Two months before IndyMac Bancorp collapsed in July, at a cost of $8.9 billion to taxpayers, a top federal banking regulator allowed the bank to backdate a capital infusion and gloss over its deepening problems, the Treasury Department’s independent investigator said Monday.
In what industry analysts said was an example of the excessively cozy relations between high-flying subprime lenders and federal bank regulators, the Office of Thrift Supervision’s West Coast director allowed IndyMac’s parent company to backdate an $18 million contribution to preserve its status as a “well-capitalized” institution.
Investigators reported that similar officially approved backdating appears to have occurred at other financial institutions, though they did not name them.
IndyMac, based in Pasadena, Calif., was one of the nation’s biggest subprime mortgage lenders at the time. But analysts said it was already in trouble when the maneuver occurred, because of rising default rates and a big stockpile of subprime loans on its books that investors abruptly refused to buy.
The Office of Thrift Supervision’s western regional director, Darrel W. Dochow, allowed IndyMac Bank to receive $18 million from its parent company on May 9 but to book the money as having arrived on March 31, according to the Treasury Department’s inspector general, Eric M. Thorson. The backdated capital infusion allowed IndyMac to plug a hole that its auditors had belatedly found in the bank’s financial results for the first quarter. If IndyMac had not been able to plug that hole retroactively, its reserves would have slipped below the minimum level that regulators require for classifying banks as well capitalized.
Though the $18 million transaction was minuscule in comparison to IndyMac’s $32 billion in assets, it had tremendous significance. If IndyMac had lost its well-capitalized status it would not have been allowed to accept “brokered deposits” from other financial institutions. Brokered deposits are typically high-yielding certificates of deposit arranged by brokers and sold to savings and loans. IndyMac relied heavily on brokered deposits, which amounted to $6.8 billion or 37 percent of its total deposits last spring.
“This is very significant in terms of whether IndyMac was over or under the O.T.S.’s thresholds for capital,” said Bert Ely, a veteran banking analysts in Alexandria, Va. “But what’s really troubling is that it seems to have been going on elsewhere.”
The episode had a link to the savings-and-loan scandals of the late 1980s, which cost the federal government more than $100 billion.
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. Lincoln became one of the biggest institutions to collapse. Mr. Keating served four and a half years in prison before his fraud and racketeering convictions were overturned. He later pleaded guilty to more limited charges, and was sentenced to the time already served.
Senator Charles E. Grassley, Republican of Iowa and the ranking member of the Senate Finance Committee, said the regulator’s behavior raised new doubts about the Office of Thrift Supervision, which has long had a reputation for being the most permissive of all the federal bank regulators.
“The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them,” Mr. Grassley said in a statement. “If the Office of Thrift Supervision is turning a blind eye to capitalization requirements, Congress needs to know.”
John M. Reich, director of the Office of Thrift Supervision, said the $18 million maneuver was “a relatively small factor” in the collapse of IndyMac. But he said he had removed Mr. Dochow from his job as the agency’s western director pending the results of a separate inquiry.
Mr. Thorson, the Treasury’s inspector general, described an intricate process by which the Office of Thrift Supervision, or at least Mr. Dochow, had quietly helped IndyMac paper over its difficulties.
In a letter to Mr. Grassley, Mr. Thorson said that IndyMac’s auditor, Ernst & Young, had discovered several issues in early May that required IndyMac to retroactively adjust its financial results for the three months that ended on March 31.
Those adjustments would have reduced IndyMac’s capital to a level that would have deprived it of its classification as a well-capitalized institution.
IndyMac executives did not dispute the adjustments, according to Mr. Thorson. But they did meet with Mr. Dochow on May 9 to ask if they could backdate the $18 million capital injection by retroactively listing it as a “receivable” on IndyMac’s books as of March 31, Mr. Thorson said.
Mr. Dochow agreed, and IndyMac filed an amended report for its first quarter that showed a higher capital ratio., Mr. Thorson said. To investors, there was no sign that IndyMac’s capital had ever dipped below what was required to qualify for well-capitalized status. In fact, the amended report slightly increased the capital ratio above what the bank had originally reported.
William K. Black, a senior bank regulator during the savings and loan crisis and the author of “The Best Way to Rob a Bank is to Own One,” said Mr. Dochow’s lenience highlighted the longstanding unwillingness of the Office of Thrift Supervision to take charge.
“The O.T.S. did nothing effective to regulate any of the specialized large nonprime lenders,” Mr. Black said. “So what you got was what the F.B.I. accurately described as early as 2004 as an epidemic of mortgage fraud.”
Mr. Black said that the Office of Thrift Supervision had never put IndyMac on its watch list of troubled institutions before the Federal Deposit Insurance Corporation took it over in July and booked a loss of $8.9 billion to its insurance fund.