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Richard E.

P.O. Box 371182
Montara, Ca. 94037

August 20, 2008

The Honorable Chairman Christopher J. Dodd

Committee on Banking, Housing, and Urban Affairs
United States Senate
534 Dirksen Senate Office Building
Washington, D.C. 20510


•The predictable collapse of IndyMac, OTS regulatory failure and circumvention of FDIC's
backup authority.

•Actions of senior OTS officials jeopardizing FDIC Insurance fund.

•Request that you distribute this letter to committee members.

FAXED 8-20-08 (202-224-5137) Hardcopy with referenced exhibits to follow by Mail.

Dear Sir:

I testified at the House Banking committee hearing into the investigation of the collapse of Lincoln
S&L on 10-31-89, various committee hearings of the California State Legislature regarding the
same matter, several criminal trials involving S&L crooks, including Charles Keating of Lincoln
S&L, and various administrative proceedings involving the FDIC and other federal and state S&L
regulators. Senator Schumer, a member of this committee, would undoubtedly remember the
House Banking Committee investigative hearing on Lincoln S&L at which I testified, because he
was a well-informed and perceptive questioner of the whistleblower panel of examiners and other
regulators testifying that day. Senator Schumer might recall that I was a persistent senior S&L
examiner for the state of California who quickly identified $50 million in losses, testified about a
federal whitewash and tried to shutdown the sales of worthless securities to elderly California
swindling victims. Representative James Leach was kind enough to refer to me as one of the few
heros of the Lincoln S&L debacle. I suggest the Committee assign a staff member to review the
Congressional record for the 10-31-89 hearing for it's relevance to the regulatory history of the
senior OTS official described below. The hearing is available on C-span in DVD form.

I am a retired Bank and Savings and Loan Examiner with 27 years in banking including 17 years
examining banks and savings and loans for the FDIC, the California Department of Savings and
Loan (CDSL), and the California State Banking Department. My private industry banking
experience includes five years as a Vice President in charge of Loan Review grading complex
bank loans during the 1980-1984 interest-rate-driven real estate recession. During the S&L crisis
from 1985 to 1990, I was a senior CDSL examiner involved in numerous examinations of failing
California S&Ls including the infamous Lincoln S&L. I identified massive asset quality problems,
losses, and numerous frauds that contributed to the failure of numerous S&Ls, including Lincoln
S&L. (Lincoln was probably the greatest regulatory failure of the last S&L crisis.) From 1990 to
1997 I examined banks and S&Ls for the FDIC during that decade's banking crisis. Again, my
specialty was asset quality and detection of insider abuse, for which I received numerous
commendations and awards. I taught classes at the FDIC in evaluation of real estate appraisals,
detection of self-dealing and white-collar crime, and evaluation of commercial real estate loans.


I read in a press account that the committee may hold a hearing investigating the collapse of
IndyMac. I am writing to the committee to provide you with historical perspective as you
investigate the collapse of IndyMac and to make recommendations that might assist your staff in
preparing for such a hearing. I have conducted my own investigation and it led me down a chilling
but very familiar trail back to the regulatory disaster of Lincoln S&L. I believe also that I am
speaking for many past and present regulatory personnel who feel that the "Regulatory Light"
policies and practices in place for the last decade have inherently undermined and inherently
corrupted the banking regulatory process and contributed to the proliferation of unsafe and
unsound lending practices that have cost homeowners billions of dollars and, in many cases, their
homes. The collapse of IndyMac prior to its even being placed on the FDIC's problem bank list is
RES IPSE LOQUITUR evidence supporting this conclusion. Clearly, there has been a historic
failure to comply with at least the spirit and substance of the FDIC Improvement Act of 1991's
(The 1991 Act) requirements for regulators to take Prompt Corrective Action. The failure of
IndyMac marks the bankruptcy of the era of "Regulatory Light". The regulatory culture of denial of
problems and inaction needs to be clearly repudiated by this committee and the 1991 Act
revisited and reaffirmed.

When OTS Director Reich was appointed to his position in 2005 he was clearly already an expert
in situations where OTS regulatory failure had cost the FDIC fund dearly in subprime lending. In
fact he was the acting FDIC Chairman on July 27, 2001 when Superior Bank FSB failed. This
was the largest S&L failure in a decade. In a section below I have summarized lessons and errors
described by both then FDIC director Reich and the FDIC's Inspector General in separate
reports to this committee. Incredibly, it appears that most, if not all, of the key OTS regulatory
errors cited by Reich and the FDIC Inspector General in 2001 and 2002 were repeated at
IndyMac by Reich. The inexplicable delay in regulatory action at IndyMac appears reminiscent in
some respects to the delay orchestrated from 1987 to 1989 in the seizure of Lincoln S&L.

Most alarming of all, to we Lincoln S&L veterans, was OTS Director Reich's August 2007
appointment of Darrel Dochow to be the Regional Director of the OTS Western Region;
essentially, Dochow became the primary federal regular of IndyMac, Countrywide, and
Washington Mutual the month after the current crisis started. It is fair to describe Dochow as the
job foreman in the 1988 federal examination effort to whitewash the 1988 examination of Lincoln
S&L that was the subject of congressional hearings in 1989. I have included a section on Darrel
Dochow in this letter and I have attached an addendum with reference material on Lincoln S&L.
This is a chilling reflection on Director Reich's judgment, in my opinion.

Clearly, Countrywide, which was purchased and bailed out by Bank of America should also have
been on the FDIC's problem bank list with a 5 rating. It couldn't have been on the FDIC problem
bank list based on its sheer size relative to the published problem bank total numbers and dollars.
This is further evidence of systemic OTS failure to properly assign appropriate composite
CAMELS ratings to distressed S&Ls. Indeed, OTS officials have attempted to spin and trivialize
their egregious failures in a Wall Street Journal article dated 8-19-08. Fortuitously, the FDIC has
reportedly started to recognize the threat to the FDIC insurance fund posed by OTS and OCC
regulatory failure. Undoubtedly the unwillingness of senior OTS and possibly OCC officials to
properly rate large failing institutions as problems has spilled over into composite bank ratings
throughout the system as suggested in the enclosed news article by Kathleen Pender in the San
Francisco Chronicle. "Regulation light" was at least as disastrous as deregulation in the
1980's and evidently senior OTS officials, at least, still have their thumb on the "CAMELS"

Bank regulators must be provided an honest environment where informing management of

problems is encouraged and not punished when the conclusions don't fit predetermined
conclusions of senior officials. This is as true now as it was at Lincoln S&L in 1988. The 1991
FDIC Improvement Act gave the FDIC backup authority to act as a regulatory watchdog to
prevent Lincoln-like regulatory failures. However, the FDIC's own Inspector General submitted a
report to your same committee on 2-6-2002 regarding the collapse of Superior Bank FSB which
warned that the FDIC's backup authority was, in essence, dysfunctional. This problem was not
corrected. Later, the FDIC even adopted policies that shrank and reduced the expertise of its
examiners, ostensibly to reduce the "regulatory burden" on insured institutions. The result is

Your own investigators will, no doubt, know some of what I have to say, but I believe the attached
documents will support my statements to you and assist your investigation.


OTS Director John Reich's attack on Senator Schumer for allegedly causing the failure of
IndyMac and an $8 Billion loss to the FDIC fund amazed me. While my experiences as a senior
CDSL examiner at Lincoln S&L makes me loath to defend any politician for intervening in a
regulatory matter, I must speak in defense of Senator Schumer. I was shocked to see on CNBC
news announcements that IndyMac had failed, in essence, without ever being placed on the
FDIC's published quarterly problem bank list.

I have included as an exhibit Kathleen Pender's San Francisco Chronicle news story dated July
24, 2008, titled "Why Wasn't IndyMac on FDIC problem list?" Further, in this letter I address
contradictions in this news article that suggest the possibility of an attempted cover-up by OTS
that warrants clarification by the committee.

The attack on Senator Schumer reminds me of 1966 when I was in a field encampment during
spring field training exercises as a cadet at the Virginia Military Institute. It was spring in the
Shenandoah Valley and it had rained steadily and soaked us for a couple of days. Suddenly, the
whole camp was started alert by a tremendous whump! explosion and the sight of flaming
debris flying into the treetops. A cadet was detailed daily to use some diesel fuel to burn the
battalion’s considerable daily refuse in a large garbage pit. The cadet that day was pointed to a
can of gasoline. I think Senator Schumer should be commended. Sometimes someone has to
pour gasoline in the garbage pit to get people's attention to a serious problem.

IndyMac was a financial zombie

My own cursory review of IndyMac’s public Thrift Financial Reports (TFRs) indicates that IndyMac
was in the latter stages of a financial death spiral at 3-31-08. Pender's article suggested that was
likely the consensus estimate of everyone but OTS, which still hadn't identified it as a 4- or 5-
rated S&L. It was, and had been, a financial zombie for some time. It lost money each quarter
after 6-30-07. A run on the bank was imminent as soon as acceptance and renewal of brokered
deposits was curtailed, which appeared imminent and inevitable due to rapidly deteriorating risk-
based capital ratios, operating losses, and declining Alt-A asset values that undoubtedly were
below book value warranting more writedowns. Further, between 6-30-2007 and 3-31-08
IndyMac's FDIC insured deposits dramatically increased from $8.8 Billion to $16 Billion to the
apparent detriment of the FDIC fund. I have included these calculations for your review. A key
factor in controlling FDIC risk is regulatory restrictions controlling and restricting brokered
deposits. Notification by the primary regular that the S&L is a troubled institution that cannot
accept or renew brokered deposits is the key. Apparently and perhaps inexplicably, this official
notification came very late at IndyMac and I would encourage your staff to obtain the letter and
investigate OTS’ and the FDIC's handling of this matter. I believe this may tie in to the sense of
frustration in Senator Schumer's letter to Reich.

Essentially, IndyMac was a zombie long before brokered deposits were curtailed. By 6-30-07, it
was likely too late to have saved IndyMac. Effective enforcement action might have saved it if
taken earlier or at least reduced the FDIC's loss. In the short term it would have benefited the
FDIC to have more time to prepare bid packages, however, the committee needs to investigate
whether OTS actions such as the failure to appropriately rate the bank as a 4 or 5 were really a
root cause of the delay. Further, at IndyMac there appears to have been little "there” there. Core
deposits were minimal and deposits were high yielding. Brokered deposits at high yields don't
benefit the FDIC in a liquidation or sale. The assets are Alt-a loans and securities in a glutted
market with few buyers and at low prices. The Alt-A franchise value appears of dubious value
because the Alt-a product is essentially extinct. If IndyMac had been appropriately rated as a 5 in
the 3d quarter of 2007 undoubtedly the FDIC would have been 6 months ahead in the sale
process. I look forward to seeing the committee investigate any prior regulatory enforcement
actions or the lack thereof. I encourage your staff to ask pointed questions and ask for all records
that might suggest OTS efforts or even discussion of retroactively altering old bank ratings on
Countrywide or IndyMac. Obviously, Countrywide could not have been placed on the problem
bank list, nor could Washington Mutual.

Darrel Dochow

Reich resurrected and promoted, in August 2007, Darrel Dochow to a key position as Regional
Director of OTS in the 13 western states. Reich promoted Dochow to a position that apparently
made Dochow the primary federal regulator of IndyMac, Countrywide, Washington Mutual, and
other troubled lenders, just two months after the credit crisis started to unfold in July of 2007.

Dochow was the infamous S&L regulator who engineered a two-year delay in the seizure of the
notorious Lincoln S&L, which collapsed in 1989. Dochow was utterly discredited in the House
Banking committee hearings investigating the collapse of Lincoln S&L. Representative Schumer
was a particularly effective interrogator of the whistleblower panel that testified on 10-31-89 at the
House Banking Committee. I have described that hearing below under more detailed comments
on Lincoln S&L in an addendum. These issues were publicly known after the Congressional
hearings in 1989 and written about in "The Greatest Ever Bank Robbery" by Martin Mayer on
pages 208, 210, 211, 213, 215, 216 ["…there was an undercurrent of fear that Dochow
wanted a Whitewash…", 219, and others. William Black, then OTS' chief San Francisco
counsel wrote a book, "The Best Way to Rob a Bank is to Own One", which addresses
Dochow's role in much more detail. Page #s 211, 215, 216, 223, 229, 230, 238, 239, and 240 are
particularly relevant. Page 240 in particular involved extraordinary responses by witnesses to
questions by Representative Schumer about Dochow's actions. Former FDIC Chairman William
Seidman's book, "Full Faith and Credit: The Great S&L Debacle and Other Washington
Saga's," also addresses Dochow’s role. In fact, seeing Reich's sharp attack on Senator Schumer
made me wonder if Dochow encouraged Reich's attack as a preemptive strike or payback for
Senator Schumer's critical conclusions about Dochow at Lincoln S&L. I encourage the committee
to investigate this as a possibility, particularly since some of the egregious S&L regulatory errors
that apparently occurred at IndyMac and Countrywide mirror those of Lincoln S&L (1989) and
Superior Bank FSB, which failed in 2001, while Reich was Acting FDIC Chairman.

William Black in his book The Best Way to Rob a Bank Is to Own One, on page 240, described
the penultimate moment of the 10-31-89 House Banking Committee hearing:

"The single most damaging moment came when Representative Schumer asked the entire
panel: "{W}ould any of you disagree...that Washington knew... the subordinated debt was
virtually worthless, and still allowed the sale to proceed?" (US House Banking Committee
1989, 3:77) No one disagreed. Both FHLB-Seattle witnesses then responded to Schumer's
question whether there was any "plausible explanation" for Dochow's conduct.
Mr. Clarke: There is no plausible explanation that was ever given to us, and I cannot think
of one frankly...
Ms. McJoynt: No. US House Banking Committee 1989, 3:77."

Director Reich's awareness of OTS failures prior to Superior Bank FSB's failure in 2001

In fact Reich provided a statement dated 9-11-01 as an FDIC Director to this very committee that
addressed OTS regulatory failures at Superior Bank FSB. Superior was the largest S&L failure in
a decade in 2001 and failed due to subprime lending. As an FDIC Director he submitted a 19-
page report dated 9-11-01 on the reasons and early lessons of the Superior collapse to this
committee. While there was a distinction between IndyMac's Alt-A portfolio and pure subprime
loans, by July-August of 2007 at the outset of the credit crunch, this distinction was rapidly fading
and the marketability and value of IndyMac's Alt-A loans and mortgage-backed securities was
gone. Pages 4, 5, 9, 10, 12, and 18 are particularly relevant to the current situation:

•Page 4 and 5 describe how Superior was 1- or 2-rated by OTS prior to the January 1999
examination and that OTS had refused FDIC's request to join the OTS' January 1999
examination. On page 18 he said: "However, in this particular case, it may be valid to
agree that having two sets of eyes earlier in the process may have mitigated loss." Reich
continued by recommending that the FDIC needed additional authority to intervene
earlier in such situations to protect the FDIC fund.
•Page 9 and 10. Reich noted the FDIC's strong preference "to market the bank prior to the FDIC's
appointment as receiver.... to minimize disruption to the failed bank's insured depositors
and customers, while minimizing the cost of failure to the deposit insurance funds. When
Superior failed however, the FDIC had not had an opportunity to effectively market the
bank or its assets."
•Page 12.Reich described "safe and sound" subprime lending as follows- "(1) risks are
effectively managed through proper underwriting standards and attention to servicing; (2)
loans are priced on the basis of risk; (3) allowances for loan losses cover the potential
credit losses in the portfolios; and (4) capital levels reflect the additional risks inherent in
this activity. His statement tacitly admitted that OTS obstruction of the FDIC and other
regulatory failures had increased the loss to the FDIC fund. [All of these appear to be
enormous problems at Indy Mac and likely major factors in IndyMac's failure]
Incredibly, Mr. Reich appears to have at least countenanced as OTS Director egregious
regulatory practices at IndyMac and Countrywide similar to those that he had criticized in
his statement to this committee. I have attached Director Reich’s statement and five key
pages of excerpts from the even more critical FDIC Inspector General’s report on
Superior Bank FSB’s failure, which Reich would have reviewed as an FDIC director in
2002. I encourage your staff to use these reports as a road map in preparing questions
for Director Reich and Regional Director Dochow. I have addressed the Superior Bank
FSB regulatory failure, Director Reich's statement and the FDIC Inspector General's
report below in more detail. Reich's own biography shows he was Acting Chairman of the
FDIC when Superior failed and thus was well aware of the high price to be paid by the
FDIC fund for lax supervision of high-risk institutions.

On February 6, 2002 the FDIC Inspector General presented its report on the Superior Bank FSB
failure to the Senate Banking Committee. Number 02-005. Undoubtedly Mr. Reich reviewed this
report because he was an FDIC director at the time and had been the Acting FDIC Chairman the
day Superior Bank FSB failed. Page ii criticized OTS refusal to let FDIC staff accompany OTS
examiners. Page 67 of this report bluntly described the failure by the OTS for years to detect
high risk indicators that were evident early that led to the failure of the S&L. This page also noted,
"effective supervisory action was not implemented" by the OTS. On page 21, the report includes
a matrix showing the CAMEL rating history of both FDIC and OTS noting that "a lower CAMELS
rating should have been assigned earlier..." to reflect the risk in the S&L of a "large volume of
high risk assets." Perhaps most troubling of all was the Inspector General’s warning on page iii
that despite the 1/29/02 interagency agreement, "we are concerned that limitations remain that
may impede the FDIC’s ability to independently assess risks to the insurance funds." I describe
the weaknesses in the 1-29-02 interagency agreement in the chronology.

Director Reich would also have seen FDIC Inspector General audit report #02-024 dated 7-24-02
which clearly documents the increased costs to the FDIC fund of belatedly getting FDIC Division
of Resolution staff into a failing institution. It appears probable that OTS failure to properly rate
IndyMac a 5 delayed the FDIC and increased loss to the fund.

Director Reich's and other OTS officials’ upbeat statements to Congress and others in
March 2007, 4 months before credit crunch

I encourage your committee's staff to review the upbeat assessments made in OTS Deputy
Director Polakoff’s statement to this very committee on March 22, 2007, {page 11 and 19}. The
headline on the OTS press release "OTS Deputy Director...testifies on Limited Thrift Industry
Exposure to Subprime Mortgage Market" seems remarkable given the virtual collapses of both
IndyMac and Countrywide occurring within a few months in July/August of 2007. Director Reich
made a similar speech to a House subcommittee on March 27, 2007 (page 10). Director Reich
made a speech on April 10, 2007, to the California Banker's Association that appears very much
like an overt pitch to bankers to convert to OTS charters, as Countrywide had the month before. I
would encourage the committee staff to investigate the circumstances surrounding the conversion
of Countrywide from a national bank charter regulated by the OCC to an OTS charter. This
conversion process started in late 2006 at approximately the same time as Countrywide's
chairman filed a plan with the SEC to dispose of his stock, that is reportedly under investigation
by the SEC.

I encourage your staff to check the upbeat statements by OTS officials to Congress against the
FDIC's version of composite ratings on IndyMac, Countrywide, and others, at the same time. If
your committee prepared a composite rating matrix on IndyMac similar to that on page 21 in the
FDIC Inspector General's 2002 report on Superior Bank's failure and compared it to dated public
statements made to congressional committees, it might be revealing. IndyMac has apparently
been permitted to operate for years with a huge concentration of credit in high risk Alt-A assets
with virtually no liquidity independent of the Alt-A exposure. I would suggest your staff look at
OTS officials’ public statements and IndyMac's high risk profile in the context of the Superior
Bank FSB Inspector General’s report.

Suggested questions for investigating whether FDIC was obstructed by OTS in the
IndyMac matter

Additionally, I would encourage your staff to ask the FDIC if they requested orally or in writing to
have FDIC examiners participate in the OTS examinations of IndyMac. This was an important
aspect of the FDIC Inspector General's report on Superior Bank FSB. Further, if so, when and
what was the response by OTS? If the OTS declined, did FDIC formally ask the FDIC Board to
approve FDIC involvement? If so, was it approved or denied, and who voted yes or no? Minutes
extracts of the FDIC Board Meetings would be desirable. Perhaps the FDIC should be asked for a
list of all such votes and the outcomes since the 1/29/02 interagency agreement referenced
below. An important question for the FDIC would be whether the OTS's failure to rate IndyMac as
a 4 or 5, or other OTS actions had slowed or interfered in any way with FDIC Division of
Resolution preparatory work at IndyMac. Further, if FDIC staff was permitted to participate in the
2008 examination what number of staff was permitted and what restrictions were in place on
FDIC staff? It is not unheard of to have FDIC staff on such assignments precluded from speaking
to bank management. The watchdog is not only tethered in the backyard but also muzzled to
prevent barking! If these agreements are put in writing, the committee should ask for them. The
FDIC's own Inspector General implied that there were serious bureaucratic obstacles interfering
with FDIC staff protecting the insurance fund as described below. The defacto breakdown of
FDIC back-up authority is a serious circumvention of the 1991 FDIC Improvement Act. I would
encourage the committee to consider immediately requesting the Secretary of the Treasury to
order the Director of the OTS and the Comptroller of the currency (who automatically sit on the
FDIC Board) to abstain in all future FDIC Board votes over FDIC Special Examinations of their
respective agencies - this is an obvious conflict of interest.

The Regulatory financial institutions CAMELS system has been corrupted for expediency,
presumably in a failed attempt to conceal regulatory failure.

The Regulator's composite bank rating system has clearly been corrupted for expediency at least,
indicating that the primary federal regulators have been in essence gaming the system with
optimistically biased ratings; obviously deeply distressed and failing insured institutions have
been deliberately kept off the FDIC’s problem bank list of 4- and 5-rated institutions by OTS and
probably the OCC. If the publicly reported number and size of problem banks are going to be
grossly understated by regulatory officials corrupting and gaming the system, it would be better to
make the totals on the list non-public but accurate. High government officials such as Fed
Chairman Bernanke apparently have relied on the integrity of the FDIC's problem bank list of 4-
and 5-rated banks and made comforting speeches to the Congress and the American people.
This is a clear circumvention of the FDIC Improvement Act of 1991 (1991 Act) which was
intended to compel Prompt Corrective Action (PCA) to prevent just such disasters as IndyMac
and Countrywide. In fact, the 1991 Act was intended to prevent Dochow/Lincoln type debacles
from ever happening again. Further, as described in comments below on the 1-29-01 interagency
agreement maintaining a 2 rating on a financial institution virtually lock's out FDIC participation in
examinations without OTS or OCC approval and constraints. This is precisely what happened,
according to the FDIC Inspector General, at Superior Bank FSB.

FDIC staff expertise undermined by "Regulation Lite"

The number and expertise of FDIC examiners have been deliberately undermined by past FDIC
Board-approved policies that were corrosive, even toxic, to FDIC staff expertise and morale. The
FDIC's MERIT examination program for example, described by the FDIC Inspector General’s
report in 2005, reduced the loan samples in many FDIC examinations to as little as 15-20%. This
tiny sample virtually guaranteed that the asset quality rating of 1- and 2-rated banks under this
program would be whatever bank management said they were. Even worse, staff exposed to this
expedited loan review process could never develop the analytical skills, expertise in loan
analysis, documentation, and credit administration practices that their predecessors during the
1990's or earlier learned and passed on to other examiners in on-the-job training. The obstacles
and challenges facing the current FDIC chairman are historic. I know this because I was there
in earlier crisis and I trained examiners, formally and informally.

July 24, 2008, San Francisco Chronicle news reporter Kathleen Pender's article "The FDIC
Missed on Indy Mac”

Attached is Kathleen Pender's story on how the "FDIC missed on IndyMac." I believed she
asked excellent questions but received disingenuous answers from OTS. In her report, she
quotes FDIC spokesman David Barr who said IndyMac wasn't on the problem list [CAMELS rated
4 or 5] because OTS hadn't put it there. OTS spokesman William Ruberry reportedly told her that
OTS started the current year IndyMac exam “four months early” in January of 08 and it took 6
months, at which time it went on the problem list. Reporter Kathleen Pender reported that she
was told by OTS spokespeople that OTS invited the FDIC into Indy's examination in 2008. The
report was silent on prior FDIC involvement. OTS reportedly claimed they couldn't downgrade
the bank rating until the examination was complete. This statement contradicts the OTS' own
administrative procedures published at their own website setting forth that it is OTS' specific
responsibility to do interim bank rating changes. Indeed, OTS's own manuals identifies it as the
Regional Office’s responsibility. I encourage you to contact Mr. Ruberry, probably at the OTS in
Daly City, CA, and challenge him on this statement. Additionally you might press the designated
OTS Washington, DC, spokesperson Gray and the FDIC's Barr on the same matter. OTS also
said the 2008 exam was started 4 months early and that the OTS invited the FDIC [at some
unstated point] to accompany the OTS exam. Presumably, the prior 2007 OTS exam started in
April 2007 and inexplicably found nothing and resulted in no enforcement action? The FDIC
Improvement Act was passed to prevent just such craziness from happening again: i.e., 1-, 2-,
and 3-rated institutions suddenly failing with no effective enforcement actions ever undertaken.

Given the overall facts there appears to an overpowering sense of smell of a possible cover up
drifting from the answers in the Pender Story.


•Lincoln S&L failed in April 1989. It was the quintessential regulatory failure of the S&L crisis.
The 2-year regulatory delay in seizing Lincoln S&L orchestrated by Washington DC
officials, including Darrel Dochow, cost the FDIC at least $1 billion. It was the worst of the
most egregious, because it left 20,000 elderly investors swindled out of $250 million of
their life savings. Incredibly, OTS Director John Reich promoted one of the most
infamous regulators of the Lincoln debacle and may have repeated some of the same
mistakes increasing the loss to the FDIC on IndyMac. In 1991, Congress passed the
FDIC Improvement Act. An important objective was to create milestones that would
compel regulators to take Prompt Corrective Action (PCA) in the form of timely and
effective supervisory action against deteriorating insured institutions before they
became imminent threats to the FDIC fund. Additionally, because the S&L crisis had
shown that the worst S&Ls could raise unlimited deposits through brokered deposits at
high costs, the FDIC was given the authority to restrict brokered deposits only to well-
capitalized and well-managed institutions.

•Institutions notified that they are troubled by their primary regulator or that fall below well-
capitalized capital ratios are generally prohibited from accepting brokered deposits
without specific FDIC brokered deposit waivers. The act also established back-up
authority for the FDIC to conduct examinations of financial institutions chartered by the
OCC and the OTS under certain conditions that have been written into flawed
interagency agreements. There is the appearance, at least, that the OTS gamed the
system on Reich’s and Dochow's watch and circumvented or violated the spirit, at least,
of the Improvement Act.

•John Reich was appointed an FDIC Director in January 2001. His biography indicates he was
Acting FDIC Chairman from July to August 2001. He was Vice Chairman from
November 2002 to 2005 when he was appointed as Director of the OTS, which left him
as a Director of the FDIC. In 2004, the FDIC adopted a MERIT examination program that
dramatically reduced the percentage of loan review samples reviewed during

July 27, 2001, Superior Bank FSB, a large Subprime lender, failed due to huge
writedowns due to overvalued assets left on the books from Subprime loan sales. It was
the largest S&L failure in a decade and it should have set off alarm bells. On September
11, 2001, John Reich, then a Director on the FDIC's Board provided a statement to
the Senate Banking committee described above.
•On January 29, 2002, the FDIC entered into an interagency agreement with the OCC and the
OTS that gave the FDIC the authority to examine OCC and OTS institutions rated 3, 4, or
5 or those determined to be "undercapitalized" under PCA rule without being invited by
the OCC or OTS. This is an unreasonably high bar for the FDIC to hurdle. For example
"undercapitalized" banks may long since have failed from a run on the bank due to
curtailment of brokered deposits when the bank or S&L simply failed to be "well-
capitalized". Unanswered is whose rating (FDIC or OTS) triggers this FDIC authority.
Most likely the key rating is the primary regular, such as OTS, which creates a Catch 22
situation inviting OTS to keep 2 ratings to keep FDIC off OTS turf. While not addressed,
FDIC may not be permitted to have interaction with S&L management in some instances
when the OTS "invites" the FDIC to join examinations. This is like muzzling a watchdog.
Further, the invitations to participate can include severe limitations on FDIC staffing. I
know this because I was there and saw it in the 1990's.

•On February 6, 2002 the FDIC Inspector General presented its report on the Superior
Bank FSB failure to the House Banking Committee.[Number 02-005] Page ii
criticized OTS refusal to let FDIC staff accompany OTS examiners. Page 67 of this report
bluntly described the failure by the OTS for years to detect high risk indicators that were
evident early that led to the failure of the S&L. This page also noted that "effective
supervisory action was not implemented" by the OTS. On page 21, the report noted that
"a lower CAMELS rating should have been assigned earlier..." to reflect the risk in the
S&L of a "large volume of high risk assets." Perhaps most troubling of all was the
Inspector General’s warning on page iii that despite the 1/29/02 interagency agreement,
"we are concerned that limitations remain that may impede the FDIC’s ability to
independently assess risks to the insurance funds." {Source FDIC Inspector General
Report 2/6/2002 #02-005 first page, page ii, iii, 21, and 67} This appears to have been
prophetic at IndyMac. The FDIC can ask the FDIC Board to approve an FDIC special
examination, but the FDIC Chairman's vote may be offset by the heads of OTS and OCC
who also vote. It is clearly an inherent conflict of interest to let the OTS Director vote on a
matter that, in his role as FDIC Director, is in conflict with his agency’s bureaucratic turf. It
hasn't worked well so far! The interagency agreement would not even have assisted the
FDIC in early intervention at Superior, because OTS had a 2 rating on it, which
undoubtedly contributed to the cynicism in the Inspector General’s report. Further, the
agreement creates an opportunity for OTS and OCC to game the regulatory system by
maintaining an unjustified 2 rating in the face of deterioration to keep the FDIC at bay and
avoid or delay the embarrassment of an FDIC downgrade. A rigged system at the top
discourages everyone in junior positions from going through the extra work and
frustration of preparing a well supported recommendation that will probably not even get
to the rigged vote. Further, since only S&Ls that maintain a "well-capitalized position" can
accept or renew brokered deposits without regulatory approval, it creates a serious
liquidity risk to institutions [like IndyMac] with deteriorating capital ratios and heavy
reliance on brokered deposits; suddenly turning off the brokered deposit spigot starts
what is inherently a silent run.

•The 2005 FDIC Inspector General’s report, attached, describes the FDIC MERIT examination
program that reduces loan review samples to as little as 15-20% on certain one- and two-
rated banks. As we see now, some 2-rated institutions may be failing and drop from 2
composite ratings to 5’s between examinations. I saw this in the 1990's also. I believe
this program has been belatedly canceled; however, it leaves a legacy of poorly trained
junior examiners lacking essential loan review skills.

•Reich and other OTS officials told Congress in March 2007 that the OTS heavily monitored
subprime risk. One OTS press release stated, for example, on March 22, 2007, "OTS
Deputy Director Scott Polakoff Testifies on Limited Thrift Industry Exposure to Subprime
Mortgage Market". This testimony was to your committee.

•April 2007 represents the estimated start date for IndyMac's 2007 examination that can be
inferred from Kathleen Pender's news story in the SF Chronicle. This is a key date for the
committee's investigation, because it appears the last time at best that FDIC intervention
might have had any hope of saving IndyMac. It may have already been too late.
Questions for the committee might include: What were OTS and FDIC composite ratings
at this time, both before and after this examination? Was the FDIC permitted to
accompany OTS? How many FDIC examiners were permitted, if any? What restrictions
were placed on FDIC staff? This examination failed to identify IndyMac as a 4- or 5-rated
problem bank. IndyMac had a huge concentration of credit risk in high risk Alt-A
mortgages and few liquid assets other than mortgage Backed Alt-A securities. This is the
last quarter that IndyMac reported even marginal earning before it collapsed. Given what
has been said in the press and not said, it is possible that a 2 rating might even have
been possible, which would have shut out the FDIC, unless invited by OTS. Arguably,
OTS Director Reich (the former FDIC Director), of all people, knew that the FDIC
should have been brought in and that Indy's high Risk ALT-A concentration of
credit posed high risks like Superior's had! By 2008 when the OTS claims they
invited the FDIC, IndyMac was a zombie.

•June 30, 2007, IndyMac’s Financial TFR reports filed with the OTS show total deposits of $12
Billion including $1.5 billion in high cost brokered deposits. Deposits included $3.2 billion
in uninsured deposits leaving FDIC insured deposit risk at $8.8 Billion at 6-30-07.
Liquid assets were less than a billion. On 3-31-08 IndyMac TFRs filed with OTS indicate
total deposits of $18.5 Billion with hot brokered deposits of 6.9 Billion. Uninsured deposits
of $2.5 billion left FDIC insured deposit risk at about $16 billion at 3-31-08. Liquid
assets totaled less than a billion$ (.8 billion). This is significant because IndyMac's risk-
based capital ratio, according to its 3/31/ TRF report, had shrunk to 10.26%, just above
the 10% threshold necessary to remain "well-capitalized". Falling below this level, which
seemed inevitable by 6-30-2008, would eliminate Indy's ability to accept or renew
brokered deposits per FDIC rules. Indy's ALT-A assets were obviously worth less than
book value and declining as the market for ALT-A investments collapsed. Between 6-
30-2007 and 3-31-08 the FDIC's potential insured deposit risk dramatically
increased from $8.8 Billion to $16 billion with the increase in FDIC insured
deposits. At 3-31-08 IndyMac had an ominous liquidity crisis. FHLB borrowing's
held a senior lien on Indy’s assets and Indy held less than a billion in liquid assets
to cover $6.9 Billion in brokered deposits and uninsured deposits of $2.5 Billion
ready to run as soon as Indy's risk-based capital ratio fell below 10%, which
undoubtedly would happen imminently due to operating losses even if no
additional writedowns were required on Alt-A mortgages by examiners. This
institution was still not on the Problem Bank List with a 4- or 5-rating! Timely
effective enforcement action reduces FDIC risk. The FDIC fund simply can't afford
the OTS "Regulation Lite" approach to S&L regulation.

•The credit crunch hit in July and August 2007 and, by 9-30-2007, the resale market for Indy's Alt-
A loans and securitized Alt-A's (Mortgage-Backed Securities) was gone. On August 21,
2007, an OTS press release 07-059 announces Dochow has been appointed as Regional
Director in the Western Region, after serving as Deputy Regional Director in the same
region and previously as an Assistant Director. Pender’s story described how virtually
every analyst (except OTS) in the U.S. had, by August 2007, identified imminent and
severe problems at Indy.

•The June 2008 OTS exam concluded and Pender says an OTS spokesman told her that OTS
couldn't downgrade Indy's rating until the six month exam which started in January was
completed. Contrarily, the OTS own website includes OTS guidelines requiring OTS
regional staff to do interim downgrades and included the procedures for doing it.

•News accounts indicate that in July 2008 IndyMac finally stopped accepting brokered deposits.




In fairness, I have no direct knowledge about Dochow's involvement in the collapse of IndyMac,
but the committee would be remiss not to investigate Dochow's role in this, for no other reason
than he was essentially the OTS primary federal regulatory official for IndyMac as the OTS
Western Regional Director in a historic regulatory failure (again) costing the FDIC from $4 to $8
Billion or more.

In September 1988, I was handpicked by the CDSL commissioner to join the examination of
Lincoln S&L, which started in July and was virtually complete with a negligible amount of loan
losses identified by Federal examiners. [$20 million total, per OTS examiner Gozdovich's own
admission at the 10-31-89 hearing.] My mission was to quickly find enough losses on the books
to force Federal Home Loan Bank Board Chairman Danny Wall and his key assistant Darrel
Dochow to embrace the reality that Lincoln S&L was a fraud and that its parent holding company
was actively swindling 1/2 million dollars a day out of the life savings of primarily elderly
Californians. The CDSL's objective was to compel Wall and Dochow to shut down the sales of
worthless securities by Lincoln's insolvent parent American Continental Corp (ACC) for which the
CDSL also designated me the CDSL Examiner in Charge. The true horror of Lincoln S&L was
that key Washington officials knew that ACC was insolvent in September 1988 and took no
action (which was within their power) to stop the swindling of elderly Lincoln "Widows and
Orphan's" as described by Federal Examiner Jack Meek in the Congressional record. I testified at
Charles Keating's trial in state court that I had handed out to Lincoln and ACC senior managers in
the fall of 1988 my written agenda that advised them that Losses tentatively identified by the
CDSL totaled $130 million, which exceeded ACC's total capital, and that ACC was therefore
insolvent while continuing to sell worthless debt to the public. Federal officials attended this exit

One aspect of the delay engineered by Dochow was a succession of no money down phony
buyers being brought in by Keating to discourage federal enforcement action while elderly victims
continued to be swindled by ACC sales of worthless debt almost up to the date ACC filed for

I testified at the House Banking committee hearing into the investigation of the collapse of Lincoln
S&L on 10-31-89, various committee hearings of the California State Legislature regarding the
same matter, a 5 day civil deposition, several criminal trials involving S&L crooks, including
Charles Keating of Lincoln S&L, and various administrative proceedings involving the FDIC and
other federal and state S&L regulators. Senator Schumer was on the House Banking committee
and would undoubtedly remember the House Banking Committee investigative hearing on Lincoln
S&L at which I testified, because he was a well-informed and perceptive questioner of the
whistleblower panel of examiners and other regulators testifying that day. I suggest the
Committee assign a staff member to review the Congressional record for the 10-31-89 hearing.
The hearing is available on C-span in DVD form. If you want I'll lend you my copy by express
mail. I invite the Committee's staff to pull out the extracts of Senator Schumer's questions relative
to Mr. Dochow.. I testified about the whitewash of Lincoln S&L's 1988 examination by federal
examiners who were assigned leaders and constraints that virtually guaranteed a whitewash and
regulatory failure. The whitewash failed because of the efforts of a few people and the simple fact
that the swindling victims could never be swept under the carpet. The essence of the testimony
by myself and others was that Danny Wall and a key assistant Darrel Dochow had delayed the
seizure of Lincoln S&L by over a year and engineered a new examination of Lincoln S&L that was
virtually programmed to fail to detect Lincoln's insolvency.

FDIC Chairman L. William Seidman said at the time that the delay in taking over Lincoln cost
FDIC over a billion dollars, and that was an early estimate.

Black's book described how Dochow obstructed regulatory efforts to stop Lincoln’s reckless
investments piling up huge additional losses for the federal deposit insurance fund as well as
enabling the active swindling of the widows and orphans to continue nearly up through the day
Lincoln was closed. [Dochow trashed a 1986 examination report of San Francisco federal
regulators which recommended a federal takeover, ignored massive file stuffing and falsification
of records surfaced by examiners, worked to transfer regulatory authority for Lincoln S&L from
San Francisco to Seattle (which bluntly refused to accept it) engineered a Memorandum of
Understanding which handcuffed federal examiners and guaranteed a whitewash of Lincoln in
the 1988 examination. It became obvious by September 1988 that Keating had defrauded $93
million dollars from Lincoln and upstreamed it to Lincoln's holding company and squandered it.
State and federal holding company examiners who did not report to Dochow confirmed that
Lincoln’s parent was insolvent and that the holding company was still selling worthless subdebt to
the widows and orphans (which continued for 6 months).] Federal regulators including Dochow
knew but didn't stop it. I was there at Lincoln S&L in 1988 and I testified about the whitewash
to the house banking committee.


•Lincoln S&L

•Darrel Dochow-excerpts from William Black's Book "The Best Way to Rob a Bank is to Own
One", re Dochow's role in regulatory failure of Lincoln S&L pages 211, 215, 216, 223,
229, 230, 238, 239, 240 [copied by permission of author]

•OTS Press Release #07-059 8-21-2007 Announces Appoinment of Darrel W. Dochow as

Western District Regional Director-[Apparent primary federal regulator of IndyMac,
Countrywide, Washington Mutual and others]

•OTS Biography of John M. Reich, Director of OTS since August 2005, FDIC director since
January 2001, Vice Chairman of Board of Directors of FDIC from November 2002 to
August 2005, Acting Chairman of FDIC board July and August 2001

•John Reich's 9-11-2001 statement , as FDIC Director, to Senate Banking committee on

regulatory failure of OTS at Superior Bank FSB which failed July 27, 2001 see pages 4,5,
9, 10, 12, and 18

•Federal Deposit Insurance Corp Office of Inspector General's Report, 2-6-2002, Audit Report #
02-005-"Issues related to the Failure of Superior Bank FSB," first page, page ii, iii, 21,
and 67

•Excerpt from FDIC 2002 Annual Report-Expanded Special Examination Activities re:1-29-02
Interagency agreement between OTS and FDIC. Established criteria when FDIC may
examine OTS and OCC S&L's and banks when not invited by OTS and OCC.
• OTS March 27, 2007 press release # 07-020 John Reich's statement dated March 27, 2007 to
house banking committee; "relatively few OTS-Regulated thrift institutions have
significant subprime lending programs, and those that do are subject to heightened OTS
oversight and supervision..."

•OTS March 22, 2007 press release # 07-018 OTS Deputy Director Polakoff testifies to Senate
Banking Committee on " limited Thrift Industry Exposure to Subprime Mortgage Market";
also page 10,11, and 19 of his statement.

•OTS April 10, 2007 press release #07-023 John Reich addresses California Bankers
Association, also page 2, 3, and 7

•Kathleen Penders 7-24-2008 news story "Why Wasn't IndyMac on FDIC problem list?"

•OTS manual excerpts composite bank CAMEL'S ratings definitions, "Ratings, Developing
assigning and presenting" Section 070- defines characteristics of 1,2,3,4,5 rated S&L's
and banks, also manual excerpts requiring OTS to update and downgrade CAMEL's
ratings through interim grade changes to keep S&L's composite CAMEL'S ratings up to

•OTS Manual excerpts Appendix A Enforcement Actions PCA and PCA reclassifications

•FDIC Office of Inspector General's report 05-027 July 2005 re: FDIC's Merit program reducing
loan samples during examination of selected banks to as low as 15-20%.

•TFR excerpts on IndyMac-6-30-07 and 3-31-08

•Countrywide Financial anomalies re: SEC investigation and timing of conversion from OCC to

•FDIC Inspector General audit report dated 7-24-02 #02-024,1st four pages describes [at
Superior Bank FSB] the necessity of getting FDIC Division of Resolution staff into
S&L's earlier in failing bank situations to reduce FDIC fund loss

•Wall Street Journal 8-19-2008 "FDIC Presses Bank Regulators to Use Warier Eye-Flagging
Woes now will Bolster Insurer; the "Camel's" Rating "