Regulatory Capture, Anyone?

Tue, 23 Dec 2008 22:53:32 +0000

As I read "Irregularity Uncovered at IndyMac," I kept thinking to myself, "How did they even know to ask for this favor?" The key excerpt:

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.

The regulator, the senior management, and the board of directors -- if the auditor did what it was supposed to do and presented the information to the board -- should all be held liable for this fraud.

But this is more than a case of the regulator falling down on the job. It is an example of the regulator not reporting up. The western regional director needs to provide good information to the head of the OTS and up the chain of command if there is any hope of regulating the whole system, not just an individual bank. But that cannot happen if he's covering his own ass for going in the tank at IndyMac. How is that conversation going to go, "Uh, boss, you won't see it in the official documentation, but we allowed IndyMac to fake its report. So, really, when you think about the problems in the banking sector, add that in."