'Pitiful' OTS Blamed for Wamu's Fall

WASHINGTON — More than 18 months after the largest bank failure in U.S. history, regulators of the collapsed Washington Mutual Inc. faced a day of reckoning Friday, with a key lawmaker accusing them of gross incompetence.

The bulk of Sen. Carl Levin's ire was directed at the Office of Thrift Supervision and its former director, John Reich, who was grilled for more than an hour about why he allowed risky lending practices to proliferate at Wamu and whether he was too cozy with its executives.

The OTS only acted forcefully, Levin charged, to block the Federal Deposit Insurance Corp. from seeking more information.

"You wouldn't even give them a desk," said Levin, the chairman of the Senate Permanent Subcommittee on Investigations. "About the only time OTS showed backbone was against another agency's moving, in your view, into your turf. … I don't see your blood pressure getting up against a bank which is engaging in the kind of dangerous practices that that bank engaged in."

In reference to internal OTS e-mails, Levin sought to portray Reich as almost reverent toward Kerry Killinger, the thrift company's former chief executive. He noted an e-mail to Killinger in which Reich said he was "sorry" for an action against the thrift.

"Are you at all embarrassed by this?" Levin asked. "You should be."

"I'm not disturbed by it," Reich replied. "I make no apology for that e-mail whatsoever."

And as in other high-profile hearings involving former regulators and executives of troubled institutions, Reich was defiant, arguing that Wamu's collapse was not his fault and that, in fact, it should not have been closed by the government.

His comments to Killinger just reflected his personal style, he said, and he was not too close to the CEO.

"I am by nature, Mr. Chairman, a humble person," he said. "I'm a casual person and an informal person, and it's not at all unusual for me to address the people who run the institutions that I supervise by their first names, if I know them, particularly if I'm 10 years older than they are."

In his prepared remarks, Reich categorically denied any effort to protect the thrift.

"As director of the agency, I never felt beholden to 'preserve' Wamu or any other chartered entity under our supervision for the purpose of preserving OTS' revenue stream or its standing as a separate regulatory agency," he said.

Reich's defense echoed comments earlier in the week by Killinger, who said Wamu should have been rescued by the government but was not because it lacked good connections with Washington policymakers.

Wamu was closed because of liquidity problems sparked in part by a run on the bank, Reich said. "Though asset quality was a growing and continuing concern at Wamu, this was a liquidity failure, not a capital failure," he said.

The former OTS chief said that government programs, including an expansion of deposit insurance coverage, introduced within two weeks after Wamu's collapse could have prevented its failure.

He also said other companies later got massive assistance in order to prevent their failure.

"Although Washington Mutual has been referred to as the largest failure in American history, in fact the largest failure in American history was Citi," he said. "It wasn't allowed to fail. It was bailed out."

Though Reich also spent much of his last years at the OTS defending the thrift charter, he ultimately blamed Wamu's problems on the charter, saying it barred the company from diversifying.

"In my personal opinion, the thrift charter is obsolete because the … statute requires that two-thirds of their assets be invested in real estate loans, which is a concentration," Reich said.

But Levin was not persuaded. He derided Reich and the agency for waiting months to downgrade Wamu's Camels rating or to take any public enforcement action against it until too late.

"Even after all these years and all these violations, you finally decide in early 2008 you're going to push it from a 2 to a 3, you don't make that public," and "you delay" issuing the memorandum of understanding with Wamu "for months," he said. "You apologize in an e-mail. 'I'm so sorry,' you say. You're so sorry … . It's not only feeble enforcement. It's pitiful enforcement."

In response, Reich said he did regret not reining in loan products at Wamu that he himself felt were too risky, but ultimately, he said, the thrift giant failed because uncertainty about the banking industry caused a systemwide panic.

Reich also defended himself regarding e-mails in which he expressed disdain for FDIC Chairman Sheila Bair, who was pressing the OTS for tougher action against Wamu. In an e-mail to another OTS employee, Reich said, "I cannot believe the continuing audacity of this woman."

On Friday, Reich said he regretted those words.

"Characterize it how you may," he told Levin, but "I have the highest regard for Sheila Bair. … These were tense times. People's blood pressure increases under situations like this, and sometimes we say things that we wish had not appeared in print."

Reich said the OTS' reluctance to give the FDIC access was intended to limit confusion.

"When the FDIC enters the premise, confusion develops about who really is the primary regulator," he said.

The agency's reputation has been battered by the financial crisis as several large thrifts, including BankUnited and IndyMac, failed. Regulatory reform legislation would eliminate the agency.

Levin has also directed some relatively light criticism at the FDIC. In response, Bair, who testified separately from Reich, acknowledged that a 2002 interagency agreement dictating when the FDIC may get involved should be beefed up.

"The agreement limited our direct access to bank employees and required the FDIC to rely, when possible, on examinations and inspections conducted" by the primary regulator, she said. "The compromises that appeared reasonable in theory at the height of the banking industry profitability served to blind us when the FDIC needed to implement this agreement in practice."