I found the news about IndyMac intriguing this morning. Mortgage lender IndyMac of Pasadena, California has been diving down the path of illiquid insolvency since this time last year (here's a chart I posted elsewhere showing the skid as a reflection of stock price). The gradual failure prompted a letter from a Senator (Schumer, NY) a few weeks ago, which precipitated a run on this bank. The bank was seized by FDIC regulators yesterday subsequent to the run. This is the second largest bank failure in history.
John Reich, director of the Office of Thrift Supervision, a chronic Republican community banker who spent twelve years working for Republican Senator Connie Mack's staff, and appointed by President Bush in 2005, blames Schumer for the run on the bank. But looking at the institution's stock price over the past year, one readily sees that investors have known the place was cascading towards Armageddon for the past year. In fact, it was Reich (BTW, it's pronounced "rich," and isn't that rich?) himself who...
...ushered in the "regulatory relief" which rolled back consumer protection and enabled thrifts to skate on thin ice through the current mortgage crisis.
Under Reich, whom Bush appointed to the FDIC board in 2002 after an undistinguished career in community banking, the Office of Thrift Supervision has largely gone AWOL until this year. It's shades of "Heckuva job, Brownie!" all over again.
Reich like Brownie hardly had the kind of c.v. that anticipated success, which unfolded far from Washington when he wasn't working for highly partisan Rep./Sen Mack. The National Bank of Sarasota, in fact, a bank with under a billion in assets while operating, doesn't exist anymore.
Just a month ago, Reich told the Senate Banking Committee:
Thrifts' capital and loan loss provisionts keep them well-positioned to withstand further pressures. The overall safety and soundness of the industry is perhaps best illuniated by noting that there were only a dozen problem thrifts in the first quarter of this year, compared with more than 200 during the height of the thrift crisis in the early 1990s. Although the number of problem thrifts will probably increase slightly in coming months and a handful of failures could occur, we expect these seriously troubled institutions to remain few in number and small in asset size. (TS-166 on this page, a .pdf).
By no measure is Indy small in asset size. Nonetheless, when Reich became Vice Chair of the Office of Thrift, he was worried not about solvency, but about compliance. Compliance in banking is the effort a bank spends devoted to pleasing auditors and regulatory agencies. In a consumer's mind, it's protection; in a Bush Republican's mind, it's a damn nuisance.
"I know what bankers are living through," Reich said. "We had two people in a $450 million bank whose sole job was compliance." (Community Banker, September 2003)
In short, he didn't feel consumer pain, he felt pain for bankers. Reich's concern about compliance led to the Office of Thrift to cut all that durn tape in compliance---an enabler of the rush to back assets with unreasonably optimistic scenarios. An enabler of IndyMac, in short.
Even by 2006 Reich admitted to Massachusetts Banker that the dismantling of consumer protection via streamlining compliance had gone too far.
My first two or three months on the job, I visited our regional offices around the country. And one of the common threads of concern was, as we dismantled in earlier years our centralized management of compliance and consumer protection, we wound up with no go-to people so to speak, on questions pertaining to policy issues on compliance and consumer
protection. Massachusetts Banker, Page 21 of an ugly html page
While the idea of a country club bumpkin heading an important government agency smacks of Heckuva-job-Brownie-ism, the way the mortgage meltdown is unfolding is in truth more redolent of the Enron catastrophe. Top-drawer auditors kept signing audits at IndyMac and its cousin Countrywide while government regulators looked the other way and free-market swooners cheered them on. Countrywide, in fact, in order to go gung-ho into flimsily-backed mortgages, dropped its auditor of thirty years in 2003, bringing in KPMG, which may emerge as the Arthur Anderson of the mortgage debacle.
With Reich like Brownie bent on providing Congress with rosy scenarios even while the house is on fire, it's hard to appraise if more banks that banked on mortgage brokers as their cash cows are going to fail. (In California, where speculators and lenders have thrived since the gold rush, banks are known to "lead with credit" more avidly than banks elsewhere in the country, and sometimes this has paid off--see 1990's Silicon Valley e.g., and it's not an accident that both Countrywide and IndyMac are LA-adjacent based banks). But when Reich tries to point a finger at Senator Schumer for stating the obvious, anyone with a bank account backed by the FDIC---which is pretty much everyone---shouldn't let him get away with it.
