Wall Street and the Financial Crisis: Anatomy of a Financial Collapse


D. Regulatory Failures

In a market economy, the purpose of regulation within the financial markets is to provide a level playing field that works for everyone involved, from the financial institutions, to the investors, to the consumers and businesses that rely on well functioning financial systems. When financial regulators fail to enforce the rules in an effective and even handed manner, they not only tilt the playing field in favor of some and not others, but also risk creating systemic problems that can damage the markets and even the entire economy.

At the April 16, 2010 hearing of the Subcommittee, Senator Coburn had the following exchange with Inspectors General Thorson and Rymer, which explains in part why OTS failed as a regulator to address WaMu's harmful lending policies:

    Senator Coburn: As I sat here and listened to both the opening statement of the Chairman and to your statements, I come to the conclusion that actually investors would have been better off had there been no OTS because, in essence, the investors could not get behind the scene to see what was essentially misled by OTS because they had faith the regulators were not finding any problems, when, in fact, the record shows there are tons of problems, just there was no action taken on it. ... I mean, we had people continually investing in this business on the basis—as a matter of fact, they raised an additional $7 billion before they collapsed, on the basis that OTS said everything was fine, when, in fact, OTS knew everything was not fine and was not getting it changed. Would you agree with that statement or not?

    Mr. Thorson: Yes, sir. I think ... basically assigning a ‘satisfactory' rating when conditions are not is contradictory to the very purpose for which regulators use a rating system. I think that is what you are saying.

    Senator Coburn: Any comments on that Mr. Rymer?

    Mr. Rymer: I would agree with Mr. Thorson. ...

    Senator Coburn: [To Mr. Thorson] By your statement, it would imply almost that OTS is an enabler of this effort rather than an enabler of making sure that the American people's taxpayer dollars and the trust in institutions that are supposed to be regulated by an agency of the Federal Government can be trusted.

    Mr. Thorson: Right.

In trying to understand why OTS failed to make use of its enforcement tools to compel WaMu to operate in a safe and sound manner, the Subcommittee investigation has identified factors that have resonance not only in the recent financial crisis, but are critical for regulators and policymakers to address in order to avoid future financial disasters as well.

During the five-year period of the Subcommittee's inquiry, from 2004 to 2008, OTS identified over 500 serious operational deficiencies at WaMu and Long Beach. At WaMu, the problems included weak lending standards, high loan exception and error rates, noncompliance with bank loan policy, weak risk management, poor appraisal practices, and poor quality loans. At Long Beach, OTS identified many of the same problems and added on top of those, weak management, poor quality mortgage backed securities, and inadequate repurchase reserves. The problems are described in examination report after examination report, and OTS raised many of the same concerns, in writing and in person, with WaMu's Board of Directors.

But for all those years, OTS did little beyond describing the problems and asking bank executives to make improvements. When the reforms failed to materialize, the problems continued, and the risk increased, OTS stood on the sidelines. Subcommittee interviews found that, until 2008, OTS regulators never even held internal discussions about taking an enforcement action against the bank. In 2008, in the face of mounting losses, OTS took two informal, nonpublic enforcement actions, which contained few mandatory measures or deadlines and were together insufficient to save the bank.

In trying to understand the agency's years of inaction, the Subcommittee's investigation concluded that the lack of enforcement reflected an OTS culture of deference to bank management, demoralized examiners whose oversight efforts were unsupported by their supervisors, and a narrow regulatory focus that allowed short term profits to excuse high risk activities and disregarded systemic risk. Inflated CAMELS ratings may have further reduced the pressure to act, while conflicts of interest may have also tempered OTS' willingness to take tough enforcement action against WaMu.

Part of the reason that OTS declined to take enforcement action against Washington Mutual was a posture of deference to the management of the institutions it regulated. Ronald Cathcart, WaMu's chief enterprise risk officer from 2006-2008, described OTS as essentially believing in "self-regulation":

    "I … have actually operated in banks under three regulators, in Canada under the Office of the Supervisor of Financial Institutions, at Bank One under the OCC, and then at Washington Mutual under the OTS[.] … [T]he approach that the OTS took was much more light-handed than I was used to. It seemed as if the regulator was prepared to allow the bank to work through its problems and had a higher degree of tolerance that I had … seen with the other two regulators. … I would say that the OTS did believe in selfregulation." |796|

A former OTS regulator who later took a job with WaMu, was quoted in a press report as saying that OTS provided "by far the softest" oversight of any federal bank regulator. |797|

Evidence of OTS' unusually deferential approach can be found in its internal documents, starting at the top. In a May 2007 email, for example, cancelling lunch with a colleague so he could instead have lunch with WaMu's CEO, Kerry Killinger, OTS Director, John Reich, described the bank as "my largest constituent." |798| At the Subcommittee hearing, Mr. Reich defended using the term, testifying that referring to others as constituents was a "habit" he had picked up while working on Capitol Hill. |799| One Senator pointed out that OTS' true constituents were not the banks it regulated, but "the American people it was supposed to protect from unsafe and unsound banking practices." |800|

On another occasion in July 2008, Mr. Reich sent an email to Mr. Killinger informing him that OTS had decided to issue a Memorandum of Understanding (MOU) to address issues of concern at the bank. In the email, the OTS Director apologized twice for his method of communication, but also sounded a note of regret for his decision to take a tougher approach:


    I'm sorry to communicate by email – I've left a couple of messages on your office phone, but I'm guessing you may be off for a long weekend.

    I've been wrestling with the issue of an MOU versus a Board Resolution as a result of our conversation in my office last week. And I've decided that an MOU is the right approach for OTS to do in this situation ….

    We almost always do an MOU for 3-rated institutions, and if someone were looking over our shoulders, they would probably be surprised we don't already have one in place. …

    So as much as I would like to be able to say a Board Resolution is the appropriate regulatory response, I don't really believe it is. I do believe we need to do an MOU. We don't consider it a disclosable event, and we also think the investment community won't be surprised if they learn of it, and would probably only be surprised to learn one didn't already exist.

    Again, I'm sorry to communicate this decision by email, but I'm scheduled to be out of the office next week myself and wanted you to have this information.

    Best regard, Kerry,

    John" |801|

The email does not convey a message from an arms-length regulator concerned about a failing bank. To the contrary, the email conveys a sense of familiarity and discloses that the head of OTS knew his agency had already been providing preferential treatment to the bank by failing to impose an MOU after its downgrade to a 3 rating five months earlier, in February 2008. Mr. Reich stated that others "looking over our shoulders … would probably be surprised" an MOU was not already in place at WaMu.

When asked about this email at the Subcommittee hearing, the Treasury and the FDIC Inspectors General both expressed discomfort with its language and tone:

    Mr. Thorson: Again, he sort of apologizes in the previous document that this could become known. This gets right to the heart of what you were talking about, the culture. … [T]here is not an acceptance of the fact that a strong regulatory control helps them.

    Senator Levin: This is far too cozy?

    Mr. Thorson: Absolutely, as far as I am concerned, yes.

    Senator Levin: Mr. Rymer, do you have any reaction to this?

    Mr. Rymer: It does indicate a level of familiarity that makes me uncomfortable. |802|

Equally telling is the fact that, even after sending the email, OTS delayed imposing the MOU on WaMu for another two months, waiting until September 2008, just three weeks before the bank's failure. |803|

Like the head of the agency, OTS examiners also took a deferential approach to WaMu. In a January 2006 email discussing WaMu's desire to purchase Long Beach, for example, the OTS Examiner-in-Charge indicated that, rather than insist the bank clean up Long Beach problems before the purchase, OTS would have to rely on its "relationship" with WaMu to get the job done:

    "The letter [from WaMu] seems okay. They obviously want to leave it a little squishy, of course, on the growth plans, but at least they make a firm commitment to clean up the underwriting issues. At some level, it seems we have to rely on our relationship and their understanding that we are not comfortable with current underwriting practices and don't want them [Long Beach] to grow significantly without having the practices cleaned up first." |804|

On another occasion in June 2006, the same OTS Examiner-in-Charge sent a lengthy email to his Regional Director discussing plans for the annual WaMu Report on Examination (ROE). His email expressed concern about losing credibility with the bank if OTS pressed too hard on certain reforms, twice noted the bank's size and complexity, and stressed that the bank was making progress in fixing identified problems:

    "[W]e still have some strong feelings on some items that I'd like to ‘push back' … some on. Generally we feel that we are quite balanced and do not have any gloves on in our approach to our findings and conclusions at WAMU. We have some concern that if we press forward with some things … we may run the risk of losing some credibility in terms of understanding the size and complexity of their business and looking as though we do not have a balanced perspective. My own fear is that we may not have done enough to communicate to you [the Regional Director] why we feel that the few negative things we have brought up through findings memos and meetings, while important to keep in front of management, are not so serious they wipe out all the right things the institution is doing in all those areas we reviewed and did not have any issues, nor should they negate the ongoing good progress in making improvements in a manner that seems reasonable given the size, complexity, and status of the institution." |805|

The Examiner-in-Charge then listed three areas of concern, problems at Long Beach which he seemed to downplay, the need to limit the number of corrective actions listed in the ROE, and the need to review how OTS cited the bank for compliance violations. In the Long Beach discussion, he wrote that improvements "will take time because of size and complexity …. We don't feel demanding more than providing us with an acceptable action plan with realistic timelines is appropriate or necessary at this time." On the corrective actions, he wrote that the list had to be limited or "more important findings will get lost. … We feel strongly that we should not cite all findings and corrective actions within the body of the ROE … [which] is already not getting read I believe." He also expressed concern that OTS was "starting to ‘overmeeting' the institution" and suggested that "the exit meeting" with the bank to discuss the ROE findings had "become almost unnecessary."

After urging patience on WaMu reforms, suggesting a limit on the corrective actions listed in the ROE, and recommending fewer meetings with WaMu management, the curious final line in the email is: "My management class this week has made me feel empowered! Can you tell? Please don't fire me!"

Additional evidence of OTS deference is its reliance on WaMu to track its own compliance with OTS findings calling for corrective action. At all other thrifts, OTS tracked the extent to which the thrift implemented OTS findings, using its own systems. But at WaMu, OTS did not keep its own records, but relied on WaMu's Enterprise Risk Issue Control System (ERICS). The Treasury and the FDIC Inspectors General criticized this arrangement, noting that they were unable to use WaMu's system to determine the status of multiple OTS findings. |806| In addition, they noted that, in 2006, ERICS discontinued its practice of identifying "repeat findings," making it difficult to identify and track those findings. |807| Their report explicitly recommends against OTS' relying on a bank's systems in the future to track compliance.

Finally, the actual language used by OTS in its reports and memoranda that described deficiencies demonstrated a passive approach to dealing with management. Common phrases noted that the bank's practices were "less than satisfactory," error rates were at "higher than acceptable levels," and "management's actions did not improve underwriting to a satisfactory level." OTS reports rarely used more assertive language that, for example, called the bank's efforts unsatisfactory, inadequate, or ineffective. An exchange at the Subcommittee hearing between Senator Levin and the OTS Examiner-in-Charge at WaMu from 2004 to 2006, Lawrence Carter, captured the issue:

    "Mr. Carter: I think that what I said here is that we could not conclude that their progress was wholly inadequate, because they did make some progress.

    Senator Levin: … Can you use the words, ‘Folks, your progress was inadequate?' Are you able to tell them that?

    Mr. Carter: For their progress on this specific action plan, I did not conclude we could tell them that.

    Senator Levin: That it was inadequate?

    Mr. Carter: That is right.

    Senator Levin: You could tell them it was not wholly adequate.

    Mr. Carter: Yes.

    Senator Levin: But not inadequate.

    Mr. Carter: I do not think I could say it was wholly inadequate.

    Senator Levin: I did not use the word ‘wholly.' You could tell them it was not wholly adequate, but you could not tell them it was inadequate. That is what you are telling us.

    Mr. Carter: Yes.

    Senator Levin: That is the kind of bureaucratic speech which I think sends the message to people you regulate that, hey, folks, you are making progress, instead of telling them it is inadequate." |808|

At times, WaMu took advantage of its special relationship with OTS and lobbied for leniency. In one instance from May 2006, a WaMu official from the Regulatory Relations division sent an email to his colleagues stating that he was able to convince the agency to reduce an audit "criticism" to the less serious category of a "recommendation": "OTS confirmed today that they will re-issue this memo without the ‘Criticism.' It will be a ‘Recommendation.'" |809| His colleague forwarded the email to bank executives noting: "Good news - John was able to get the OTS to see the light and revise the Underwriting rating to a Recommendation." |810|

A more serious incident involved WaMu's 2005 discovery, after almost a year-long investigation by an internal Home Loans Risk Mitigation Team, of substantial loan fraud taking place at two high volume loan offices in California, known as Downey and Montebello. The WaMu investigators found that 83% of the loans reviewed from the Downey office and 58% of the loans reviewed from the Montebello office contained fraudulent information, either with respect to the borrower or the appraised value of the property. The investigators wrote up their findings and presented them to WaMu's Chief Risk Officer and the President of Home Loans. |811| No one, however, informed OTS, and WaMu took no action to stop the fraudulent loans.

Two years later, in 2007, after a mortgage insurer refused to insure any more loans issued by the lead loan officer in the Montebello office, OTS directed WaMu to investigate the matter. WaMu's internal auditors launched an investigation, confirmed the loan fraud problem at the Montebello office, and also uncovered the 2005 investigation whose fraud findings had been ignored. WaMu took until April 2008 to produce a report documenting its findings. |812| WaMu also initially resisted providing the report to OTS, claiming it was protected by attorney-client privilege. |813| The OTS Examiner-in-Charge at the time told the Subcommittee that he insisted on seeing the report. After finally receiving it and reading about the substantial loan fraud occurring at the two loan offices since 2005, he told the Subcommittee that it was "the last straw" that ended his confidence that he could rely on WaMu to combat fraudulent practices within its own ranks.

OTS' deference to WaMu management appeared to be the result of a deliberate posture of reliance on the bank to take the steps needed to ensure that its personnel were engaged in safe and sound practices. The reasoning appeared to be that if OTS examiners simply identified the problems at the bank, OTS could then rely on WaMu's own self interest, competence, and discipline to ensure the problems were corrected, with no need for tough enforcement action. It was a regulatory approach with disastrous results. While OTS may have hoped that it could accomplish its regulatory responsibilities by simply identifying problems without the threat of enforcement action, that approach proved ineffective.

For five years, OTS examiners identified serious problems with WaMu's lending practices and risk management, but OTS senior officials failed to support their efforts by using the agency's enforcement tools to compel the bank to correct the identified problems. WaMu's chief risk officer from 2004 to 2005, James Vanasek, remarked at the Subcommittee hearing on how OTS examiners seemed to receive little support from more senior officials in terms of enforcement:

    "[T]he OTS Examiner-in-Charge during the period time in which I was involved … did an excellent job of finding and raising the issues. Likewise, I found good performance from … the FDIC Examiner-in-Charge. … What I cannot explain is why the superiors in the agencies didn't take a tougher tone with the banks given the degree of … negative findings. My experience with the OTS, versus with the OCC, was completely different. So there seemed to be a tolerance there or a political influence on senior management of those agencies that prevent them from taking a more active stance. By a more active stance, I mean putting the banks under letters of agreement and forcing change." |814|

Internal OTS documents and emails indicate that the result was a cadre of OTS examiners who were skeptical of their ability to effect meaningful change at WaMu, who were too often rebuffed by their own management when they tried to reduce risk or strengthen bank controls, and whose leaders worked to weaken rather than strengthen the standards used by examiners to hold banks accountable.

Low Expectations. The documents show that OTS examiners had low expectations that WaMu would actually implement recommended changes at the bank. Ultimately, OTS examiners adapted to the situation, they gave up trying to make the bank act more quickly, and WaMu was able to delay needed changes for long periods of time if it wished.

In 2003, for example, one OTS examiner wrote to the Examiner-in-Charge:

    "It is clear from my experience that changes seem to progress slowly at WaMu so I don't know if we can expect faster progress …. If any target is missed, as happens at WaMu, then we may not be in a position to determine the effectiveness of the corrective actions." |815|

In 2005, another OTS examiner wrote: "They agree to take all action required to correct the problem. The Target Completion Dates are not real timely but fine for WaMu." |816|

Other examiners were more critical. In 2007, for example, one OTS examiner wrote:

    "Regulatory Relations [the WaMu office established to work with regulators] is a joke. The purpose of this group seems to be how can we give the regulators the bare minimum without them raising a fuss." |817|

The examiner also wrote:

    "WaMu's compliance management program has suffered from a lack of steady, consistent leadership. Dick Stevenson, who took over as Chief Compliance Officer on March 2, 2007, is the bank's ninth compliance leader since 2000. … The OTS is very concerned that this lack of consistent, stable leadership leaves the program vulnerable. This amount of turnover is very unusual for an institution of this size and is a cause for concern. The Board of Directors should commission an evaluation of why smart, successful, effective managers can't succeed in this position. If you would like my opinion, just ask. (HINT: It has to do with top management not buying into the importance of compliance and turf warfare and Kerry [Killinger] not liking bad news.)" |818|

In an interview, OTS examiner Benjamin Franklin, who worked at the agency for 24 years, told the Subcommittee that the thrifts he oversaw generally did not "collaborate" with the agency but would "fight" OTS reviews and resist OTS recommendations. He said that at WaMu, "for the most part" OTS examiners were "butting heads" with bank personnel and it was difficult to effect change. |819|

Weak Standards. The documents show that the OTS examiners were also frustrated by the agency's weak standards, which made it difficult to cite WaMu for violations or require the bank to strengthen its operations.

In 2007, for example, an examiner critical of WaMu's compliance procedures wanted to downgrade the bank's compliance rating from 2 to 3, but told the OTS Examiner-in-Charge that, due to the lack of standards on compliance matters, she didn't believe she could win a battle with the bank:

    "I'm not up for the fight or the blood pressure problems. … It doesn't matter that we are right, what matters is how it is framed. … They [Washington Mutual] aren't interested in our ‘opinions' of the [compliance] program. They want black and white, violations or not. … [O]ur training always emphasizes ‘Best Practices' but when it comes down to it, we don't have the resources to show the risk." |820|

At another point, when discussing standards for calculating acceptable loan error rates, an OTS examiner wrote:

    "We will need additional discussion of acceptable error rates and how we view their [WaMu's] standard. … [A] 2.5 percent error rate would mean that approximate[ly] $600.0 million could be originated and be within acceptable guidelines. A 20.0 percent medium error rate means that $4.8 billion of loans with these types of errors could be originated without a criticism. The latter seem[s] especially high when you consider that their medium criteria includes loans that we don't think should be made." |821|

The OTS Examiner-in-Charge responded with a lengthy email criticizing outdated, unclear OTS standards on the acceptable loan error rate for a portfolio of subprime loans:

    "Unfortunately, our sampling standards are 10 years old and we have no standards of acceptance really. It depends on our own comfort levels, which differ. … Moreover, our guidance requires that an exception be SIGNIFICANT, which ... we have over time interpreted as loans that should not have been made. … While we may (and have) questioned the reasonableness of these standards, they are all we have at this time. If our tolerance for some reason is now a lot lower than our handbook standards, it would be nice to have this clarified. I have always used these standards as rough benchmarks and not absolutes myself, upping my expectations for higher risk portfolios. … It would be nice if they [higher risk loan portfolios] could meet even higher expectations, but that would require us to agree on what the standard should be." |822|

At another point, the same Examiner-in-Charge wrote a long email discussing issues related to a decision by WaMu to qualify borrowers for adjustable rate mortgages using an interest rate that was less than the highest rate that could be charged under the loan. He complained that it was difficult to force WaMu to comply with the OTS "policy of underwriting at or near the fully indexed rate," when "in terms of policy, I am not sure we have ever had a really hard rule that institutions MUST underwrite to the fully indexed rate." |823| He also noted

that OTS sometimes made an exception to that rule for loans held for sale.

NTM Guidance. While some OTS examiners were complaining about the agency's weak standards, other OTS officials worked to ensure that new standards being developed for high risk mortgages would not restrain WaMu's lending practices. The effort began in 2006 with an aim to address concerns about lax lending standards and the risks posed by subprime, negatively amortizing, and other exotic home loans. The federal banking agencies convened a joint effort to reduce the risk associated with those mortgages by issuing interagency guidance for "nontraditional mortgage" products ("NTM Guidance"). Washington Mutual filed public comments on the proposed NTM Guidance and argued that Option ARM and Interest-Only loans were "considered more safe and sound for portfolio lenders than many fixed rate mortgages," so regulators should "not discourage lenders from offering these products." |824| It also stated that calculating a potential borrower's "DTI [debt-to-income ratio] based on the potential payment shock from negative amortization would be highly speculative" and "inappropriate to use in lending decisions." |825| During subsequent negotiations to finalize that guidance, OTS argued for less stringent lending standards than other regulators were advocating and bolstered its points using data supplied by Washington Mutual. |826|

In one July 2006 email, for example, an OTS official expressed the view that early versions of the new guidance focused too much on negative amortization loans, which were popular with several thrifts and at WaMu in particular, and failed to also look closely at other high risk lending products more common elsewhere. |827| He also wrote that OTS needed to address this issue and "should consider going on the offensive, rather than defensive to refute the OCC's positions" on negatively amortizing loans, defending the loans using WaMu Option ARM loan data. |828| In August, several OTS officials discussed over email how to prevent the proposed restrictions on negatively amortizing loans from going farther than they believed necessary, noting in part the "profitable secondary market" for Option ARMs and the fact that "hybrid IO [interest only] ARMs are a huge product for Wamu." One OTS official wrote:

    "We have dealt with this product [negatively amortizing loans] longer than any other regulator and have a strong understanding of best practices. I just don't see us taking a back seat on guidance that is so innate to the thrift industry." |829|

OTS officials argued variously that the new proposal would wrongly put the focus on "products" instead of "underwriting," as well as that it would hurt the business of large thrifts like WaMu. |830|

The NTM Guidance was finally issued on October 4, 2006. |831| The final version did not fully reflect the recommendations of OTS on negatively amortizing loans. Among other matters, it called on banks to:

  • evaluate a borrower's ability to fully repay a prospective loan, including any balance increase from negative amortization;

  • qualify borrowers using the higher interest rate that would apply after any teaser or introductory interest rate;

  • avoid loans whose repayment was dependent solely upon the value of the collateral or the borrower's ability to refinance the loan; and

  • implement strong quality control and risk mitigation procedures for loans containing layers of risk, including loans with no documentation requirements, no verification of the borrower's income or assets, or high loan-to-value ratios.

The Guidance also called for capital levels commensurate with risk and adequate allowances for loan losses.

The Guidance was not promulgated as a bank regulation that could be enforced in court, and it contained no explicit deadline for compliance. Instead, it provided policies and procedures that regulators could use as benchmarks during examinations. Agencies could penalize noncompliance with the standards through lower CAMELS ratings or enforcement actions. FDIC officials told the Subcommittee that the FDIC expected banks to come into immediate compliance with the Guidance, and that no agency should have been telling a bank that it did not have to comply with the new standards. |832|

A few days after the NTM Guidance went into effect, WaMu officials met with OTS about implementation and reported back that OTS had indicated that compliance was something institutions "should" do, not something they "must" do. |833| According to a written summary by WaMu of its October 12, 2006 meeting with OTS to discuss the new rules, OTS told the bank that it "view[ed] the guidance as flexible" and "specifically pointed out that the language in the guidance says ‘should' vs. ‘must' in most cases and they [were] looking to WaMu to establish our position on how the guidance impacts our business processes." |834|

In 2007, OTS conducted a review of WaMu's Option ARM activities and compliance efforts and found that three months after the NTM Guidance had become effective, the bank was not yet complying with the new standards when issuing Option ARMs. |835| The OTS review noted that as of January 31, 2007, the bank had a total of $62 billion in outstanding Option ARMs in its investment portfolio, of which 80% were negatively amortizing. |836| The review stated that, as of December 31, 2006, WaMu was not in compliance with the NTM Guidance, because it continued not to consider potential negative amortization amounts when qualifying borrowers for Option ARMs; placed too much reliance on FICO scores instead of income verification to qualify borrowers for nontraditional mortgages; failed to consider amortizing payments or payment shocks when qualifying borrowers for interest only loans; and placed too much reliance on collateral, rather than borrower income, as the primary repayment source in the event of a loan default. |837| The review contained no recommendations for actions to ensure WaMu changed its procedures.

In April 2007, the FDIC asked OTS for permission to conduct its own review of WaMu loan files to evaluate the bank's compliance with the NTM Guidance. |838| OTS refused, however, to provide the FDIC with access to the relevant loan files and effectively blocked the review. |839| The FDIC Assistant Regional Director George Doerr told the Subcommittee that when he contacted OTS official Mike Finn about the FDIC's request to review WaMu loan files to test NTM compliance, Mr. Finn said that OTS was giving its institutions more time to comply with the guidance, even though it had taken effect more than six months earlier. |840| The FDIC Chairman Sheila Bair told the Subcommittee that the FDIC had not known until then that OTS was allowing institutions to delay compliance with the NTM Guidance and were "surprised" by the agency's actions. She said that normally, if an institution needs more time to comply with new standards, a regulator required it to provide a written plan with milestones for achieving compliance. |841|

Documents uncovered by the Subcommittee show how WaMu took advantage of the delay to continue its high risk lending practices. The NTM Guidance directed banks, for example, to evaluate a borrower's ability to repay a mortgage using the highest interest rate that would be charged under the loan and the fully amortized payment amount rather than any smaller or minimum payment amount. After determining that those new requirements could lead to a 33% drop in Option ARM loan volume due to borrowers who would no longer qualify for the loans, WaMu's Chief Enterprise Risk Officer, Ron Cathcart, advised "holding off on implementation until required to act for public relations (CFC [Countrywide] announces unexpectedly) or regulatory reasons." |842| When he made that suggestion in March 2007, OTS had already allowed Washington Mutual to delay its compliance with the Guidance for six months, resulting in the bank's originating billions of dollars in new Option ARM loans that would later suffer significant losses. |843| Instead of using the NTM Guidance as an opportunity to strengthen WaMu's lending standards and reduce its loan risk, OTS chose to delay its implementation.

In addition, in May 2007, when an OTS official attempted to stop WaMu from issuing mortgages without verifying borrower incomes, relying on the NTM Guidance and other rules as justification, OTS senior management rebuffed the official's efforts. Instead, OTS senior managers interpreted its standards as allowing thrifts to continue issuing "stated income loans," also called "No Income No Asset" (NINA) or "no doc" loans, because they permitted lenders to provide credit without verifying the borrower's income or assets. On May 15, 2007, after reviewing a summary of WaMu's loans, an OTS official in Washington, Bill Magrini, sent an email to the OTS Examiner-in-Charge with responsibility for WaMu stating:

    "I note that WAMU makes a significant amount of No-doc loans. OTS policy states that no-doc loans are unsafe and unsound. I assume they mean no doc regarding NINA or no income-no asset loans.

    Without even asking for income or assets/liabilities, the loans are collateral-dependent. This is imprudent … [T]he interagency NTM Guidance states specifically that collateral dependent loans are unsafe and unsound. …

    Does WAMU have any plans to amend its policies per no doc loans?" |844|

The Examiner-in-Charge, Benjamin Franklin, relayed the inquiry to the then Director of the OTS Western Region Office, Darrel Dochow, and stated that, while WaMu had not issued "true NINAs" in the past, the bank had begun "doing NINA's in 2006 through their conduit program. As such, all these loans are held for sale." He estimated WaMu then had about $90 million of NINA loans held for sale, had originated about $600 million in 2006, and would originate the same amount again in 2007. |845|

Mr. Dochow responded that he was already in regular contact with OTS officials in Washington about WaMu and "there is no need to duplicate with Bill Magrini as far as I know." |846| Later the same day, Mr. Dochow wrote:

    "I am being told that Bill's views may not necessarily represent OTS policy in these matters. I value Bill's input, but we should be careful about relaying his views to others as being OTS policy, absent collaborating written guidance. [His] views … are somewhat inconsistent with NTM guidance and industry practice. I also understand Grovetta [another OTS official] promised to clarify section 212 of the handbook in several areas as a result of the NTM roundtable discussion in Wash DC last month." |847|

That same day, another OTS official, Mark Reiley, sent an email indicating his belief that sections of the OTS handbook barred WaMu from issuing NINA loans, even when those loans were originated for sale to Wall Street:

    "The Handbook guidance Section 212 states that no-doc loans (NINAs) are unsafe and unsound loans (Pg. 212.7). Furthermore, even if the no-doc (NINA) loans are originated and held for sale the guidance indicates (pg. 212.8) the association must use prudent underwriting and documentation standards and we have already concluded they are unsafe and unsound. Even if the institution holds the loans for a short period of time. … [T]his is a hot topic in DC and we are getting a significant amount of push back from the industry. … At this point I don't think a memo is the best avenue, I think we need to request in writing that WAMU respond to us on how the NINA's comply with the handbook guidance?"

The WaMu Examiner-in-Charge, Benjamin Franklin, responded:

    "I didn't intend to send a memo until I got a blessing from [the Western Region Director] or DC on what our official policy is on this. … [M]any of our larger institutions now do NINAs (including Countrywide) .… Apparently [OTS policy official] Bill Magrini is the lone ranger in his view that NINA's are imprudent. West region position seems to be that FICO, appraisal, and other documentation … is sufficient to assess the borrower's ability to repay in all but subprime loans. While I probably fall more into the Magrini camp (until we get empirical data to support NINAs are not imprudent) we will just document our findings … until the ‘official' policy on this has been worked out." |848|

A year later, in October 2008, after WaMu's failure, the same Examiner-in-Charge, Benjamin Franklin, wrote to a colleague:

    "[N]ot one regulatory agency had a rule or guideline saying you couldn't do stated income lending, even to this day. That, I find incredible. We criticized stated income lending at WaMu but they never got it completely fixed. … [I]n hindsight, I'm convinced that it is just a flawed product that can't be fixed and never should have been allowed in the first place. How do you really assess underwriting adequacy when you allow the borrower to tell you what he makes without verification. We used to have documentation requirements for underwriting in the regs, but when those were taken out, the industry slowly migrated to an anything goes that got us into this mess. … When I told Scott Polakoff [OTS Deputy Director] that stated income subprime should not be made under any circumstance, I was corrected by Mike Finn [OTS Western Region head] that that was not the West Region's position. I rest my case." |849|

Data compiled by the Treasury and FDIC Inspectors General shows that, by the end of 2007, stated income loans – loans in which the bank did not verify the borrower's income – represented 50% of WaMu's subprime loans, 73% of its Option ARMs, and 90% of its home equity loans. |850| At the Subcommittee hearing, virtually every witness condemned stated income loans as unsafe and unsound. |851| OTS Director John Reich testified that he regretted not doing more to prevent supervised thrifts from issuing stated income loans. |852|

Subcommittee interviews with OTS examiners who worked at WaMu found those examiners to be demoralized and frustrated at their inability to effect change at the bank. They had identified serious deficiencies at the bank year after year, with no enforcement consequences; some tried to interpret OTS standards in ways that would reduce risk, only to be rebuffed by their leaders; and others were told that the NTM Guidance being enforced by other agencies did not have standards that could be enforced by OTS examiners. Days after WaMu's failure, one OTS examiner had this to say about OTS leadership:

    "My examination history here is filled with the editing and removal of my comments as well as predictions (that turned out to be true) by EICs [Examiners-in-Charge]. No system in place to keep that from happening. Instead we put whitewashers and scaredity cats in charge of the most problematic shops. I don't know what happened to you at WAMU, but I was critical of their accounting at Card Services and the AP. Fortunately, I think I made the ‘don't let him come back here' list. … [O]ur leadership screwed us and can't acknowledge it. They should resign." |853|

In addition to a policy of deference to management, weak standards, and demoralized examiners, OTS employed an overly narrow regulatory focus that allowed WaMu's short term profits to excuse its risky practices and that ignored systemic risk. For a time, its short term profits masked the problems at Washington Mutual, and regulators allowed practices which they knew to be risky and problematic to continue. Because it mishandled its responsibilities, OTS gave the illusion to investors, economists, policy makers, and others that the bank was sound, when in reality, it was just the opposite. Unfortunately, the truth of the matter was not revealed until it was too late, and the bank collapsed.

Using Short Term Profits to Excuse Risk. OTS justified not taking enforcement action against WaMu in part by pointing to Washington Mutual's profits and low loss rates during the height of the mortgage boom, claiming they made it difficult to require the bank to reduce the risks threatening its safety and soundness. In 2005, when faced with underwriting problems at WaMu, the OTS Examiner-in-Charge put it this way:

    "It has been hard for us to justify doing much more than constantly nagging (okay, ‘chastising') through ROE [Reports of Examination] and meetings, since they [WaMu] have not been really adversely impacted in terms of losses. It has been getting better and has not recently been bad enough to warrant any ratings downgrade." |854|

The OTS Handbook was explicit, however, in stating that profits should not be used to overlook or excuse high risk activities:

    "If an association has high exposure to credit risk, it is not sufficient to demonstrate that the loans are profitable or that the association has not experienced insignificant losses in the near term." |855|

But in the case of Washington Mutual, profits did make a difference. At the Subcommittee hearing, when asked by Senator Kaufman to identify one or two reasons why no regulatory action was taken against WaMu, the FDIC IG Jon Rymer testified as follows:

    "[L]et me start by saying I think the problem in 2005, 2006, and into 2007, the problem was the bank was profitable. I think there was a great reluctance to [take action], even though problems were there in underwriting, the product mix, the distribution process, the origination process, all in my view extraordinarily risky .… [T]he people in [agency] leadership positions have to be willing to make the tough calls and be experienced enough to know that today's risky practices may show today profitability, but to explain to management and enforce with regulatory action that risky profitability is going to have a cost. It either has a cost in control processes an institution would have to invest in now, or it is going to have a cost ultimately to the bank's profitability and perhaps eventually to the Deposit Insurance Fund." |856|

In his prepared statement, the Treasury Inspector General, Eric Thorson, noted that OTS examiners told his staff they did not lower WaMu's CAMELS ratings because "even though underwriting and risk management practices were less than satisfactory, WaMu was making money and loans were performing." |857|

This problem was not isolated within OTS, however, but applied to other regulatory agencies as well. The FDIC Inspector General noted, for example, that the bank's profitability also tempered the FDIC views of the bank. He explained that, prior to 2008, the FDIC did not challenge WaMu's 2 CAMELS ratings, because "the risks in WaMu's portfolio had not manifested themselves as losses and nonperforming loans, and therefore did not impact WaMu's financial statements." |858| At the same time, an internal FDIC analysis of the bank identified a long list of "embedded risk factors" in WaMu's home loans that, despite the bank's profitability, exposed the bank to losses in the event of "a widespread decline in housing prices." |859|

In the financial industry, high risk activities are undertaken by financial institutions to earn higher marginal returns. The role of the regulator is to enforce rules that ensure the risks an institution undertakes do not unfairly transfer that risk to others or threaten the safety and soundness of the economy, despite any short term profits. In the case of the FDIC, the judgment includes whether the risk threatens loss to the Deposit Insurance Fund. Any firm that decides to take a risk should be the only firm, along with its investors, to bear the brunt of the problem if it turns out to have been a mistake. Regulators that, when faced with short term profits, stop evaluating or downplay attendant risks that could produce later losses fail in their obligation to ensure the safety and soundness of the financial institutions they are regulating. In the case of WaMu, both OTS and the FDIC allowed the bank's success in the short term to paper over its underlying problems.

In October 2008, after Washington Mutual failed, the OTS Examiner-in-Charge at the bank, Benjamin Franklin, deplored OTS' failure to prevent its thrifts from engaging in high risk lending because "the losses were slow in coming":

    "You know, I think that once we (pretty much all the regulators) acquiesced that stated income lending was a reasonable thing, and then compounded that with the sheer insanity of stated income, subprime, 100% CLTV [Combined Loan-to-Value], lending, we were on the figurative bridge to nowhere. Even those of us that were early opponents let ourselves be swayed somewhat by those that accused us of being ‘chicken little' because the losses were slow in coming, and let[']s not forget the mantra that ‘our shops have to make these loans in order to be competitive'. I will never be talked out of something I know to be fundamentally wrong ever again!!" |860|

Failure to Consider Financial System Impacts. A related failing was that OTS took a narrow view of its regulatory responsibilities, evaluating each thrift as an individual institution without evaluating the effect of thrift practices on the financial system as a whole. The U.S. Government Accountability Office, in a 2009 evaluation of how OTS and other federal financial regulators oversaw risk management practices, concluded that none of the regulators took a systemic view of factors that could harm the financial system:

    "Even when regulators perform horizontal examinations across institutions in areas such as stress testing, credit risk practices, and the risks of structured mortgage products, they do not consistently use the results to identify potential system risks." |861|

Evidence of this narrow regulatory focus includes the fact that OTS examiners carefully evaluated risk factors affecting home loans that WaMu kept on its books in a portfolio of loans held for investment, but paid less attention to the bank's portfolio of loans held for sale. OTS apparently reasoned that the loans held for sale would soon be off WaMu's books so that little analysis was necessary. From 2000 to 2007, WaMu securitized about $77 billion in subprime loans, mostly from Long Beach, as well as about $115 billion in Option ARM loans. |862| Internal documents indicate that OTS did not consider the problems that could result from widespread defaults of poorly underwritten mortgage securities from WaMu and other thrifts.

Numerous documents show that OTS and the FDIC were, in fact, aware that WaMu was issuing high risk loans that led to poor quality securitizations:

    2005 OTS email describing poor quality Long Beach mortgage backed securities: "Performance data for 2003 and 2004 vintages appear to approximate industry average while issues [of securities] prior to 2003 have horrible performance. ... [Long Beach] finished in the top 12 worst annualized [net credit losses] in 1997 and 1999 thru 2003. … At 2/05, [Long Beach] was #1 with a 12% delinquency rate. Industry was around 8.25%." |863|

    2005 FDIC analysis of WaMu high risk loans: "Management acknowledges the risks posed by current market conditions and recognizes that a potential decline in housing prices is a distinct possibility. Management believes, however that the impact on [WaMu] would be manageable, since the riskiest segments of production are sold to investors, and that these investors will bear the brunt of a bursting housing bubble." |864|

    2005 OTS email discussing allowing lower standards for loans held for sale: "[L]oans held for sale could be underwritten to secondary market standards …. I believe we would still find that secondary market requirements are more lax than our policy on underwriting to fully indexed rates. … [I]f you allow them [WaMu] the exception for loans held for sale … they probably do not have a ton of loans that fall far outside our policy guidance." |865|

    2006 OTS email discussing Long Beach loans that had to be repurchased from buyers: "The primary reasons for the problem were … [g]eneral lower quality 2005 production due to economy and lowered standards …. The $4.749 billion in loans on [Long Beach] books at 12/31/05 are largely comprised of the same 2005 vintage production that was sold in the whole loan sales and are now subject to the increased repurchases. … Management is balancing the probability that these loans will perform worse than expected and priced for, versus the increased income they generate … in considering whether to [sell] some or all of the portfolio." |866|

    2008 OTS email after WaMu's failure: "We were satisfied that the loans were originated for sale. SEC and FED [were] asleep at the switch with the securitization and repackaging of the cash flows, irrespective of who they were selling to." |867|

    2005 WaMu audit of Loan Sales and Securitization planned no further audit for three years. In March 2007, OTS informally suggested that more frequent audits would be appropriate given the high volume and high risk nature of WaMu's securitization activity and "data integrity issues surrounding the creation of securitization trusts, resulting in loan repurchases from those trusts." |868| OTS was two years too late, however; the secondary market for subprime securities collapsed four months later.

Neither OTS nor the FDIC saw preventing WaMu's sale of high risk mortgages into U.S. securitization markets as part of its regulatory responsibilities.

Still another possible explanation for OTS' inaction may have been the overly positive CAMELS ratings it assigned WaMu. From 2004 until early 2008, WaMu held a 2 rating, which meant that it was "fundamentally sound," had "satisfactory risk management," and had "only moderate weaknesses that [were] within the board's and management's capability and willingness to correct." |869| A lower CAMELS rating would have represented one of the strongest actions that OTS and the FDIC could have taken, because it would have required changes from WaMu.

Both the Treasury and the FDIC Inspector General criticized the assignment of the 2 ratings as inaccurate and inappropriate, highlighting how those inflated ratings masked the true problems. |870| Treasury IG Thorson focused in particular on the 2 rating assigned to WaMu's high risk home loans:

    "[W]e find it difficult to understand how OTS could assign WaMu a satisfactory asset quality 2-rating for so long. Assigning a satisfactory rating when conditions are not satisfactory sends a mixed and inappropriate supervisory message to the institution and its board. It is also contrary to the very purpose for which regulators use the CAMELS rating system." |871|

Inspector General Thorson also criticized the 2 rating assigned to WaMu's management, which signaled "satisfactory performance by management and the Board of Directors and satisfactory risk management practices." |872| He noted that OTS gave management this positive rating until June 2008, despite the bank's ongoing failure to correct the many deficiencies identified by OTS examiners and the fact that management problems at WaMu were longstanding. At the Subcommittee hearing, the FDIC Inspector General Rymer also criticized the 2 rating assigned to WaMu's management:

    "[T]he management piece should be, in my view, downgraded if management has not demonstrated that it has built the adequate systems and control processes and governance processes to help manage problems when they eventually do occur in assets. … I find it difficult to understand why the management rating at a minimum was not lowered much earlier on." |873|

The FDIC Inspector General also noted that, from 2004 to 2008, the FDIC had assigned LIDI ratings to WaMu that indicated a higher degree of risk at the bank than portrayed by the bank's CAMELS ratings. He observed that LIDI ratings, which are intended to convey the degree of risk that a bank might cause loss to the Deposit Insurance Fund, are designed to be more forward-looking and incorporate consideration of future risks to a bank, as compared to CAMELS ratings, which are designed to convey the state of an institution at a particular point in time. |874|

WaMu kept its 2 rating despite the five-year litany of lending, risk management, appraisal, and Long Beach deficiencies identified by OTS examiners from 2004 to 2008. It was only in February 2008, after the bank began to incur substantial losses, that OTS downgraded the bank to a 3. When the FDIC urged a further downgrade to a 4 rating in the summer of 2008, OTS disagreed. In September 2008, however, while still resisting the ratings downgrade, OTS acknowledged internally that WaMu's poor quality loans and poor risk management were the source of its problems:

    "The bank's overall unsatisfactory condition is primarily the result of the poor asset quality and operating performance in the bank's major Home Loans Group area of business. … The deteriorating asset quality in the Home Loans Group is accompanied by inadequacies in risk management, internal controls, and oversight that made more vulnerable to the current housing and economic downturn. The examination criticized past liberal home loan underwriting practices and concentrated delivery of nontraditional mortgage products to higher risk geographic markets." |875|

It was only on September 18, 2008, after the bank began to run out of the cash needed to conduct its affairs and the FDIC independently downgraded the bank to a 4, that OTS finally agreed to the downgrade. One week later, OTS placed the bank into receivership.

Hindsight establishes that the CAMELS ratings assigned to Washington Mutual Bank were inflated. Whether the ratings inflation was attributable to the OTS culture of deference to management, examiners who were too intimidated to downgrade the agency's largest institution, an overly narrow regulatory focus that was blinded by WaMu's short term profits and ignored systemic risk, or an absence of forward-looking risk analysis, the WaMu collapse suggests that the CAMELS rating system did not work as it should.

During the investigation, when asked why OTS senior officials were not tougher on Washington Mutual Bank, several persons brought up the issue of fees – that WaMu supplied $30 million or nearly 15% of the fees per year that paid for OTS' operating expenses. WaMu's former Chief Risk Officer James Vanasek offered this speculation:

    "I think you have to look at the fact that Washington Mutual made up a substantial portion of the assets of the OTS and one wonders if the continuation of the agency would have existed had Washington Mutual failed." |876|

The issue was also raised by Treasury IG Thorson who warned that OTS should have been "very clear from top to bottom" that WaMu's payment of $30 million in fees per year to OTS was "not a factor. It just [was] not." |877|

The OCC and OTS are the only federal banking regulators reliant on fees paid by their regulated entities to fund their operations. At OTS, Washington Mutual was far larger than any other thrift overseen by the agency and was a far larger and more important contributor to the agency's budget. It is possible that the agency's oversight was tempered by recognition of the thrift's unique importance to the agency's finances and a concern that tough regulation might cause WaMu to convert its charter and switch to a different regulator. Its dependence on WaMu fees may have given OTS the incentive to avoid subjecting WaMu to regulatory enforcement actions and ultimately compromised its judgments.

Conclusion. WaMu is the largest bank failure in the history of the United States. When OTS seized it, WaMu had $307 billion in assets. By comparison, the next largest U.S. bank failure was Continental Illinois, which had $40 billion in assets when it collapsed in 1984. OTS' failure to act allowed Washington Mutual to engage in unsafe and unsound practices that cost borrowers their homes, led to a loss of confidence in the bank, and sent hundreds of billions of dollars of toxic mortgages into the financial system with its resulting impact on financial markets at large. Even more sobering is the fact that WaMu's failure was large enough that, if the bank had not been purchased by JPMorgan Chase, it could have exhausted the entire Deposit Insurance Fund which then contained about $45 billion. Exhausting the Deposit Insurance Fund could have triggered additional panic and loss of confidence in the U.S. banking system and financial markets.

Washington Mutual was not the only failed thrift overseen by OTS. In 2008, OTS closed the doors of five thrifts with combined assets of $354 billion. |878| Another seven thrifts holding collective assets of $350 billion were sold or declared bankruptcy. |879| Virtually all of these thrifts conducted high risk lending, accumulated portfolios with high risk assets, and sold high risk, poor quality mortgages to other financial institutions and investors. At the Subcommittee hearing, the Treasury Inspector General testified that, after completing 17 reviews and working on another 33 reviews of a variety of failed financial institutions, he could say that OTS' lack of enforcement action was "not unique to WaMu" and lax enforcement by the relevant federal banking regulator was "not unique to OTS." |880|

Mortgage lenders other than banks also failed. Many of these mortgage lenders had operated as private firms, rather than as depository institutions, and were not overseen by any federal or state bank regulator. Some were overseen by the SEC; others were not overseen by any federal financial regulator. Some became large companies handling billions of dollars in residential loans annually, yet operated under minimal and ineffective regulatory oversight. When residential loans began to default in late 2006, and the subprime securitization market dried up in 2007, these firms were unable to sell their loans, developed liquidity problems, and went out of business. Together, these failed mortgage lenders, like the failed thrifts, contributed to systemic risk that damaged the U.S. banking system, U.S. financial markets, and the U.S. economy as a whole.

Countrywide Financial Corporation, now a division of Bank of America and known as Bank of America Home Loans, was formerly the largest independent mortgage lender in the United States and one of the most prolific issuers of subprime mortgages. |881| For a number of years, Countrywide operated as a national bank under the OCC. In March 2007, it converted to a thrift charter and operated for its last 18 months under the regulatory supervision of OTS. |882| At its height, Countrywide had approximately $200 billion in assets, 62,000 employees, and issued in excess of $400 billion in residential mortgages each year. In 2008, Countrywide originated nearly 20% of all mortgages in the United States. |883| But in August 2008, after the collapse of the subprime secondary market, Countrywide could no longer sell or securitize its subprime loans and was unable to obtain replacement financing, forcing the bank into a liquidity crisis. |884| By the end of the summer of 2008, it would have declared bankruptcy, but for its sale to Bank of America for $2.8 billion. |885|

Neither the OCC nor OTS ever filed a public enforcement action against the bank. In June 2009, the SEC filed suit against the three most senior Countrywide executives, the chief executive officer, the chief operating officer and president, and the chief financial officer, charging them with fraudulently misleading investors by representing that Countrywide had issued loans primarily to "prime" or low risk borrowers, when it had actually written increasingly risky loans that senior executives knew would result in substantial defaults and delinquencies. |886| In addition, the SEC charged that CEO Angelo Mozilo had violated his federal disclosure obligations and engaged in insider trading. |887|

The SEC complaint detailed the bank's increasingly risky underwriting and lending practices from 2005 to 2007, including its use of stated income loans, loan-to-value ratios in excess of 95%, loans to borrowers with low FICO scores, frequent use of loan exceptions, and willingness to match the loan terms of any competitor. Like WaMu, from 2003 to 2007, the bank switched from issuing primarily low risk, 30-year loans, to subprime and other high risk mortgages. |888|

The complaint also described how Mr. Mozilo was internally alarmed and critical of the increased credit risks that Countrywide was incurring, while at the same time telling investors that the bank was more prudent than its competitors. |889| The SEC complaint cited, for example, an April 2006 email from Mr. Mozilo discussing Countrywide's issuance of subprime 80/20 loans, which are loans that have no down payment and are comprised of a first loan for 80% of the home's value and a second loan for the remaining 20% of the value, resulting in a loan-tovalue ratio of 100%. Mr. Mozilo wrote: "In all my years in the business I have never seen a more toxic pr[o]duct." |890| In another email that same month, after being informed that most borrowers were making the minimum payments allowed on Option ARM loans, Mr. Mozilo wrote: "Since over 70% have opted to make the lower payment it appears it is just a matter of time that we will be faced with much higher resets and therefore much higher delinquencies." |891|

Later he warned that the bank was "flying blind" on the ultimate delinquency rate and should consider selling the loans. |892| The SEC complaint also stated:

    "Mozilo went on to write that he had ‘personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s].' Mozilo noted that, ‘In my conversations with Sambol [Countrywide's chief operating officer] he calls the 100% sub prime seconds as the ‘milk' of the business. Frankly, I consider that product line to be the poison of ours." |893|

On October 15, 2010, the SEC announced a record settlement with the three Countrywide executives. |894| Mr. Mozilo agreed to pay $22.5 million to settle the disclosure fraud allegations and $45 million to settle the insider trading allegations, bringing his total settlement to $67.5 million. |895| He also agreed to be permanently barred from serving as an officer or director of a publicly traded corporation. Countrywide's former chief operating officer paid $5.5 million and agreed to a three-year bar. The chief financial officer paid $130,000 and agreed to a one-year bar on practicing before the SEC.

In June 2010, in a case brought by the Federal Trade Commission, Countrywide agreed to pay penalties of $108 million for charging inflated mortgage servicing fees to homeowners in delinquency, including excessive fees to inspect property or mow lawns for people struggling to keep their homes. |896| In August 2010, Countrywide and some former executives agreed to pay $600 million to settle several class action lawsuits. |897|

IndyMac Bank was established in 1985 by Countrywide co-founders Angelo Mozilo and David Loeb. While its lines of business changed over time, in 2000, it became a chartered thrift overseen by OTS, and grew to become the country's ninth-largest originator of residential mortgage loans. |898| IndyMac specialized in two types of high risk home loans, Alt A loans which did not require verification or documentation of the borrower's income, assets or employment; and Option ARM loans which allowed borrowers to pay less than the fully amortized cost of the mortgage. From 2004 to 2006, Option ARMs made up 75% of IndyMac's home loans and, in 2006, IndyMac allowed 75% of its Option ARM borrowers to make only the minimum payment required by the loan, triggering negative amortization. In addition to originating loans, IndyMac packaged them into securities and sold them on the secondary market. |899|

In July 2007, after the credit rating agencies downgraded the ratings on most subprime mortgage backed securities and the subprime secondary market collapsed, IndyMac – like WaMu – was left holding a large inventory of poor quality mortgage loans it could not sell. As delinquencies increased and the value of the mortgages fell, IndyMac incurred substantial losses, and its depositors began withdrawing funds. The withdrawals continued throughout 2007 and into 2008, eventually reaching $1.55 billion and triggering a liquidity crisis at the bank. |900| In July 2008, IndyMac collapsed and was seized by the FDIC, which had to pay more than $10 billion from the Deposit Insurance Fund to protect insured deposits and pay related expenses. |901|

As it did with WaMu, OTS gave IndyMac high CAMELS ratings until shortly before the thrift's failure, despite the fact that OTS had identified numerous problems with IndyMac's subprime mortgage business practices. |902| Those problems included adopting an overly narrow definition of "subprime," so that IndyMac could maintain a lower level of capital reserves; |903| poor underwriting and sloppy property appraisal practices; |904| and improper risk mitigation. |905| Neither OTS nor the FDIC ever took a public enforcement action against the bank.

After IndyMac's failure, the Treasury Inspector General conducted a review and issued a report evaluating OTS' oversight efforts. |906| The report attributed IndyMac's collapse to its strategy of rapid growth; originating and securitizing nontraditional, high risk loans; lack of verification of borrowers' income or assets; lax underwriting; and reliance on high interest loans for its own operations. |907| The Treasury IG found that OTS was aware of IndyMac's problems, but did not take sufficient enforcement action to correct them. |908| According to the Inspector General, OTS typically relied on the "cooperation of IndyMac management to obtain needed improvements" – which was usually not forthcoming – to remedy identified problems. |909|

In February 2011, the SEC charged three former senior IndyMac executives with securities fraud for misleading investors about the company's deteriorating financial condition. |910| The SEC alleged that the former CEO and two former CFOs participated in the filing of false and misleading disclosures about the financial stability of IndyMac and its main subsidiary, IndyMac Bank F.S.B. One of the executives – S. Blair Abernathy, former CFO – has agreed to settle the SEC's charges without admitting or denying the allegations for approximately $125,000. The SEC's complaint against former CEO Michael W. Perry and former CFO A. Scott Keys seeks, among other things, disgorgement, financial penalties, and a bar on their acting as an officer or director of a publicly traded corporation. |911|

IndyMac was the third-largest bank failure in U.S. history and the largest collapse of a FDIC-insured depository institution since 1984. |912| At the time of its collapse, IndyMac had $32 billion in assets and $19 billion in deposits, of which approximately $18 billion were insured by the FDIC. |913| IndyMac's failure cost the FDIC $10.7 billion, |914| a figure which, at the time, represented over 10% of the federal Deposit Insurance Fund. |915|

New Century Financial Corporation is an example of a failed mortgage lender that operated largely without federal or state oversight, other than as a publicly traded corporation overseen by the SEC. New Century originated, purchased, sold, and serviced billions of dollars in subprime residential mortgages, operating not as a bank or thrift, but first as a private corporation, then as a publicly traded corporation, and finally, beginning in 2004, as a publicly traded Real Estate Investment Trust (REIT). |916| By 2007, New Century had approximately 7,200 employees, offices across the country, and a loan production volume of $51.6 billion, making it the second largest subprime lender in the country. |917| Because it did not accept deposits or have insured accounts, it was not overseen by any federal or state bank regulator.

In 2007, after the company announced its intent to restate its 2006 financial results, investors lost confidence in the company, its stock plummeted, and New Century collapsed. In April 2007, it filed for bankruptcy. |918| In February 2008, the bankruptcy examiner released a detailed report that found New Century was responsible for "significant improper and imprudent practices related to its loan originations, operations, accounting and financial reporting processes." |919| Like WaMu, New Century had engaged in a number of harmful mortgage practices, including "increasing loan originations, without due regard to the risks associated with that business strategy"; risk layering in which it issued high risk loans to high risk borrowers, including originating in excess of 40% of its loans on a stated income basis; allowing multiple exceptions to underwriting standards; and utilizing poor risk management practices that relied on the company's selling or securitizing its high risk mortgages rather than retaining them.

After New Century's bankruptcy, a 2007 class action complaint was filed by the New York State Teachers' Retirement System and others alleging that New Century executives had violated federal securities laws and committed fraud. |920| Among other matters, the complaint alleged that the company sold poor quality loans that incurred early payment defaults, received numerous demands from third party buyers of the loans to repurchase them, and built up a huge backlog of hundreds of millions of dollars in repurchase requests that the company deliberately delayed paying to make its 2005 and 2006 financial results appear better than they actually were. |921| The complaint also alleged that New Century issued loans using lax underwriting standards to maximize loan production, |922| and "routinely and increasingly lent money to people who were unable to repay the debt shortly after the loans were closed." |923| The suit took note of a news article stating: "Loans made by New Century, which filed for bankruptcy protection in March, have some of the highest default rates in the industry." |924|

In December 2009, the SEC filed a civil complaint charging three former New Century executives, the CEO, CFO, and controller, with fraudulent accounting that misled investors about the company's finances. |925| The SEC alleged that, while the company's financial disclosures painted a picture that the company's performance exceeded that of its peers, its executives had failed to disclose material negative information, such as significant increases in its loans' early payment defaults and a backlog of loan repurchases, which had the effect of materially overstating the company's financial results. The SEC complaint also stated that, although New Century had represented itself as a prudent subprime lender, it "soon became evident that its lending practices, far from being ‘responsible,' were the recipe for financial disaster." |926| The complaint detailed a number of high risk lending practices, including the issuance of interest only loans; 80/20 loans with loan-to-value ratios of 100%; and stated income loans in which the borrower's income and assets were unverified. |927| The complaint charged the New Century executives with downplaying the riskiness of the company's loans and concealing their high delinquency rates.

In July 2010, the three former New Century executives settled the SEC complaint for about $1.5 million, without admitting or denying wrongdoing. |928| Each also agreed to be barred from serving as an officer or director of any publicly traded corporation for five years. A larger group of about a dozen former New Century officers and directors settled several class action and other shareholder lawsuits for $88.5 million. |929|

In 2007, New Century reported publicly that it was under criminal investigation by the U.S. Attorney's Office for the Central District of California, but no indictment of the company or any executive has been filed. |930|

Fremont Investment & Loan was once the fifth largest subprime mortgage lender in the United States. |931| At its peak in 2006, it had $13 billion in assets, 3,500 employees, and nearly two dozen offices. |932| Fremont Investment & Loan was neither a bank nor a thrift, but an "industrial loan company" that issued loans and held insured deposits. |933| It was owned by Fremont General Credit Corporation which was owned, in turn, by Fremont General Corporation. In 2007, the bank was the subject of an FDIC cease and desist order which identified multiple problems with its operations and ordered the bank to cease its subprime lending. |934| In 2008, due to insufficient capital, the FDIC ordered Fremont General Corporation to either recapitalize the bank or sell it. The bank was then sold to CapitalSource, Inc. |935| In June 2008, Fremont General Corporation declared bankruptcy under Chapter 11 and has since reorganized as Signature Group Holdings, Inc. |936|

As a California based industrial loan company, Fremont Investment & Loan was overseen by the California Department of Financial Institutions, a state bank regulator. Since it had deposits that were federally insured, Fremont was also regulated by the FDIC. |937| The March 2007 FDIC cease and desist order required the bank to end its subprime lending business, due to "unsafe and unsound banking practices and violations of law," including operating with "a large volume of poor quality loans"; "unsatisfactory lending practices"; "excessive risk"; and inadequate capital. |938| The FDIC also determined that the bank lacked effective risk management practices, lacked adequate mortgage underwriting criteria, and was "approving loans with loanto- value ratios approaching or exceeding 100 percent of the value of the collateral." |939|

Many of the specific practices cited in the cease and desist order mirror the FDIC and OTS criticisms of WaMu. For example, the FDIC determined that Fremont was "marketing and extending adjustable-rate mortgage (‘ARM') products to subprime borrowers in an unsafe and unsound manner that greatly increase[d] the risk that borrowers will default"; "qualifying borrowers for loans with low initial payments based on an introductory or ‘start' rate that will expire after an initial period"; "approving borrowers without considering appropriate documentation and/or verification of the their income"; and issuing loans with "features likely to require frequent refinancing to maintain an affordable monthly payment and/or to avoid foreclosure." |940| Fremont later reported receiving default notices on $3.15 billion in subprime mortgages it had sold to investors. |941|

One year later, in March 2008, the FDIC filed another public enforcement action against the bank, for failing to provide an acceptable capital restoration plan or obtaining sufficient capital, and ordered the bank's parent company to either adequately capitalize the bank within 60 days or sell it. |942| The bank was then sold to CapitalSource, Inc.

The FDIC took action against Fremont much earlier – in March 2007 – than other regulators did with respect to other financial institutions, including OTS' nonpublic enforcement actions against WaMu in March and September 2008; the FDIC's seizure of IndyMac in July 2008; the SEC's action against Countrywide in June 2009; and the SEC's action against New Century in December 2009. By putting an early end to Fremont's subprime lending, the FDIC stopped it from selling additional poor quality mortgage backed securities into U.S. securitization markets.

In November 2008, the OCC researched the ten metropolitan areas with the highest foreclosure rates and identified the ten lenders in each area with the most foreclosed loans; Long Beach, Countrywide, IndyMac, New Century, and Fremont all made the list of the "Worst Ten in the Worst Ten." |943| Moody's, the credit rating agency, later calculated that, in 2006 alone, Long Beach, New Century, and Fremont were responsible for 24% of the residential subprime mortgage backed securities issued, but 50% of the subsequent credit rating downgrades of those securities. |944| The fact is that each of these lenders issued billions of dollars in high risk, poor quality home loans. By allowing these lenders, for years, to sell and securitize billions of dollars in poor quality, high risk home loans, regulators permitted them to contaminate the secondary market and introduce systemic risk throughout the U.S. financial system.


796. April 13, 2010 Subcommittee Hearing, at 39- 40 (Testimony of Ronald J. Cathcart, former WaMu Chief Enterprise Risk Officer, 2006- 2008). [Back]

797. "Lax Regulators Helped Doom Washington Mutual," Associated Press (4/16/2010). [Back]

798. 5/2/2007 email from OTS Director John Reich to Shelley Hymes, "Re: Lunch Friday," Reich_John- 00025837_001, Hearing Exhibit 4/16- 78. [Back]

799. April 16, 2010 Subcommittee Hearing at 36. [Back]

800. Id. at 5 (opening statement of Senator Levin). [Back]

801. 7/3/2008 email from OTS Director John Reich to WaMu CEO Kerry Killinger, OTSWMS08- 014 0000912- 13, Hearing Exhibit 4/16- 44. [Back]

802. April 16, 2010 Subcommittee Hearing at 34. [Back]

803. See also id. at 46 (When asked why OTS took so long to complete the MOU, former OTS Director John Reich testified: "I don ' t know, to tell you the truth. I do not know why it took so long to implement the MOU. … I regret [the] … delay." ). [Back]

804. 1/27/2006 email from Lawrence Carter to Darrel Dochow, OTSWMS06- 008 0001082, Hearing Exhibit 4/16- 32. [Back]

805. 6/15/2006 email from Lawrence Carter to Darrel Dochow, Dochow_Darrel- 00022908_001, Hearing Exhibit 4/16- 7. [Back]

806. See, e.g., IG Report at 30. [Back]

807. See Thorson prepared statement, April 16, 2010 Subcommittee Hearing at 12. [Back]

808. April 16, 2010 Subcommittee Hearing at 60- 61. [Back]

809. 5/30/2006 email from John Robinson, WaMu VP of Regulatory Relations, to colleagues, JPM_WM02619435. Hearing Exhibit 4/16- 34. [Back]

810. 5/30/2006 email from Wayne Pollack, WaMu SVP, to David Schneider, et al., JPM_WM02619434, Hearing Exhibit 4/16- 34. [Back]

811. See 11/17/2005 WaMu internal memorandum, "re So. CA Emerging Markets Targeting Loan Review Results," JPM_WM01083051, Hearing Exhibit 4/13- 22a; 11/16/2005 WaMu internal PowerPoint presentation, "Retail Fraud Risk Overview," JPM_WM02481934- 49, Hearing Exhibit 4/13- 22b; 11/19/2005 email from Cheryl Feltgen to colleagues, "Re: Retail Fraud Risk Overview," JPM_WM03535694- 95, Hearing Exhibit 4/13- 23a; 8/29/2005 email from Jill Simons to Timothy Bates, "Risk Mit Loan review data ‘ Confidential, '" JPM_WM04026076- 77, Hearing Exhibit 4/13- 23b. [Back]

812. 4/4/2008 WaMu internal memorandum, from June Thoreson- Rogers, Corporate Fraud Investigations, and Michele Snyer, Deputy General Auditor, to Stewart Landefeld, Acting Chief Legal Officer, and others, Hearing Exhibit 4/13- 24. [Back]

813. Subcommittee interview of OTS Examiner- in- Charge Benjamin Franklin (2/17/2010). [Back]

814. April 13, 2010 Subcommittee Hearing at 39 (testimony of James G. Vanasek, former WaMu Chief Risk Officer, 2004- 2005). [Back]

815. 6/27/2003 email from Dennis Fitzgerald, OTS Examiner, to Lawrence Carter, OTSWEM04- 0000006748, Hearing Exhibit 4/16- 15. [Back]

816. 6/8/2005 email from Verlin Campbell, OTS Examiner, to Zalka Ancely, OTS Examiner, OTSWME05- 003 0000634, Hearing Exhibit 4/16- 29. [Back]

817. 5/31/2007 Draft Compliance Memo from Susie Clark, OTS Compliance Specialist, Franklin_Benjamin- 00020408_002, Hearing Exhibit 4/16- 9. [Back]

818. Id. at Franklin_Benjamin- 00020408_001. [Back]

819. Subcommittee interview of Benjamin Franklin (2/17/2010). [Back]

820. 6/3/2007 email from OTS examiner Mary Clark to Examiner- in- Charge Benjamin Franklin, "Compliance Rating," OTSWMS07- 013 0002576, Hearing Exhibit 4/16- 39. [Back]

821. 11/21/2005 email exchange between OTS examiner Benjamin Franklin and Examiner- in- Charge Lawrence Carter and others, OTSEMS05- 004 0001911- 12, Hearing Exhibit 4/16- 30. [Back]

822. Id. [Back]

823. 9/15/2005 email from OTS Examiner- in- Charge Lawrence Carter to OTS Western Region Deputy Director Darrel Dochow, OTSWMS05- 002 0000535, Hearing Exhibit 4/16- 6. [Back]

824. 3/29/2006 letter from Washington Mutual Home Loans President David C. Schneider to OTS Chief Counsel, Proposed Guidance – Interagency Guidance on Nontraditional Mortgage Products 70 Fed. Reg. 77249, JPM_WM04473292. [Back]

825. Id. at JPM_WM04473298. [Back]

826. Subcommittee interviews of Sheila Bair (4/5/2010) and George Doerr (3/30/2010). The Subcommittee was told that OTS was the "most sympathetic to industry" concerns of the participating agencies and was especially protective of Option ARMs. [Back]

827. 7/27/2006 email from Steven Gregovich to Grovetta Gardineer and others, "NTM Open Issues," OSWMS06- 008 0001491- 495, Hearing Exhibit 4/16- 71. [Back]

828. Id. [Back]

829. 8/14/2006 email from Kurt Kirch to David Henry and Steven Gregovich, "Latest AMP Guidance," Hearing Exhibit 4/16- 72. [Back]

830. 7/27/2006 email from Steven Gregovich to Grovetta Gardineer, et al., "NTM Open Issues," OSWMS06- 008 0001491- 495, Hearing Exhibit 4/16- 71. [Back]

831. 10/4/2006 "Interagency Guidance on Nontraditional Mortgage Product Risks," (NTM Guidance), 71 Fed. Reg. 192 at 58609. [Back]

832. Subcommittee interviews of Sheila Bair (4/5/2010) and George Doerr (3/30/2010). [Back]

833. See 10/2006 OTS Meeting, "Washington Mutual Alternative Mortgage Guidance Implementation Plan," JPM_WM02549033, Hearing Exhibit 4/16- 73. [Back]

834. Id. at JPM_WM02549037. Subcommittee interview of Darrel Dochow (3/3/2010) (indicating that the NTM Guidance used "should" instead of "must" to avoid being a "one- size- fits- all" set of requirements). See also Subcommittee interview of John Bowman (4/6/2010) (indicating that guidance is not enforceable and that giving banks more time to comply was a reasonable approach). [Back]

835. See undated OTS document, "Option ARM Neg Am Review Workprogram 212A(1) & Nontraditional Mortgage Guidance Review," OTSWMEF- 0000009888, Hearing Exhibit 4/16- 74. The document quotes Option ARM data from March 31, 2007, indicating that the document was prepared after that date. [Back]

836. Id. at OTSWMEF- 0000009890. [Back]

837. Id. at OTSWMEF- 0000009893- 94. [Back]

838. See, e.g., 4/30/2007 email from FDIC Western Region Assistant Director George Doerr to FDIC official David Collins, FDIC_WAMU 000014457, Hearing Exhibit 4/16- 57. [Back]

839. See April 16, 2010 Subcommittee Hearing at 33 (Testimony of FDIC IG John Rymer: "OTS did grant FDIC greater access at WaMu, but limited FDIC's review of WaMu's residential loan files. The FDIC wanted to review these files to assess underwriting and WaMu's compliance with the Non- Traditional Mortgage Guidance." ); See also April 16, 2010 Subcommittee Hearing at 187 (Testimony of George Doerr, FDIC). [Back]

840. Subcommittee interview of George Doerr (3/30/2010). [Back]

841. Subcommittee interview of Sheila Bair (4/5/2010). [Back]

842. 3/19/2007 email from Ron Cathcart to David Schneider, JPM_WM02571598, Hearing Exhibit 4/16- 75. [Back]

843. See wamusecurities.com. (subscription website maintained by JPMorgan Chase with data on Long Beach and WaMu mortgage backed securities showing, as of January 2011, delinquency rates for particular mortgage backed securities, including WMALT 2006 OA- 3 – 57.87%). [Back]

844. See 5/15/2007 email from OTS Examiner- in- Charge Benjamin Franklin to OTS Western Region Director Darrel Dochow, Franklin_Benjamin- 00020449_001, Hearing Exhibit 4/16- 79 (quoting email from Bill Magrini). See also 3/27/2007 email from OTS official Bill Magrini to OTS colleagues, Quigley_Lori- 00110324, Hearing Exhibit 4/16- 76 ( "I noted that several of our institutions make NINA loans. That, in my humble opinion is collateral dependent lending and deemed unsafe and unsound by all the agencies. … It is not at all surprising that delinquencies are up, even among Alt- A. In my opinion, credit standards have gone too low." ). See also undated OTS document, "Option ARM Neg Am Review Workprogram 212A(1) & Nontraditional Mortgage Guidance Review," at OTSWMEF- 0000009891, Hearing Exhibit 4/16- 74 (determining that 73% of the Option ARMs in WaMu's portfolio were "low doc" loans). [Back]

845. 5/16/2007 email from OTS Western Region Director Darrel Dochow to OTS Examiner- in- Charge Benjamin Franklin, Franklin_Benjamin- 00020449_001, Hearing Exhibit 4/16- 79. [Back]

846. Id. [Back]

847. Id. [Back]

848. Id. [Back]

849. 10/7/2008 email exchange between OTS Examiner- in- Charge Benjamin Franklin and OTS examiner Thomas Constantine, "West Region Update," Franklin_Benjamin- 00034415_001, Hearing Exhibit 4/16- 14. [Back]

850. 4/2010 "Evaluation of Federal Regulatory Oversight of Washington Mutual Bank," prepared by the Offices of Inspector General at the Department of the Treasury and Federal Deposit Insurance Corporation, at 10, Hearing Exhibit 4/16- 82. [Back]

851. See, e.g., April 16, 2010 Subcommittee Hearing at 14- 15, 41- 42. [Back]

852. Id. at 42 ( "In hindsight, I regret it." ). [Back]

853. 10/7/2008 emails from OTS examiner Thomas Constantine to OTS Examiner- in- Charge Benjamin Franklin, "West Region Update," Franklin_Benjamin- 00034415_002, Hearing Exhibit 4/16- 14. [Back]

854. 9/15/2005 email from Examiner- in- Charge Lawrence Carter to Western Region Deputy Director Darrel Dochow, OTSWMS05- 002 0000535, Hearing Exhibit 4/16- 6. [Back]

855. 11/2004 Office of Thrift Supervision Examination Handbook, at 070.8, OTSWMEF- 0000032053; 2/2011 Office of Thrift Supervision Examination Handbook, at 070.9, http://www.ots.treas.gov/_files/422008.pdf (quote is the same in updated version of handbook). See also April 16, 2010 Subcommittee Hearing at 19 (testimony of FDIC and Treasury Inspectors General). [Back]

856. April 16, 2010 Subcommittee Hearing at 24- 26. [Back]

857. Thorson prepared statement at 10, April 16, 2010 Subcommittee Hearing at 110. [Back]

858. Rymer prepared statement at 10, April 16, 2010 Subcommittee Hearing at 129. [Back]

859. Undated draft memorandum from the WaMu examination team at the FDIC to the FDIC Section Chief for Large Banks, FDIC- EM_00251205- 10, Hearing Exhibit 4/16- 51a (likely mid- 2005). [Back]

860. 10/7/2008 email from OTS Examiner- in- Charge Benjamin Franklin to OTS Examiner Thomas Constantine, Franklin_Benjamin- 00034415, Hearing Exhibit 4/16- 14. [Back]

861. 3/18/2009 Government Accountability Office, "Review of Regulators ' Oversight of Risk Management Systems at a Limited Number of Large, Complex Financial Institutions," Testimony of Orice M. Williams, Hearing Exhibit 4/16- 83 (GAO reviewed risk management practices of OTS, as well as the Federal Reserve, the Office of the Comptroller of the Currency, the SEC, and self- regulatory organizations.). [Back]

862. "Securitizations of Washington Mutual and Long Beach Subprime Home Loans," chart prepared by the Subcommittee, Hearing Exhibit 4/13- 1c; 10/17/2006 "Option ARM" draft presentation to the WaMu Board of Directors, JPM_WM02549027, chart at 2, Hearing Exhibit 4/13- 38. [Back]

863. 4/14/2005 email from OTS examiner to colleagues, OTSWME05- 0120000806, Hearing Exhibit 4/13- 8a. [Back]

864. Undated draft memorandum from WaMu examination team to the FDIC Section Chief for Large Banks, FDICEM_ 00251205- 10, Hearing Exhibit 4/16- 51a (likely mid- 2005). [Back]

865. 9/16/2005 email from OTS Examiner- in- Charge at WaMu, OTSWMS05- 002 0000535, Hearing Exhibit 4/16- 6. [Back]

866. 1/20/2006 email from Darrel Dochow to Michael Finn and others, OTSWMS06- 007 0001020. [Back]

867. 10/7/2008 email from OTS examiner Thomas Constantine to OTS colleague Benjamin Franklin, Franklin_Benjamin- 00034415_001, Hearing Exhibit 4/16- 14. [Back]

868. See 3/5/2007 WAMU Examination "Review of Securitization," OTSWME07- 075 0000780- 791 at 789 (data gathered from WaMu's Market Risk Committee minutes, Dec. 2006 and Jan. 2007). [Back]

869. Thorson prepared statement at 7, April 16, 2010 Subcommittee Hearing at 107. [Back]

870. See, e.g., Treasury and FDIC IG Report at 16. [Back]

871. Thorson prepared statement at 10, April 16, 2010 Subcommittee Hearing at 110. See also id. at 8, April 16, 2010 Subcommittee Hearing at 108. [Back]

872. See Thorson prepared statement at 11, April 16, 2010 Subcommittee Hearing at 111. [Back]

873. April 16, 2010 Subcommittee Hearing at 24- 26. [Back]

874. See, e.g., Rymer prepared statement at 5. [Back]

875. 9/11/2008 OTS document, "WaMu Ratings of 3/343432," Polakoff_Scott- 00065325, Hearing Exhibit 4/16- 48. [Back]

876. April 13, 2010 Subcommittee Hearing at 40 (Testimony of James Vanasek). [Back]

877. See April 16, 2010 Subcommittee Hearing at 25. [Back]

878. 1/2009 Center for Responsible Lending report, "The Second S&L Scandal," at 1, Hearing Exhibit 4/16- 84. [Back]

879. Id. [Back]

880. April 16, 2010 Subcommittee Hearing at 18 (Testimony of Treasury IG Thorson). The Treasury IG also reviewed, for example, failed banks overseen by the OCC. [Back]

881. See, e.g., "Mortgage Lender Rankings by Residential Originations," charts prepared by MortgageDaily.com, http://www.mortgagedaily.com/MortgageLenderRanking.asp (indicating Countrywide was one of the top three issuers of U.S. residential mortgages from 2003 to 2008); "A Mortgage Crisis Begins to Spiral, and the Casualties Mount," New York Times (3/5/2007). [Back]

882. 3/5/2007 OTS press release, "OTS Approves Countrywide Application," http://www.ots.treas.gov/_files/777014.html. [Back]

883. OCC, "Annual Report: Fiscal Year 2009," http://www.occ.gov/static/publications/annrpt/2009AnnualReport.pdf. [Back]

884. See, e.g., SEC v. Mozilo, Case No. CV09- 03994 (USDC CD Calif.), Complaint (June 4, 2009), at ¶¶ 102- 104 (hereinafter "SEC Complaint against Countrywide Executives" ). [Back]

885. "Countrywide Financial Corporation," New York Times (10/15/2010). [Back]

886. SEC Complaint against Countrywide Executives. [Back]

887. Id. [Back]

888. See, e.g., SEC Complaint against Countrywide Executives, at ¶¶ 17- 19. [Back]

889. See, e.g., id. at ¶¶ 6- 7. [Back]

890. Id. at ¶ 50. [Back]

891. Id. at ¶ 63. [Back]

892. Id. at ¶ 68- 69. [Back]

893. Id. at ¶ 49. [Back]

894. 10/15/2010 SEC Press Release, "Former Countrywide CEO Angelo Mozilo to Pay SEC's Largest- Ever Financial Penalty Against a Public Company's Senior Executive," http://www.sec.gov/news/press/2010/2010-197.htm. [Back]

895. Id. [Back]

896. 6/7/2010 U.S. Federal Trade Commission press release, "Countrywide Will Pay $108 Million for Overcharging Struggling Homeowners; Loan Servicer Inflated Fees, Mishandled Loans of Borrowers in Bankruptcy," http://www.ftc.gov/opa/2010/06/countrywide.shtm. [Back]

897. See, e.g., "$600 Million Countrywide Settlement," Associated Press (8/3/2010). [Back]

898. 2/26/2009 Office of Inspector General, Dept. of the Treasury Audit Report, "Safety and Soundness: Material Loss Review of IndyMac Bank," at 40, http://www.treasury.gov/about/organizationalstructure/ig/Documents/oig09032.pdf (hereinafter "IG Report on IndyMac Bank" ). [Back]

899. Id. at 7. [Back]

900. Id. at 3. [Back]

901. Id. at 1. [Back]

902. Id. at 8. [Back]

903. Id. at 18. [Back]

904. Id. at 21- 31. [Back]

905. Id. [Back]

906. Id. In addition to the Material Loss Review, the Treasury Inspector General investigated OTS ' conduct in permitting thrifts, including IndyMac to backdate certain capital infusions. See 12/22/2008 Office of the Inspector General, Dept. of the Treasury, Letter to Ranking Member Charles Grassley, Senate Committee on Finance, http://media.washingtonpost.com/wpsrv/business/documents/Indymac_Thorson_122308pdf.pdf?sid=ST2008122202386. Darrel Dochow was removed from his position as Director of the OTS West Division for having allowed IndyMac to backdate a capital contribution of $18 million, which made it appear stronger than it really was in the relevant financial statement. Then Acting OTS Director Scott Polakoff was also placed on leave during the backdating investigation, but he disputed that he directed anyone to allow backdated capital injections and asserted that the real impetus for his being placed on leave was his Congressional testimony critical of the agency's conduct related to AIG. Subcommittee interview of Scott Polakoff (3/16/10). [Back]

907. 3/31/2009 Office of the Inspector General, Dept. of the Treasury, "Semiannual Report to Congress," at 15, http://www.treasury.gov/about/organizational-structure/ig/Documents/sar042009.pdf. [Back]

908. Id. at 31. [Back]

909. Id. at 38. [Back]

910. 2/11/2011 SEC press release, "SEC Charges Former Mortgage Lending Executives With Securities Fraud," http://www.sec.gov/news/press/2011/2011- 43.htm. [Back]

911. Id. [Back]

912. "The Fall of IndyMac," CNNMoney.com (7/13/2008). [Back]

913. Id. [Back]

914. 3/31/2010 Office of Inspector General, Dept. of the Treasury, "Semiannual Report to Congress," http://www.treasury.gov/about/organizationalstructure/ig/Documents/March%202010%20SAR%20Final%20%20(04- 30- 10).pdf. [Back]

915. "Crisis Deepens as Big Bank Fails; IndyMac Seized in Largest Bust in Two Decades," Wall Street Journal (7/12/2008). [Back]

916. See SEC v. Morrice, Case No. SACV09- 01426 (USDC CD Calif.), Complaint (Dec. 7, 2009), ¶¶ 12- 13 (hereinafter "SEC Complaint against New Century Executives" ). See also In re New Century, Case No. 2:07- cv- 00931- DDP (USDC CD Calif.), Amended Consolidated Class Action Complaint (March 24, 2008), at ¶¶ 55- 58 (hereinafter "New Century Class Action Complaint" ). [Back]

917. In re New Century TRS Holdings, Inc., Case No. 07- 10416 (KJC) (US Bankruptcy Court, Del.), 2/29/2008 Final Report of Michael J. Missal, Bankruptcy Court Examiner, at 2, http://graphics8.nytimes.com/packages/pdf/business/Final_Report_New_Century.pdf (hereinafter "New Century Bankruptcy Report" ). See also New Century Class Action Complaint at ¶ 59- 60. [Back]

918. In re New Century TRS Holdings, Inc., Case No. 07- 10416 (KJC) (US Bankruptcy Court, Del.). [Back]

919. New Century Bankruptcy Report. [Back]

920. New Century Class Action Complaint. [Back]

921. Id. at ¶¶ 75- 79. [Back]

922. Id. at ¶ 112. See also ¶¶ 126- 130. [Back]

923. Id. at ¶ 113. See also ¶¶ 114- 116. [Back]

924. Id. at ¶ 123. [Back]

925. SEC Complaint against New Century Executives; See also 12/7/2009 SEC Press Release, "SEC Charges Former Offices of Subprime Lender New Century With Fraud." [Back]

926. SEC Complaint against New Century Executives at 3. [Back]

927. See, e.g., SEC Complaint against New Century Executives at ¶¶ 24- 32. [Back]

928. See 7/30/2010 SEC Litigation Release No. 21609, "SEC Settles With Former Officers of Subprime Lender New Century, "http://www.sec.gov/litigation/litreleases/2010/lr21609.htm. [Back]

929. See, e.g., "New Century Ex- leaders to Pay $90 Million in Settlements," Los Angeles Times (7/31/2010). [Back]

930. See 3/12/2007 New Century Financial Corporation Form 8- K, Item 8.01. [Back]

931. "Fremont Ordered by FDIC to Find Buyer; Curbs Imposed," Bloomberg (3/28/2010), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=atIgi9otRZ3k. [Back]

932. 3/2006 Fremont General Corporation Form 10- K filed with the SEC. [Back]

933. Id. [Back]

934. In re Fremont Investment & Loan, Order to Cease and Desist, Docket No. FDIC- 07- 035b (March 7, 2007) (hereinafter "Fremont Cease and Desist Order" ). [Back]

935. In re Fremont Investment & Loan, Supervisory Prompt Corrective Action Directive, Docket No. FDIC- 08- 069 PCAS (March 26, 2008); "CapitalSource, Inc.," Hoover's Company Records. See also "CapitalSource to Acquire Fremont's Retail Arm," New York Times (4/14/2008). [Back]

936. In re Fremont General Corporation, Case No. 8:08- bk- 13421- ES (US Bankruptcy Court, CD Calif.), First Status Report (July 30, 2010) (included in 7/30/2010 Fremont General Corporation 8K filing with the SEC). [Back]

937. 2006 Fremont 10- K Statement with the SEC. [Back]

938. Fremont Cease and Desist Order at 1- 3. See also 3/7/2007 FDIC press release, "FDIC Issues Cease and Desist Order Against Fremont Investment & Loan, Brea, California, and its Parents." [Back]

939. Fremont Cease and Desist Order at 2- 4. [Back]

940. Id. at 3. [Back]

941. See 3/4/2008 Fremont General Corporation press release, "Fremont General Corporation Announces Receipt of Notice of Covenant Default With Respect to Guaranties Issued in Connection With Certain Prior Residential Sub- Prime Loan Sale Transactions," http://media.corporate-ir.net/media_files/irol/10/106265/08-03-04N%20FGCAnnouncesDefaultNoticewithRRELoanTransactions.pdf. See also "CapitalSource to Acquire Fremont's Retail Arm," New York Times (4/14/2008). [Back]

942. In re Fremont Investment & Loan, Supervisory Prompt Corrective Action Directive, Docket No. FDIC- 08- 069 PCAS ( March 26, 2008). [Back]

943. See 11/13/2008 "Worst Ten in the Worst Ten," document prepared by the OCC, Hearing Exhibit 4/13- 58. [Back]

944. 7/12/2007 "Moody's Structured Finance Teleconference and Web Cast: RMBS and CDO Rating Actions," prepared by Moody's Investors Service, Hearing Exhibit 4/23- 106. [Back]

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C. Washington Mutual Examination History E. Preventing Regulatory Failures

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