bankers Association, New York, NY, April 6, 2006:
Reich also served 12 years on the staff of U.S. Senator Connie Mack
(R-FL), before joining the FDIC. From 1998 through 2000, he was Senator Mack's Chief of Staff
, directing and overseeing all of the Senator's offices and committee activities, including those at the Senate Banking Committee.
On April 6, 2006, Reich voiced his concern that banks were allowing an overall slippage in underwriting due to increased competition in certain market segments and geographical areas as banks tried to feed loan volumes after the real estate market peaked. He also cited the increased sales of alternative or nontraditional mortgage lending products like “interest-only” and “pay option” adjustable rate mortgage (ARMs). These loan products were legitimate and valuable, according to Reich, suggesting the main danger was from institutions with limited experience in these loans and managing the associated risks, particularly the inherent credit risks. However, of the five leading issuers of option adjustable-rate mortgages, three — IndyMac Bank
, Washington Mutual
and Downey Financial — would fail. Countrywide Financial
, the largest, was forced to sell itself to Bank of America for a small fraction of its previous value or fail. AIG Financial Products
, regulated by OTS, would also fail, . AIG FP was a major issuer of Credit Default Swaps
related to the securitized, outstanding interest of these and other subprime loans.
On July 21, 2008, following the failure of IndyMac but before the failures of Washington Mutual, AIG and Downey Financial, Reich described his agency's "Financial Institution Reform Initiative":
In those same remarks, he described the role he felt his agency should play:
on July 11, 2008, was the fourth largest bank failure
in United States
history. Prior to IndyMac's failure on July 11, 2008, the bank had come to rely heavily on higher cost, less stable, brokered deposits, as well as secured borrowings, to fund its operations. The bank had focused on stated income and other aggressively underwritten loans in areas with rapidly escalating home prices, particularly in California and Florida.
On June 26, 2008, Senator Charles E. Schumer publicly released letters he had previously sent to Reich's agency and others, suggesting that IndyMac bank was in danger of failing and that the danger was being ignored. In the weeks that followed, Director Reich blamed Schumer's release of the letters for instigating IndyMac's collapse.
On July 21, 2008, Reich described "interference with the regulatory process by reporting and disseminating speculation about the condition of financial institutions, thereby undermining public confidence in those institutions and causing serious harm" as a contributor to the failure of IndyMac as well as Fannie Mae, Freddie Mac and Lehman Brothers
.
On December 22, 2008, Reich removed his agency's western director, Darrel W. Dochow for allowing IndyMac to backdate a capital infusion of $18 million from its parent company so that the bank would appear "well capitalized" in its 10-Q for the period ending March 31, 2008. According to a source with knowledge of the incident, at another point Mr. Dochow limited the scope of a review by OTS regulators of IndyMac's portfolio of loans and other assets, overruling the advice of others in the agency. Mr. Dochow played a central role in the savings-and-loan scandal of the 1980s, overriding a recommendation by federal bank examiners in San Francisco to seize Lincoln Savings, the giant savings and loan owned by Charles Keating. Mr. Reich called the backdating irregularity “a relatively small factor” in the collapse of IndyMac.
On February 12, 2009, Reich resigned, announcing he would step down February 27.
On February 26, 2009, the Treasury Department's inspector general released a report citing laxity at the OTS under Reich for adding significantly to the $10.7 billion in FDIC losses from the IndyMac failure, as well as the estimated $270 million in losses suffered by uninsured depositors. The report concluded that, under the law, OTS should have taken Prompt Corrective Action against IndyMac in May, 2008.
Commenting on the report, Inspector General Eric Thorson dismissed Reich's claim that Senator Schumer's letters caused the failure. Marla Freedman, the assistant inspector general for audit, detailed a pattern of excess risk-taking and abuse of the lending process at IndyMac and the OTS's consistent and concurrent failure to act. Mr. Reich said in a letter to the inspector general that he agreed with the agency's filings.
On February 27, 2009, Reich stepped down amidst the continuing audit of backdating at IndyMac and four other institutions. Scott Polakoff, OTS senior deputy director and chief operating officer, hired under Mr. Reich, became acting director on his departure.
On March 26, 2009, Polakoff was removed and placed on leave by United States Secretary of the Treasury
Timothy Geithner, amidst an announced further review and investigation of the backdating scandal by the U.S. Treasury's Inspector General.
In a March 2007 report on financial regulation, the Government Accountability Office looked at the OTS and found "a disparity between the size of the agency and the diverse firms it oversees." The report noted a lack of specialized skills at the OTS, which had just one insurance specialist to oversee several insurers such as AIG.
In March 2008, Acting Director Polakoff admitted told a U.S. Senate panel that the Office of Thrift Supervision “fell short” in its oversight of American International Group Inc. Polakoff admitted that the regulator “did not sufficiently assess the susceptibility of highly illiquid, complex instruments,” to ratings downgrades and "should have directed the company to stop originating credit-default swap products before December 2005.” In response to a Senator Mel Martinez's remark that OTS might be "the regulator that we've been looking for", Polakoff acknowledged that OTS was "the one".
. He has also served as a Board member for a number of civic organizations, and was active for many years in youth baseball programs in Sarasota, FL. In Washington, DC, Reich has served as an elder and trustee of the National Presbyterian Church, and chairman of the National Presbyterian Church Fund for Charitable Giving. In March 2009, he became a member of the Board of Directors of the Senior Housing Crime Prevention Foundation.
and an M.B.A. from the University of South Florida
. He is also a graduate of Louisiana State University
's
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) following an appointment by President of the United States Bill Clinton
Bill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...
and served on the FDIC Board for eight years. Reich served as Vice Chairman of the Board of the FDIC from November 2002 until he was nominated on June 7, 2005 by President George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
to be Director of the Office of Thrift Supervision
Office of Thrift Supervision
The Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
(OTS), and the U.S. Senate confirmed his nomination on July 29, 2005. He also served as Acting Chairman of the FDIC from July to August 2001. As Deputy Chairman, 2001–2005, Reich served as the Chair of FDIC's Audit Committee during a time when the General Accounting Office issued reportable conditions regarding information security at the Corporation.
Reich took the oath of Director of OTS on August 9, 2005 and continued in that capacity as well as serving as a member of the FDIC Board of Directors until he resigned on February 12, 2009 and stepped down February 27, 2009.
OTS During and After Reich
Under Director Reich, the Office of Thrift Supervision saw the failure or near-failure of at least five major institutions - IndyMac BankIndyMac Bank
OneWest Bank is a federal savings bank with 82 retail branches in southern California and approximately $14 billion in deposits as of February 2010....
, AIG
AIG
AIG is American International Group, a major American insurance corporation.AIG may also refer to:* And-inverter graph, a concept in computer theory* Answers in Genesis, a creationist organization in the U.S.* Arta Industrial Group in Iran...
, Washington Mutual
Washington Mutual
Washington Mutual, Inc. , abbreviated to WaMu, was a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association until its collapse in 2008....
, Downey Financial and Countrywide Financial
Countrywide Financial
Bank of America Home Loans is the mortgage unit of Bank of America. Bank of America Home Loans is composed of:*Mortgage Banking, which originates purchases, securitizes, and services mortgages. In 2008, Bank of America purchased the failing Countrywide Financial for $4.1 billion...
. These constituted some of the largest financial failures in modern history to that point. OTS later acknowledged that in the case of AIG it failed to take regulatory actions it should appropriately have taken as early as 2004. In the case of IndyMac, after Director Reich and OTS both denied responsibility for the failure, the Office of Inspector General of the United States Treasury found that OTS both inappropriately failed to act and inappropriately and knowingly allowed regulatory misconduct.
On June 17, 2009, President Barack Obama announced his intention to disband the Office of Thrift Supervision as part of a program of regulatory reform, citing "loopholes that have allowed important institutions to cherry-pick among banking rules".
Career highlights
Prior to coming to Washington, D.C.Washington, D.C.
Washington, D.C., formally the District of Columbia and commonly referred to as Washington, "the District", or simply D.C., is the capital of the United States. On July 16, 1790, the United States Congress approved the creation of a permanent national capital as permitted by the U.S. Constitution....
, Reich spent 23 years as a community banker in Illinois
Illinois
Illinois is the fifth-most populous state of the United States of America, and is often noted for being a microcosm of the entire country. With Chicago in the northeast, small industrial cities and great agricultural productivity in central and northern Illinois, and natural resources like coal,...
and Florida
Florida
Florida is a state in the southeastern United States, located on the nation's Atlantic and Gulf coasts. It is bordered to the west by the Gulf of Mexico, to the north by Alabama and Georgia and to the east by the Atlantic Ocean. With a population of 18,801,310 as measured by the 2010 census, it...
, including 10 years as President and CEO of the National Bank of Sarasota, in Sarasota, Florida
Sarasota, Florida
Sarasota is a city located in Sarasota County on the southwestern coast of the U.S. state of Florida. It is south of the Tampa Bay Area and north of Fort Myers...
, which he led as it grew from a two-office, $17 million institution to a $450 million institution with 19 offices.
Reflecting on his community banking experience, Mr. Reich, then Director of OTS, said in remarks to the New York Bankers Association, New York, NY, April 6, 2006:
I am deeply concerned that community banks will continue to disappear from our landscape, with local communities and consumers across the country being the ultimate losers. The loss of these community human resources not only impacts local banking relationships with small businesses and individuals, it reduces human resources available for leadership of community service organizations on which senior bank officers and their directors serve. There is an unquantified social cost to industry consolidation that is attributable to the weight of accumulated regulatory burden. This is a growing problem in communities across the country, with implications that are largely ignored by policymakers.
Reich also served 12 years on the staff of U.S. Senator Connie Mack
Connie Mack III
Cornelius Alexander McGillicuddy III , popularly known as Connie Mack, is a former Republican politician. He served as a member of the United States House of Representatives from Florida from 1983 to 1989 and then as a Senator from 1989 to 2001. He served as chairman of the Senate Republican...
(R-FL), before joining the FDIC. From 1998 through 2000, he was Senator Mack's Chief of Staff
Chief of Staff
The title, chief of staff, identifies the leader of a complex organization, institution, or body of persons and it also may identify a Principal Staff Officer , who is the coordinator of the supporting staff or a primary aide to an important individual, such as a president.In general, a chief of...
, directing and overseeing all of the Senator's offices and committee activities, including those at the Senate Banking Committee.
Regulation and reform
An ardent foe of regulatory red tape, Reich dedicated much effort and public testimony toward reducing regulatory burdens on financial institutions and, beginning in 2005, led a three-year interagency review of all federal bank regulations, mandated under the Economic Growth and Regulatory Paperwork Reduction Act of 1996. Then Director of OTS, Reich championed more regulatory independence and discretion for his agency in the cause of efficiency and regulatory burden relief.On April 6, 2006, Reich voiced his concern that banks were allowing an overall slippage in underwriting due to increased competition in certain market segments and geographical areas as banks tried to feed loan volumes after the real estate market peaked. He also cited the increased sales of alternative or nontraditional mortgage lending products like “interest-only” and “pay option” adjustable rate mortgage (ARMs). These loan products were legitimate and valuable, according to Reich, suggesting the main danger was from institutions with limited experience in these loans and managing the associated risks, particularly the inherent credit risks. However, of the five leading issuers of option adjustable-rate mortgages, three — IndyMac Bank
IndyMac Bank
OneWest Bank is a federal savings bank with 82 retail branches in southern California and approximately $14 billion in deposits as of February 2010....
, Washington Mutual
Washington Mutual
Washington Mutual, Inc. , abbreviated to WaMu, was a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association until its collapse in 2008....
and Downey Financial — would fail. Countrywide Financial
Countrywide Financial
Bank of America Home Loans is the mortgage unit of Bank of America. Bank of America Home Loans is composed of:*Mortgage Banking, which originates purchases, securitizes, and services mortgages. In 2008, Bank of America purchased the failing Countrywide Financial for $4.1 billion...
, the largest, was forced to sell itself to Bank of America for a small fraction of its previous value or fail. AIG Financial Products
AIG Financial Products
AIG Financial Products Corporation. is a subsidiary of the American International Group, headquartered in Fairfield, CT, with major operations in London, it is currently in the process of winding down all of its operations. The collapse of AIG Financial Products is considered to have played a...
, regulated by OTS, would also fail, . AIG FP was a major issuer of Credit Default Swaps
Credit default swap
A credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...
related to the securitized, outstanding interest of these and other subprime loans.
On July 21, 2008, following the failure of IndyMac but before the failures of Washington Mutual, AIG and Downey Financial, Reich described his agency's "Financial Institution Reform Initiative":
I believe Congress should help create a level, scrupulous and well-regulated playing field so consumers and investors have confidence in the transparency, fairness and integrity of all mortgage originations. The standards of the under-regulated segments of the market must be raised to the level followed by the federally regulated segments. All entities that originate home loans should be required to comply with basic credit principles, such as conducting a reasonable assessment of each borrower’s ability to repay.
In those same remarks, he described the role he felt his agency should play:
Selecting a strong regulator to monitor this new level playing field is critical for
protecting consumers and restoring market confidence. I won’t pretend to be a
disinterested party, but I know that the OTS has the most extensive expertise of any
regulatory agency in the oversight and supervision of mortgage banking operations and I
believe the OTS is in the best position to assume federal authority to regulate the
currently unregulated players in mortgage banking.
Role In IndyMac Bank controversy
The failure of IndyMac BankIndyMac Bank
OneWest Bank is a federal savings bank with 82 retail branches in southern California and approximately $14 billion in deposits as of February 2010....
on July 11, 2008, was the fourth largest bank failure
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
in United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
history. Prior to IndyMac's failure on July 11, 2008, the bank had come to rely heavily on higher cost, less stable, brokered deposits, as well as secured borrowings, to fund its operations. The bank had focused on stated income and other aggressively underwritten loans in areas with rapidly escalating home prices, particularly in California and Florida.
On June 26, 2008, Senator Charles E. Schumer publicly released letters he had previously sent to Reich's agency and others, suggesting that IndyMac bank was in danger of failing and that the danger was being ignored. In the weeks that followed, Director Reich blamed Schumer's release of the letters for instigating IndyMac's collapse.
On July 21, 2008, Reich described "interference with the regulatory process by reporting and disseminating speculation about the condition of financial institutions, thereby undermining public confidence in those institutions and causing serious harm" as a contributor to the failure of IndyMac as well as Fannie Mae, Freddie Mac and Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
.
On December 22, 2008, Reich removed his agency's western director, Darrel W. Dochow for allowing IndyMac to backdate a capital infusion of $18 million from its parent company so that the bank would appear "well capitalized" in its 10-Q for the period ending March 31, 2008. According to a source with knowledge of the incident, at another point Mr. Dochow limited the scope of a review by OTS regulators of IndyMac's portfolio of loans and other assets, overruling the advice of others in the agency. Mr. Dochow played a central role in the savings-and-loan scandal of the 1980s, overriding a recommendation by federal bank examiners in San Francisco to seize Lincoln Savings, the giant savings and loan owned by Charles Keating. Mr. Reich called the backdating irregularity “a relatively small factor” in the collapse of IndyMac.
On February 12, 2009, Reich resigned, announcing he would step down February 27.
On February 26, 2009, the Treasury Department's inspector general released a report citing laxity at the OTS under Reich for adding significantly to the $10.7 billion in FDIC losses from the IndyMac failure, as well as the estimated $270 million in losses suffered by uninsured depositors. The report concluded that, under the law, OTS should have taken Prompt Corrective Action against IndyMac in May, 2008.
Commenting on the report, Inspector General Eric Thorson dismissed Reich's claim that Senator Schumer's letters caused the failure. Marla Freedman, the assistant inspector general for audit, detailed a pattern of excess risk-taking and abuse of the lending process at IndyMac and the OTS's consistent and concurrent failure to act. Mr. Reich said in a letter to the inspector general that he agreed with the agency's filings.
On February 27, 2009, Reich stepped down amidst the continuing audit of backdating at IndyMac and four other institutions. Scott Polakoff, OTS senior deputy director and chief operating officer, hired under Mr. Reich, became acting director on his departure.
On March 26, 2009, Polakoff was removed and placed on leave by United States Secretary of the Treasury
United States Secretary of the Treasury
The Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...
Timothy Geithner, amidst an announced further review and investigation of the backdating scandal by the U.S. Treasury's Inspector General.
Role in AIG Controversy
In a May 2006 congressional hearing, Reich addressed the issue of OTS's regulating of international financial holding companies through its special office of Complex and International Organizations. Reich said he was working to ensure that the financial companies under his watch wouldn't be burdened by added "regulatory scrutiny" in Europe. Among other things, he said the OTS designation meant U.S. companies operating in Europe could avoid testing "the qualifications of key personnel" and requirements to keep more cash and assets in reserve to cushion against losses.In a March 2007 report on financial regulation, the Government Accountability Office looked at the OTS and found "a disparity between the size of the agency and the diverse firms it oversees." The report noted a lack of specialized skills at the OTS, which had just one insurance specialist to oversee several insurers such as AIG.
In March 2008, Acting Director Polakoff admitted told a U.S. Senate panel that the Office of Thrift Supervision “fell short” in its oversight of American International Group Inc. Polakoff admitted that the regulator “did not sufficiently assess the susceptibility of highly illiquid, complex instruments,” to ratings downgrades and "should have directed the company to stop originating credit-default swap products before December 2005.” In response to a Senator Mel Martinez's remark that OTS might be "the regulator that we've been looking for", Polakoff acknowledged that OTS was "the one".
Civic activities
Reich's community service includes serving as Chairman of the Board of Trustees of a public hospital facility in Ft. Myers, Florida, and Chairman of the Board of Directors of the Sarasota Family YMCAYMCA
The Young Men's Christian Association is a worldwide organization of more than 45 million members from 125 national federations affiliated through the World Alliance of YMCAs...
. He has also served as a Board member for a number of civic organizations, and was active for many years in youth baseball programs in Sarasota, FL. In Washington, DC, Reich has served as an elder and trustee of the National Presbyterian Church, and chairman of the National Presbyterian Church Fund for Charitable Giving. In March 2009, he became a member of the Board of Directors of the Senior Housing Crime Prevention Foundation.
Education
Reich holds a B.S. degree from Southern Illinois UniversitySouthern Illinois University
Southern Illinois University is a state university system based in Carbondale, Illinois, in the Southern Illinois region of the state, with multiple campuses...
and an M.B.A. from the University of South Florida
University of South Florida
The University of South Florida, also known as USF, is a member institution of the State University System of Florida, one of the state's three flagship universities for public research, and is located in Tampa, Florida, USA...
. He is also a graduate of Louisiana State University
Louisiana State University
Louisiana State University and Agricultural and Mechanical College, most often referred to as Louisiana State University, or LSU, is a public coeducational university located in Baton Rouge, Louisiana. The University was founded in 1853 in what is now known as Pineville, Louisiana, under the name...
's