Office of Thrift Supervision
Encyclopedia
The Office of Thrift Supervision (OTS) 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 (that was faulted for its role in the savings and loan crisis
). Like other US federal bank regulators, it is paid by the banks it regulates. The OTS was initially seen as an aggressive regulator, but was later lax. Declining revenues and staff led the OTS to market itself to companies as a lax regulator in order to get revenue.
The OTS also expanded its oversight to companies that were not banks. Some of the companies that failed under OTS supervision during the financial crisis of 2007–2010 include American International Group
(AIG), Washington Mutual
, and IndyMac.
The OTS was implicated in a backdating scandal regarding the balance sheet of IndyMac. Reform proposals from Henry Paulson
, President Barack Obama
, and the U.S. Congress
have all proposed to merge the OTS with the Office of the Comptroller of the Currency
. Section 312 of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated merger of OTS with the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve Board, and the Consumer Financial Protection Bureau (CFPB) as of July 21, 2011. The OTS will cease to exist on October 19, 2011.
, the FDIC, the Federal Reserve System
, and the National Credit Union Administration
.
If banks regulated by OTS fail, revenues for the agency decline; conversely, if the OTS regulates more banks, revenues increase.
. On television, President George H. W. Bush
said,
and "trashed" the predecessor Federal Home Loan Bank Board; soon thereafter, the sign was changed to the "Office of Thrift Supervision". Savings and Loan legislation—the Financial Institutions Reform, Recovery and Enforcement Act of 1989
—"abolished", or renamed, the independent Federal Home Loan Bank Board to the Office of Thrift Supervision and placed it under Department of the Treasury
supervision. On March 22, 1990, in a setback to the George H. W. Bush Administration, Federal District Judge Royce C. Lamberth
ruled that OTS appointments of the former director and acting director, M. Danny Wall and Salvatore R. Martoche
, had been unconstitutional because they were not nominated by the President and confirmed by the Senate
.
In 1992, under Director T. Timothy Ryan, the OTS aggressively shut down troubled Savings and Loan (S&L) outfits, and was criticized by the industry and industry lawyers for not allowing some S&Ls that might survive to have a chance. Ryan contrasted the OTS cleanup of the S&L industry to the former situation.
S&Ls were "dropping like flies" and this presented problems for OTS staff—declining revenues led to a declining staff. The OTS responded by marketing itself at industry meetings. At one such meeting, federal regulators were "announcing a campaign to ease regulation" and they were in a photo-op over a stack of the federal regulations—holding garden shears signaling their intent to cut through them. OTS Director James Gilleran brought a chainsaw
. "Companies got the message." In 1998, OTS approved 43 charters, with more than a third going to non-banks. In 2004 Gilleran said "our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion". The OTS "adopted an aggressively deregulatory stance toward the mortgage lenders it regulated... [and] allowed the reserves the banks held as a buffer against losses to dwindle to a historic low."
In March 2007, a Government Accountability Office
report noted that "In contrast [to the Federal Reserve], a substantial minority of the firms OTS oversees—especially the large, complex ones—have primary businesses other than those traditionally engaged in by thrifts, such as insurance, securities, or commercial activities."
Section 312 of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated merger of OTS with the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve Board, and the Consumer Financial Protection Bureau (CFPB) as of July 21, 2011. The OTS will cease to exist on October 19, 2011.
(GE), AIG, Inc.
, Ameriprise Financial
, American Express
, Morgan Stanley
, and Merrill Lynch
. OTS's consolidated supervision program for GE, AIG Inc., and Ameriprise has been recognized as "equivalent" by the European Union
—allowing these firms to operate their financial businesses in the EU without forming an EU holding company and submitting to supervision in the EU.
The OTS is the primary regulator of Federal Savings Associations
(sometimes referred to as Federal thrifts). Federal savings associations include both Federal Savings Banks and Federal Savings and Loans. The OTS is also responsible for supervising Savings and Loan Holding Companies (SLHCs) and some state-chartered institutions.
stated that the Savings and Loan industry remained vibrant due to the effectiveness of regulators. Reich blamed Indymac's July 11, 2008 failure on $1.3bn of withdrawals in the fortnight following concerns raised from Senator Chuck Schumer over the bank's solvency. Schumer faulted the OTS. The failure of IndyMac Bank
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 July 21, 2008, Mr. 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, Mr. 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, Mr. 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, Mr. 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.
(AIG). In a congressional hearing, after Donald Kohn
described how there was no regulator for AIG Financial Products
or the company overall, Scott Polakoff interrupted. Polakoff stated that it was time for the OTS to take some responsibility because they had been "deemed an acceptable regulator for both US domestic and international operations".
Due to OTS regulation of AIG, the Mayfair
-based (London, UK) AIG Financial Products division was not subject to Financial Services Authority
regulation. OTS regulation allowed France's Commission Bancaire to grant approval for a Paris-based banking subsidiary, Banque AIG. The Mayfair-based AIG Financial Products division then opened under a system which allowed branch openings in member countries after one EU regulator's approval.
That OTS was the primary regulator of AIG has been described as "nonsense" and compared to "the super-heavyweight of the world going up against the 65 lb, 13-year-old, class weakling". AIG operates in 130 countries. The OTS had a small division, led by C.K. Lee, that monitored derivatives
including the credit default swaps at AIG. After a dispute with Goldman Sachs
in 2007 over the value of the credit default swaps, the OTS did not initiate formal enforcement action, but "periodically raised concerns with AIG managers". Other sources of concern were the three credit rating agencies and AIG's auditor PricewaterhouseCoopers
. In March 2008, after AIG disclosed valuation problems, the OTS sent a letter to AIG requesting a "corrective action plan" in 30 days. The division overseeing AIG Financial Products was "quietly disbanded" and AIG missed their deadline.
.
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
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 (that was faulted for its role in the savings and loan crisis
Savings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
). Like other US federal bank regulators, it is paid by the banks it regulates. The OTS was initially seen as an aggressive regulator, but was later lax. Declining revenues and staff led the OTS to market itself to companies as a lax regulator in order to get revenue.
The OTS also expanded its oversight to companies that were not banks. Some of the companies that failed under OTS supervision during the financial crisis of 2007–2010 include American International Group
American International Group
American International Group, Inc. or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in...
(AIG), 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 IndyMac.
The OTS was implicated in a backdating scandal regarding the balance sheet of IndyMac. Reform proposals from Henry Paulson
Henry Paulson
Henry Merritt "Hank" Paulson, Jr. is an American banker who served as the 74th United States Secretary of the Treasury. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs.-Early life and family:...
, President Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
, and the U.S. Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
have all proposed to merge the OTS with the Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
. Section 312 of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated merger of OTS with the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve Board, and the Consumer Financial Protection Bureau (CFPB) as of July 21, 2011. The OTS will cease to exist on October 19, 2011.
Funding
OTS does not receive a government budget; instead, they are paid by the banks they regulate (like other US federal bank regulators). Other regulatory agencies like the OTS include the Office of the Comptroller of the CurrencyOffice of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
, the FDIC, the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
, and the National Credit Union Administration
National Credit Union Administration
The National Credit Union Administration is the United States independent federal agency that supervises and charters federal credit unions...
.
If banks regulated by OTS fail, revenues for the agency decline; conversely, if the OTS regulates more banks, revenues increase.
History
The OTS was established in 1989 in response to the savings and loan crisisSavings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
. On television, President George H. W. Bush
George H. W. Bush
George Herbert Walker Bush is an American politician who served as the 41st President of the United States . He had previously served as the 43rd Vice President of the United States , a congressman, an ambassador, and Director of Central Intelligence.Bush was born in Milton, Massachusetts, to...
said,
and "trashed" the predecessor Federal Home Loan Bank Board; soon thereafter, the sign was changed to the "Office of Thrift Supervision". Savings and Loan legislation—the Financial Institutions Reform, Recovery and Enforcement Act of 1989
Financial Institutions Reform, Recovery and Enforcement Act of 1989
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 , , is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s....
—"abolished", or renamed, the independent Federal Home Loan Bank Board to the Office of Thrift Supervision and placed it under Department of the Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
supervision. On March 22, 1990, in a setback to the George H. W. Bush Administration, Federal District Judge Royce C. Lamberth
Royce C. Lamberth
Royce C. Lamberth is a federal judge in the United States District Court for the District of Columbia, serving as its Chief Judge....
ruled that OTS appointments of the former director and acting director, M. Danny Wall and Salvatore R. Martoche
Salvatore R. Martoche
Salvatore Richard Martoche is an American lawyer and judge.Martoche was born in Buffalo, New York. He received his Bachelor of Science from Canisius College in 1962 and his J.D. from the University of North Dakota School of Law in 1967. He was a public defender before going into private practice...
, had been unconstitutional because they were not nominated by the President and confirmed by the Senate
United States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...
.
In 1992, under Director T. Timothy Ryan, the OTS aggressively shut down troubled Savings and Loan (S&L) outfits, and was criticized by the industry and industry lawyers for not allowing some S&Ls that might survive to have a chance. Ryan contrasted the OTS cleanup of the S&L industry to the former situation.
S&Ls were "dropping like flies" and this presented problems for OTS staff—declining revenues led to a declining staff. The OTS responded by marketing itself at industry meetings. At one such meeting, federal regulators were "announcing a campaign to ease regulation" and they were in a photo-op over a stack of the federal regulations—holding garden shears signaling their intent to cut through them. OTS Director James Gilleran brought a chainsaw
Chainsaw
A chainsaw is a portable mechanical saw, powered by electricity, compressed air, hydraulic power, or most commonly a two-stroke engine...
. "Companies got the message." In 1998, OTS approved 43 charters, with more than a third going to non-banks. In 2004 Gilleran said "our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion". The OTS "adopted an aggressively deregulatory stance toward the mortgage lenders it regulated... [and] allowed the reserves the banks held as a buffer against losses to dwindle to a historic low."
In March 2007, a Government Accountability Office
Government Accountability Office
The Government Accountability Office is the audit, evaluation, and investigative arm of the United States Congress. It is located in the legislative branch of the United States government.-History:...
report noted that "In contrast [to the Federal Reserve], a substantial minority of the firms OTS oversees—especially the large, complex ones—have primary businesses other than those traditionally engaged in by thrifts, such as insurance, securities, or commercial activities."
Section 312 of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated merger of OTS with the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve Board, and the Consumer Financial Protection Bureau (CFPB) as of July 21, 2011. The OTS will cease to exist on October 19, 2011.
Reform
- In 2008, then Treasury Secretary Henry PaulsonHenry PaulsonHenry Merritt "Hank" Paulson, Jr. is an American banker who served as the 74th United States Secretary of the Treasury. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs.-Early life and family:...
proposed merging the OTS with the Office of the Comptroller of the CurrencyOffice of the Comptroller of the CurrencyThe Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
. - On June 17, 2009 President Barack ObamaBarack ObamaBarack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
announced that he would ask the United States CongressUnited States CongressThe United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
to merge OTS into the Office of the Comptroller of the Currency, which regulates federally chartered banks. - In 2009, both the House and Senate proposals included merging OTS with the Office of the Comptroller of the Currency.
- In 2010, the US Senate passed legislation that would strengthen oversight of large financial institutions, but would continue to allow smaller banks to shop for their own regulator, a loophole sought by the Independent Community Bankers of AmericaIndependent Community Bankers of AmericaThe Independent Community Bankers of America is the primary trade group for small U.S. banks. It represents approximately 5,000 small and mid-sized financial institutions that are commonly known as "community banks." The ICBA hosts conventions, publishes the monthly magazine ICBA Independent...
and the American Bankers AssociationAmerican Bankers AssociationThe American Bankers Association is an industry trade group and professional association representing the United States' banking industry...
.
Responsibilities
OTS supervises holding companies as well as thrift institutions. This results in OTS providing consolidated supervision for such well-known firms as General ElectricGeneral Electric
General Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...
(GE), AIG, Inc.
American International Group
American International Group, Inc. or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in...
, Ameriprise Financial
Ameriprise Financial
Ameriprise Financial, Inc. is one of the leading diversified financial services companies in the U.S. Ameriprise Financial engages in business through its...
, American Express
American Express
American Express Company or AmEx, is an American multinational financial services corporation headquartered in Three World Financial Center, Manhattan, New York City, New York, United States. Founded in 1850, it is one of the 30 components of the Dow Jones Industrial Average. The company is best...
, Morgan Stanley
Morgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
, and Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
. OTS's consolidated supervision program for GE, AIG Inc., and Ameriprise has been recognized as "equivalent" by the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
—allowing these firms to operate their financial businesses in the EU without forming an EU holding company and submitting to supervision in the EU.
The OTS is the primary regulator of Federal Savings Associations
Federal savings associations
Federal savings associations , in the United States, are institutions chartered by the Office of Thrift Supervision pursuant to the provisions of the Home Owners' Loan Act, a U.S. federal statute...
(sometimes referred to as Federal thrifts). Federal savings associations include both Federal Savings Banks and Federal Savings and Loans. The OTS is also responsible for supervising Savings and Loan Holding Companies (SLHCs) and some state-chartered institutions.
Institutions regulated
The following are some of the larger institutions that were regulated by the OTS:- American ExpressAmerican ExpressAmerican Express Company or AmEx, is an American multinational financial services corporation headquartered in Three World Financial Center, Manhattan, New York City, New York, United States. Founded in 1850, it is one of the 30 components of the Dow Jones Industrial Average. The company is best...
Bank, FSB – Salt Lake City, UT - American International GroupAmerican International GroupAmerican International Group, Inc. or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in...
– New York City, NY (Note 4) - Astoria Federal Savings and Loan Association – Long Island City, NY
- BankUnitedBankUnitedBankUnited is a savings and loan association based in Miami Lakes, Florida. It was seized by U.S. financial regulators and immediately handed over to a new holding company on 21 May 2009, in the second largest bank failure of the Financial crisis of 2007–2010...
, FSB – Coral Gables, FL now (BankUnited) - Capital OneCapital OneCapital One Financial Corp. is a U.S.-based bank holding company specializing in credit cards, home loans, auto loans, banking and savings products...
, F.S.B. – McLean, VA (Note 1) - Chevy Chase BankChevy Chase BankChevy Chase Bank, F.S.B. was the largest locally-based banking company in the Washington Metropolitan Area. It was acquired by Capital One in 2009 and rebranded as Capital One Bank in 2010. Despite its name, Chevy Chase Bank was a federally chartered thrift regulated by the Office of Thrift...
, Federal Savings Bank – McLean, VA - Citicorp Trust Bank, FSB – Wilmington, DE
- Citizens Bank of Pennsylvania – Philadelphia, PA
- Countrywide Bank, FSB - Alexandria, VA (Note 2 - now a part of Bank of AmericaBank of AmericaBank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...
) - Downey Savings, F.A. – Newport Beach, CA (now a part of US Bank)
- E-Trade Bank – Arlington, VA
- Flagstar Bank, FSB – Troy, MI
- Guaranty BankGuaranty BankGuaranty Bank was a major bank based in Austin, which collapsed in 2009.Formed in 1988 and part of Temple-Inland until 2007 when it was spun off as a standalone company, Guaranty was the second largest bank in Texas, with 162 branches across Texas and California, and at the time of its failure had...
– Austin, TX - H&R Block Bank - Kansas City, MO
- Hudson City Savings Bank, FSB – Paramus, NJ
- IndyMac BankIndyMac BankOneWest Bank is a federal savings bank with 82 retail branches in southern California and approximately $14 billion in deposits as of February 2010....
, FSB – Pasadena, CA (Note 3) - ING BankING GroupThe ING Group is a global financial institution offering retail banking, direct banking, commercial banking, investment banking, asset management, and insurance services. ING is the Dutch member of the Inter-Alpha Group of Banks, a cooperative consortium of 11 prominent European banks...
, FSB – Wilmington, DE - New York Community BankNew York Community BankNew York Community Bank is the savings bank subsidiary of the publicly traded company New York Community Bancorp. New York Community Bancorp is the fourth largest thrift in the United States and the largest in New York State...
– Flushing, NY - Ohio Savings Bank / Amtrust – Cleveland, OH
- PFF Bank & Trust - Rancho Cucamonga, CA (Note 2 - now part of US Bank)
- Sovereign BankSovereign BankSovereign Bank is a wholly owned subsidiary of the Spanish Grupo Santander. Based in Boston, Massachusetts, the bank—whose principal market is in the Northeastern United States—has more than $77 billion in assets, operates 723 retail banking offices, over 2,300 ATMs and employs approximately 8,500...
– Wyomissing, PA - USAAUSAAUnited Services Automobile Association is a Fortune 500 financial services company offering banking, investing, and insurance to people and families that serve, or served, in the United States military. In 2011, there were 8.4 million members. The company reported a net worth of $19.3 billion in...
Federal Savings Bank – San Antonio, TX - Washington MutualWashington MutualWashington 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....
FSB - Seattle, WA (Note 2 - now a part of JPMorgan Chase) - Wilmington Savings Fund Society, FSBWSFS BankWilmington Savings Fund Society, FSB, branded as WSFS Bank, is a federal savings bank headquartered in Wilmington, Delaware, U.S., and is the retail banking subsidiary of WSFS Financial Corporation. The bank operates 41 retail branches in Delaware, Pennsylvania and Virginia...
- Wilmington, DE
Indymac
In March 2008, OTS Director John M. ReichJohn M. Reich
John M. Reich was sworn in January 15, 2001, as Director of the Federal Deposit Insurance Corporation 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...
stated that the Savings and Loan industry remained vibrant due to the effectiveness of regulators. Reich blamed Indymac's July 11, 2008 failure on $1.3bn of withdrawals in the fortnight following concerns raised from Senator Chuck Schumer over the bank's solvency. Schumer faulted the OTS. The failure of 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....
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 July 21, 2008, Mr. 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, Mr. 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, Mr. 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, Mr. 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.
AIG
The OTS was pressed by the Senate Banking Committee to admit partial blame for the failure of American International GroupAmerican International Group
American International Group, Inc. or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in...
(AIG). In a congressional hearing, after Donald Kohn
Donald Kohn
Donald Lewis Kohn is an American economist who served as the former Vice Chairman of the Board of Governors of the Federal Reserve System. He is considered a moderate dove on fiscal policy. He retired after 40 years at the central bank in September, 2010.-Early life and family:Kohn was born in...
described how there was no regulator for 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...
or the company overall, Scott Polakoff interrupted. Polakoff stated that it was time for the OTS to take some responsibility because they had been "deemed an acceptable regulator for both US domestic and international operations".
Due to OTS regulation of AIG, the Mayfair
Mayfair
Mayfair is an area of central London, within the City of Westminster.-History:Mayfair is named after the annual fortnight-long May Fair that took place on the site that is Shepherd Market today...
-based (London, UK) AIG Financial Products division was not subject to Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
regulation. OTS regulation allowed France's Commission Bancaire to grant approval for a Paris-based banking subsidiary, Banque AIG. The Mayfair-based AIG Financial Products division then opened under a system which allowed branch openings in member countries after one EU regulator's approval.
That OTS was the primary regulator of AIG has been described as "nonsense" and compared to "the super-heavyweight of the world going up against the 65 lb, 13-year-old, class weakling". AIG operates in 130 countries. The OTS had a small division, led by C.K. Lee, that monitored derivatives
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
including the credit default swaps at AIG. After a dispute with Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
in 2007 over the value of the credit default swaps, the OTS did not initiate formal enforcement action, but "periodically raised concerns with AIG managers". Other sources of concern were the three credit rating agencies and AIG's auditor PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms....
. In March 2008, after AIG disclosed valuation problems, the OTS sent a letter to AIG requesting a "corrective action plan" in 30 days. The division overseeing AIG Financial Products was "quietly disbanded" and AIG missed their deadline.
Locations
In addition to being headquartered in Washington D.C., OTS has regional offices in Atlanta, Dallas, Jersey City, San Francisco, and ChicagoChicago
Chicago is the largest city in the US state of Illinois. With nearly 2.7 million residents, it is the most populous city in the Midwestern United States and the third most populous in the US, after New York City and Los Angeles...
.
External links
- Banking Regulator Played Advocate Over Enforcer: Agency Let Lenders Grow Out of Control, Then Fail Washington Post 23 November 2008.
- Information about OTS from hoovers.com