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WaMu crisis fuelled by raging turf war
By Stephanie Kirchgaessner in Washington
Published: April 17 2010 00:18 | Last updated: April 17 2010 00:18
Ben Bernanke, chairman of the federal reserve of the United States...and babysitter?
In the final weeks leading up to the collapse of Washington Mutual, Mr Bernanke was not only facing the prospect of a cratering US economy. He was also dealing with another headache: two bickering federal banking regulators who were at odds over how to cope with a thrift that was teetering on the edge of a cliff.
An investigation by the Senate permanent subcommittee on investigations this week revealed stunning new details about the reckless lending practices that led to WaMu’s eventual seizure by federal regulators. It also brought into clear focus the failure of the Office of Thrift Supervision, WaMu’s chief regulator, to rein in those underwriting practices.
The WaMu situation was exacerbated by a fierce turf war raging between the OTS and the Federal Deposit Insurance Corporation (FDIC) in the frenzied weeks before WaMu’s seizure, according to dozens of e-mails and testimony. The FDIC, headed by Sheila Bair, served as a backstop regulator, but the OTS would not cooperate with its counterpart, the investigation shows. For months, the OTS prevented the FDIC from gaining access to key records and work space at WaMu.
On August 6 2008, weeks before the bank would go belly up, OTS director John Reich sent a scathing e-mail to Ms Bair because she had suggested she wanted to discuss “contingency planning” for WaMu during an upcoming conference call – including making some “discrete inquiries” to determine whether there were any banks that would be willing to buy WaMu.
“I understand you have strong objections to our doing so, so I’d like to talk this through,” Ms Bair wrote to Mr Reich at the OTS.
“You really know how to stir up a colleague’s vacation,” Mr Reich responded to her.
“I do not under any circumstances want to discuss this on Friday’s conference call, in which I may or may not be able to participate, depending on phone service availability on the cruise ship location.”
Instead, Mr Reich wanted a “one on one” meeting with Mr Bernanke following his return to the office after his holiday. He also was deliberating having a separate meeting with then-Treasury secretary Hank Paulson before making any moves.
“This is an OTS regulated institution, not an FDIC regulated institution. We make any decision on solvency, not the FDIC, and I have staff equally as competent as staff at the FDIC, whom I know well,” Mr Reich said.
According to Senate records, Ms Bair forwarded the e-mail to Donald Kohn, then the vice chairman of the Fed, 14 minutes later.
“This is pretty over the top,” she wrote.
Mr Kohn responded from his BlackBerry on the same day: “I’ll say. Bernanke would be glad to talk to him, but John won’t like the message. Ben has several times pushed us on contingency planning and volunteered to meet with Reich if we think it would be helpful.”
When Ms Bair wrote Mr Reich a few weeks later to inform him that she had alerted WaMu that the two regulators disagreed over a possible rating downgrade of the bank, it sent the OTS director over the edge.
“I cannot believe the continuing audacity of this woman. I don’t know if I can wait much longer to announce my intentions,” he wrote to a colleague.
In testimony before the Senate panel on Friday, Mr Reich said he had total respect for Ms Bair and that his words were written under intense duress.
“Rome was burning,” Mr Reich said. “Sometimes people say things that they wish would not appear in print.”
Carl Levin, the Democratic chairman of the panel, chastised Mr Reich, saying that American taxpayers expected more of its regulators and pointed out that Mr Reich had seemed from the record to be more exercised by Ms Bair’s intrusion onto his “turf” than the shoddy practices at WaMu.
“At time, [OTS] acted like a WaMu guard dog, trying to keep the FDIC at bay,” he said.
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