Case Study On Financial Fraud in The US Treasury Department

P O LY T E C H N I C U N I V E R S I T Y O F T H E P H I L I P P I N E S 1
THE FRAUD SCANDAL OF U.S. TREASURY DEPARTMENT OF 2009
A Comprehensive Case Study Analysis

Presented to the Faculty of the Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
Sta. Mesa, Manila
In Partial Fulfilment of the Requirements of the Course Subject

FIMA 40103 – TREASURY MANAGEMENT
for the Degree of
Bachelor of Science in Business Administration major in Financial Management
Submitted by:
ALVAREZ, ERIKA O.
CALDERON, JOBIELYN C.
DACUT, MARIMEL Q.
DADULLA, JOANNA FELISE V.
FAJARDO, LOREN MAE S.
GONZALES, DEXIE JANE A.
IGLESIAS, ANAH MARIA FRANCE D.
LANUZA, KATHLENE R.
LATUGA, JAMES DOMINIC L.
LIQUIT, NESLIE FAITH J.
SOJOR, JENEVIEVE A.
TIERRA, CHELSEA B.
Submitted to:
Prof. Daren D. Cortez, CFMP, CATP, MBA

Faculty, Department of Financial Management
College of Accountancy and Finance
April 2023
TABLE OF CONTENTS
I. ABSTRACT OF THE CASE 3
II. INTRODUCTION 4
III. STATEMENT OF THE PROBLEM 7
IV. DISCUSSION 9
1. Point of View 9
2. Time Context 13
3. Areas of Consideration 13
3.1. PESTLE Analysis 14
3.2. SWOT Analysis 19
4. Alternative Courses of Action 22
5. Decision Matrix 27
6. Action Plan 29
V. CONCLUSIONS AND RECOMMENDATIONS 37
VI. REFERENCES 42
I. ABSTRACT OF THE CASE
While the Fraud Scandal of the U.S. Treasury Department of 2009 stressed the
accounting fraud that involved the Department of the Treasury and a bank known as IndyMac
Bank, the case still pointed Darrel Dochow, a government regulator, as the dominant cause
of such an unethical and unfortunate event. In this case, indeed, Dochow’s character as a
public servant had greatly been in question. Thus, this study aimed to determine the:
detrimental consequences of the said event to various stakeholders; the essence of work
accountability, good character, and ethical standards among government regulators in
maintaining public trust; significant policies and/or regulations that will ensure financial reports’
accuracy to promote transparency and accountability; and suggested recommendations to
avoid the abuse of bank relations between banking regulators and banks.
In order to avoid this kind of situation in the future, the researchers made Alternative
Courses of Action that can be implemented to resolve this issue. The researchers suggest
that it is very vital for the U.S. Treasury to have stricter guidelines in selecting and appointing
employees, as they will be the ones to play different roles that are essential to the nation’s
welfare and development. Moreover, the study advocated the essence of instilling work
accountability, good character, and ethical standards among the regulators in the U.S.
Treasury Department in accordance with maintaining the public trust of the masses. On the
other hand, it is also recommended by the researchers that implementing a quality auditing
system ensures that banks and other financial institutions are following policies and
regulations and accurately recording financial information. Thus, the key finding of this
analysis is - it is essential to build a reputable administration that works toward the betterment
of government regulators and the concerned institutions.

II. INTRODUCTION
In banking and finance, it is relevant not to embellish financial records to maintain their
accuracy. The repercussion of falsifying financial records can have far-reaching
consequences for the financial institution involved and its stakeholders – including employees,
customers, and investors. The IndyMac fraud scandal is a case in point. This scandal involved
the falsification of financial records by the bank and the connivance of a top federal banking
regulator, who allowed the bank to backdate a capital infusion and gloss over its deepening
problems.
The IndyMac fraud scandal was a significant financial event that rocked the American
banking industry in 2008, considering it is the second-largest failure in bank institutions in the
United States. IndyMac Bank, a leading subprime mortgage lender, was accused of
fraudulent activities that ultimately led to its collapse, causing billions of dollars in losses for
shareholders, investors, and depositors.
In the early 2000s, IndyMac Bank became one of the biggest mortgage lenders and
savings and loan associations in the United States. IndyMac focused on Alt-A mortgage
lending and pursued an ambitious, high-risk growth strategy and hybrid thrift/mortgage
banking business model. Alt-A mortgages fall between prime and subprime mortgages, with
little, or worse, no documentation required, indicating that the borrower is free from providing
complete proof of their assets, income, and expenses. Alt-A loans are handled based on the
reported assets, income, and expenses rather than the supporting documents, which makes
it simpler for the debtor to disclose false information about these particulars.
Most of the borrowers involved in these Alt-A mortgages consist of people unable to
enumerate all their assets or do not have a steady income. A mortgage of this kind can be
advantageous to small business owners since they could have difficulties proving the source
of their down payment funds. Their net income statistics may also make it more difficult for
them to qualify for another sort of mortgage. Self-employed borrowers frequently deduct all
of their expenses. This strategy, in the meantime, might make it more difficult for them to get
a loan. Since the borrower is not required to show proof of these figures, Alt-A offers an
alternative in certain circumstances. Due to this reason, many clients, specifically those self-
employed and with no evidence of income and assets enjoy the offer.
IndyMac, however, was susceptible to the housing market slump brought on by the
subprime mortgage crisis during the first quarter of 2007 because of its rapid growth and
riskier business strategy. The deteriorating financial condition of IndyMac led to net losses
forcing them to sell their loan production but failed to execute. Hence, the company continued
to decline in the following years. Upon investigating this event, a report that one of its primary
regulators, the Office of Thrift Supervision under the U.S. Treasury, was involved in this
scandalous event.
This study revolves around the collapse of IndyMac Bank in July, which cost taxpayers
$8.9 billion. The pointed instigator, Darrel W. Dochow, who then was the West Coast Director
of the Office of Thrift Supervision, allowed the bank to backdate an $18 million contribution
and gloss over its deepening problems. The backdated capital infusion helped IndyMac to
preserve its status as a "well-capitalized" institution. However, this allowed the bank to rely
heavily on brokered deposits, which amounted to $6.8 billion or 37 percent of its total deposits.
The U.S. Treasury Department independent investigator Eric M. Thorson mentioned that a
similar official approved another backdating case at other financial institutions. This incident
highlights the excessively cozy relations between high-flying subprime lenders and federal
bank regulators, which industry analysts say was a serious concern. The U.S. Treasury
Department got criticized for their involvement in the scandal after the bank went bankrupt,
specifically the Office of Thrift Supervision, for not doing enough to ensure that IndyMac was
not doing anything shady.
Since IndyMac Bank was also under the regulation of the Federal Deposit Insurance
Corporation (FDIC), they took some actions to minimize the losses in the company and avoid
the panic of the shareholders, customers, and investors. Hence, the FDIC planned to sell the
IndyMac to sustain its liabilities. Unfortunately, the FDIC announced that the IndyMac Bank
was “unattractive” to sell to potential buyers because it possesses high-risk lending and
mortgage losses. But because of the FDIC's perseverance to recover the losses of IndyMac,
they managed to organize bidding through “franchise marketing”. The OneWest Bank
successfully won on the bidding - having all the deposits of the IndyMac transferred to them
and acquired approximately $6.5 billion, 33 retail locations, a $16 billion loan portfolio, a $6.9
billion securities portfolio, a mortgage servicing rights (MSR) platform with an unpaid principal
balance of $157.7 billion, and the reverse mortgage platform, financial freedom, $1.5 billion
in opposite mortgages and MSRs with unsettled foremost stability amounting to $20.2 billion.
After that, the FDIC entered the shared loss agreement (SLA) with OneWest Bank in order to
minimize the losses of the FDIC to the loan-modification program of the IndyMac. As a result
of this fraudulent affair, the IndyMac Bank failure was classified as one of the most expensive
failures in FDIC history, with an estimated loss to the Deposit Insurance Fund of $12.4 billion.
The aftereffect of this scandal was significant and highlighted the need for strong
policies and regulations to ensure the accuracy of financial reports to promote transparency
and accountability within the industry, not only to maintain the integrity of the banking and
finance sector but also for the welfare of various stakeholders.
In this case study, the researchers will delve deeper into the U.S. Treasury Department
fraud scandal and examine the various factors that contributed to it, attain relevant lessons
from it, and how they can be applied to prevent similar incidents from occurring in the future.
III. STATEMENT OF THE PROBLEM
The fall of IndyMac Bank, a merger between Independent National Mortgage
Corporation and an American bank with headquarters in California, is at the center of the U.S.
Treasury Department fraud scandal in 2009. Darrel W. Dochow, the western regional director
of the federal Office of Thrift Supervision, authorized the bank to provide a false sense of
financial health in the first quarter of this year, which led to the collapse of IndyMac.
After examining documents from IndyMac's external auditor, Ernst & Young, Inspector
General for the Treasury Department Eric Thorson discovered the bank had backdated a
capital infusion. Due to the backdating, IndyMac was allowed to display a capital ratio higher
than 10%. If this ratio falls below that level, the bank no longer qualifies as "well-capitalized,"
making it obliged to get an FDIC (Federal Deposit Insurance Corporation) waiver to take
broker deposits. In addition, the Inspector General pointed out that Dochow permitted
IndyMac to report a capital infusion six weeks earlier than it occurred despite knowing that
IndyMac could not fulfill its capital needs.
In connection with the IndyMac fraud scandal, a savings and loan crisis in the late
1980s was brought up and said to have caused the central government to lose more than
$100 billion. Investigators also discovered what seems to be a similar officially sanctioned
backdating at other financial firms, though they did not name any specific ones. As a result,
Mr. William K. Black, a top bank administrator during the crisis in savings and loans and the
author of "The Best Way to Rob a Bank is to Own One," declared that Mr. Dochow's
indulgence demonstrated the Office of Thrift Supervision's persistent reluctance to assume
responsibility.
In addition to what Mr. Black has already highlighted, it seems that OTS did not place
IndyMac on its watch list of failing institutions before the Federal Deposit Insurance
Corporation took control of it in July, which resulted in a massive loss of $8.9 billion to its
insurance fund. Consequently, this case study aims to determine the following:
1. The detrimental consequences of the U.S. Treasury Fraud Scandal of 2009 to various
stakeholders and the proper action to alleviate its adverse effects;
2. The essence of instilling work accountability, good character, and ethical standards
among the regulators in the U.S. Treasury Department to maintain the public trust of
the masses;
3. Significant policies and/or regulations to ensure the accuracy of financial reports to
promote transparency and accountability within the industry conducive to the welfare
of the bank stakeholders; and
4. Suggested recommendations to avoid the abuse of bank relations between the U.S.
Treasury Department regulators and bank authorities in order to prevent negative
implications.
IV. DISCUSSION
This part of the study exhibits the various stakeholders affected by the U.S Treasury
Department fraud scandal of 2009 through the Point of View; of the timeframe when the
controversy happened, the areas considered by the researchers through the PESTLE and
SWOT analyses, the alternative courses of action conceptualized, how the researchers came
up with a chosen course of action while considering various decision factors through the
decision matrix, and how the researchers plan to execute the course of action.
1. Point of View
The Treasury Department fraud scandal in the United States in 2009 hit several
entities and individuals. The U.S. Treasury Department is responsible for establishing a
healthy economy and generating job opportunities for its populace. Moreover, it is entrusted
to nourish national security in fighting threats, protect the integrity of the financial system, and
efficiently manage the finances and resources of the government. Everything went out of
hand when the Office of Thrift Supervision (OTS) allowed the IndyMac Bank to take
extraordinary steps to stay solvent but did not advise the Federal Deposit Insurance
Corporation (FDIC), which exposed the gap between the OTS and the FDIC. The bank's
collapse cost the FDIC fund $10.7 billion and impacted the company’s stakeholders, such as
its employees, clients, and investors.
This case study seeks a comprehensive analysis of the U.S. Treasury Department
fraud scandal. Therefore, the following stakeholders' viewpoints are relevant due to their
involvement in the case.
1. The U.S. Treasury Department
The U.S. Treasury Department plays a vital role in the management and protection of
the financial and economic system of the nation. Part of its divisions is the Office of Thrift
Supervision (OTS) which issues charters, conducts audits and oversees and controls
federal savings organizations covered by the Federal Deposit Insurance Corporation
(FDIC). Mr. Darrel Dochow, the West Coast regional director during the period when the
controversy occurred, was one of the key people that led to this financial fraud. Hence, the
scandal left an immeasurable impact on the institution's reputation, resulting in the decline
of public trust. In light of this, the Bush administration announced plans for the government
to acquire billions of dollars in Fannie Mae and Freddie Mac (mortgage giants) stock in the
next two years to increase credit lines at the Treasury.
According to the investigation of Treasury Department Inspector General Eric Thorson,
an OTS regulator allowed IndyMac to apply the $18 million it received in May toward its
regulatory filing for March 2008. IndyMac used the funds to argue that it had sufficient
capital cushion and did not require special clearance from the FDIC to carry on its regular
operations. The lack of an FDIC waiver could turn the bank slip below the well-capitalized
minimum level, resulting in restrictions on specific types of deposits. It signifies that the
policies and regulations of the department are not strictly imposed due to the cozy
relationship between the parties.
2. IndyMac Employees
The involvement of IndyMac Bank and U.S. Treasury Department employees and
officials is significant in this case. The accounting fraud wouldn’t be executed if it weren't
for the connivance between the authorities of the bank and the regulators. In the statement
posted on Michael W. Perry’s website, the former chief executive of IndyMac Bank, stated
that he was "specifically directed" to backdate IndyMac's report to regulators to give it an
image of being financially sound.
When banks fail, federal and state regulators march in and bank employees are kept
in the dark. IndyMac Bank, intending to reduce expenses as it battles the increasing
housing downturn and difficulties selling mortgages to investors, reduced its workforce by
24%, dismissing 2,403 workers. One to three months of severance compensation were
provided to around 1,000 targeted employees who were instantly laid off, following a
decrease of roughly 1,600 personnel due to voluntary resignation. By 2007, the firm ended
with 9,938 employees. Perry also added that in the first half of 2008, 500 to 1,000 further
job cuts are expected globally. However, Sean Wright (2009), former Vice President of
Enterprise Information Security for IndyMac, stated that with the acquisition of the bank
(now known as OneWest Bank), 700 contractors and 2,000 employees are retained from
their jobs.
3. Banks
At that time, IndyMac was the second-largest bank failure in U.S. history with around
$32 billion in assets. Based on the analysis of Gerard Cassidy (2008), an analyst at RBC
Capital Markets, increased his initial prediction of 150 failing banks to more than 300 in
the next three years. Banks are under pressure as credit losses that were formerly limited
to subprime mortgages have migrated to other house loans and debt that was once
regarded as secure. Mr. Bob Curran also forecasted factors such as declining property
values, stricter mortgage requirements, unfavorable buyer psychology, excessive
inventories, and rising foreclosures will probably persist at least into the next year.
4. Depositors/Clients
The clients and depositors of IndyMac Bank were also impacted by the bank's failure.
According to Hoag (2008), many anxious IndyMac Bank clients reportedly waited in line to
withdraw as much money as they could from the failing bank. Many of the bank's clients
were afraid they would lose their hard-earned money as a result of the bank's failure.
Thankfully, the FDIC transferred the insured deposits to IndyMac Federal Bank,
minimizing the impact of the IndyMac Bank failure. Furthermore, House and Senate
negotiators concurred to permanently raise the Federal Deposit Insurance Corporation
coverage for individual accounts from $100,000 to $250,000 (Puzzanghera & Reckard,
2010). This means that depositors have nothing to worry about with their money, including
those who have more than $100,000, as all insured deposits at IndyMac Bank are safe.
5. FDIC
The Federal Deposit Insurance Corporation plays a vital role in insuring the deposits
of financial institutions in the United States. Its mission is to maintain stability and public
confidence in the nation's financial system. Since one of its purposes is to make sure that
no depositor will lose a penny as a result of the failure of an insured bank, the failure of
IndyMac Bank severely affected the FDIC. According to Wutkowski (2008), the failure of
mortgage lender IndyMac Bank delivered a bigger blow to its insured deposit fund than
originally expected.
The FDIC diligently monitored every risk contributing to the demise of IndyMac Bank
and implemented various measures to mitigate it. The cost of the resolution of the Deposit
Insurance Fund to the FDIC is reported to be about $10.7 billion, according to the Office
of Inspector General's 2009 review.
6. Investors and the New York Stock Exchange
The collapse of IndyMac Bank also has an impact on investors, particularly those who
trade on the New York Stock Exchange. According to Chang et al., the New York Stock
Exchange halted trading in IndyMac Bank, the holding company for IndyMac Bank. The
stock was in freefall in 2008 at 9 cents per share after reaching its high of $50 per share
in 2006.
Additionally, the bank failure started to raise fears among investors about the stability
of the top two home mortgage companies, Fannie Mae and Freddie Mac, as they saw the
collapse in the IndyMac stocks.
2. Time Context
In the first quarter of 2009, amid a Treasury Department audit and investigation into
OTS failures and misconduct, Darrel Dochow was forced to resign and retire as a government
regulator. IndyMac was already a doomed institution, according to a report by the Office of
Inspector General for the Treasury Department, and prompt corrective action ought to have
been taken in May 2008. In May 2008, IndyMac was revealed but did not admit that it was no
longer a well-capitalized institution and was on the verge of insolvency. The bank's risk-based
capital ratio was 10.26% as of March 31, down from 10.81% from the previous quarter,
according to IndyMac's 10-Q. According to reports, the bank's risk-based capital was only
$47 million above the minimum required for this 10% threshold. However, it did not disclose
that some of the $47 million claims it had as of March 2008 were a sham.
3. Areas of Consideration
The Fraud Scandal of the U.S. Treasury Department in 2009 brought distress,
mentally and financially, to the investing public, government institutions, and various
stakeholders of the organizations involved. The problem started due to the falsification of
financial records, which tainted the reputational image and integrity of the Treasury
Department and brought about the fall of IndyMac Bank. This part of the study presents the
SWOT and PESTLE Analyses, which will openly show the internal and external factors of the
controversy.
3.1. PESTLE Analysis
POLITICAL
Significant political ramifications resulted from the U.S. Treasury Department's
fraud crisis in 2009, which affected not only the Treasury Department but also other
regulatory agencies like the Federal Deposit Insurance Corporation (FDIC) and the
Securities and Exchange Commission (SEC). This would be the political analysis of the
scandal:
1. Government policies and regulations: The incident brought to light the need for
more stringent government financial institution policies and regulations. The
government was under pressure to punish the guilty parties and take action to stop
scandals of this nature from happening again. To prevent another financial disaster
and improve openness and accountability in the financial industry, the government
passed the Dodd-Frank Wall Street Reform and Consumer Protection Act.
2. Public opinion of regulatory organizations: The crisis diminished the public’s trust in
regulatory organizations like the SEC, FDIC, and Treasury Department. The
general public believed that these organizations were ineffective at preventing fraud
and defending the general public's interests. This prompted demands for these
regulatory agencies to be more open and accountable.
3. Political pressure: As a result of the scandal, the Treasury Department and other
regulatory agencies were subject to political pressure on the government to act
quickly. Many parties, including politicians, investors, and taxpayers put pressure
on the company.
4. Government response: The scandal's government response had a big political
impact. The way the government handled the incident drew criticism, and many
people thought that it did not go far enough to hold those involved accountable. This
approach also shifted attention to the government's responsibility to oversee
financial institutions and safeguard the general welfare.
5. Several regulatory changes: These were made because of the scandal, including
the founding of the Office of Financial Research and the Consumer Financial
Protection Bureau. These changes seek to improve accountability and
transparency in the financial sector while averting the next financial disaster.
In conclusion, the 2009 U.S. Treasury Department fraud scandal had enormous
political ramifications, prompting heightened government surveillance of the financial
industry, regulatory reforms, and increased scrutiny of regulatory agencies.
ECONOMIC
The U.S. Treasury Department's fraud scandal in 2009 had a substantial impact on
the economy, affecting interest rates, bank deposits, income, and investor confidence.
Following would be the economic analysis of the scandal:
1. Investor confidence: The scandal significantly decreased the value of the stock
market and the stock prices of financial institutions by shattering investor faith in the
financial system. Investors started to be cautious about making financial sector
investments, which slowed down the economy and reduced economic growth.
2. Revenue: Both financial institutions and taxpayers suffered large losses as a result
of the fraud. The government suffered a financial loss as a result of the Treasury
Department's obligation to compensate investors who were harmed by the
deception. Also, as the economy slowed down as a result of the scandal, tax
revenue decreased.
3. Bank deposits and the flow of money: People were less inclined to put their money
in financial institutions. As a result, banks had less money to lend and customers
had less money to spend, which reduced the amount of money moving around the
economy.
4. Interest rates: As a result of the scandal, the Federal Reserve was forced to reduce
interest rates to promote economic growth. As a result, investors received reduced
returns and financial institutions saw a decline in revenue.
Overall, the U.S. Treasury Department fraud scandal in 2009 had a big impact on
the economy, causing a drop in investor confidence, income, bank deposits, and money
movement. Interest rates were also impacted by the scandal, which affected both investors
and financial institutions. The consequences of the incident underlined the need for
increased transparency and accountability in the financial industry and illustrated the
substantial impact that financial crises can have on the economy.
SOCIAL
Several social issues connected to the cozy relationship between regulators and
banks and the herd behavior of financial institutions were brought to light by the U.S.
Treasury Department fraud scandal in 2009. Following would be the societal interpretation
of the scandal:
1. Regulators often turn a blind eye to unethical behavior in exchange for political
support or professional progress, according to the scandal, which exposed a cozy
relationship between regulators and banks. This tight relationship damaged the
public's confidence in the government and financial institutions by allowing
fraudulent activity to go unreported and uncontrolled.
2. The scandal also brought to light the herd mentality of financial institutions, with
many banks resorting to deceptive practices to stay competitive. Banks were more
focused on achieving short-term financial goals than they were on preserving long-
term financial stability, and this herd behavior led to a culture of corruption and a
lack of responsibility.
3. A lack of accountability for fraudulent behavior was a result of the cozy relationship
between regulators and banks and the herd mentality of financial institutions. The
scandal showed that those engaged in fraudulent activities frequently avoided
punishment because of their political connections or because regulators were
reluctant to take enforcement action.
4. Society's reaction to the fraud scandal was crucial because it weakened public
confidence in the government and financial institutions and exacerbated the world
financial crisis. The incident made clear that the financial sector needed more
responsibility and transparency, and it prompted more regulation and control of
financial institutions.
Finally, the U.S. Treasury Department fraud incident in 2009 brought to light some
social issues relating to the tight relationship between regulators and banks and the herd
mentality of financial organizations. The incident underlined the significance of regulating
and overseeing financial institutions to prevent fraudulent behavior and also showed the
need for improved accountability and transparency in the financial sector. The
consequences of the incident highlighted the need for more monitoring and regulation in
the financial industry and showed how much of an impact financial scandals can have on
society.
TECHNOLOGICAL
Since the U.S. FDIC took over the issue brought up by the scandalous affair of the
U.S. Treasury and IndyMac Bank, the organization acts as an overseer of the bank. This
would be the Technological Analysis of the scandal:
1. Upon the bank's takeover of the FDIC, the institution collaborated with Enterprise
Information Security to investigate and work through a rebirth of the new business
model of the company. Because of these, the backdating and falsifying of financial
information can be mitigated and resolved with the help of a new Security Team.
2. The Security Team handled the situation better by developing and implementing a
cross-matrixed organization. Whereas the team successfully combined IT Security,
Compliance, and Identity and Access Management to ensure that the protocol has
been followed.
3. Ensuring that the information security of the newly rebirth company was effective.
The FDIC and OTS required the new security team to have a Compliance and
Awareness Program which will help to educate the employees to look out for
possible falsifying activities such as ID Theft/Fraud, Phishing, Social Engineering,
and Data Breach. This also elevated the privileges and access rights of users who
are not IMB employees because the information is now more accessible than
before.
In conclusion, the FDIC takeover of the issue of IndyMac and the U.S. Treasury
Department was significant in easing the rising problem in terms of security features of the
IndyMac Bank. With this intervention, the institutions successfully transition the bank into a
new business model.
LEGAL
The issue of falsifying financial documents of IndyMac Bank pointed the blame on
the regulators connected with the scandalous event. This would be the Legal Analysis of
the scandal.
1. The Security and Exchange Commission, one of the regulatory institutions related
to IndyMac filed a fraud suit against the former chief executive of IndyMac Bank,
Mr. Michael W. Perry. The accusation about it led to the final say of the Office of
Thrift Supervisor's West Coast Director, Mr. Darrel W. Dochow but failed to
elaborate. Hence, Mr. Dochow was not accused by the commission. Additionally,
other regulators such as the Justice Department of Washington declined to speak
about its wrongdoings.
2. It was also said by one of the members of the Senate Banking Committee that the
fall of IndyMac Bank causes a lot more damage because the regulators were not
ready to intervene to protect the company and its clients.
In summary, according to a statement in this issue, "No one within the regulatory
ranks may go to jail." Hence, it proves that the justice system is not fair even if it is
associated with fraudulent actions and unethical conduct in the workplace.
ENVIRONMENTAL
IndyMac Bank was known for offering Alt-A mortgages which means its consumers
are mostly clients who do not have a steady source of income. IndyMac became popular
and boomed during the 2000s because of Alt-A mortgages, however, became susceptible
to the housing market slump brought on by the rising subprime mortgage crisis. This would
be the Environmental Analysis of this crisis:
1. Because of the subprime crisis in 2007, IndyMac's high dependency on promoting
Alt-A mortgages collapsed. During this crisis, those borrowers who had credit
scores below average were having a hard time getting home loans. Hence, IndyMac
could not offer Alt-A mortgages anymore. As a result, many borrowers were forced
to sell their land to satisfy mortgage payments with higher interest rates. On the
other hand, housing shortages and increasing interest rates could result in
urbanization. Whereas, congestion in a specific area, or affordable housing units,
would result in pollution, higher crime rates, and increased levels of inequality.
Thus, IndyMac's high dependency on Alt-A mortgages leaves its customers in a
very hard situation because they are mostly affected by the subprime crisis.
3.2. SWOT Analysis
STRENGTHS
1. The Treasury Department of the United States administers the economic and financial
system of the country.
➢ The department manages the financial matters of the U.S. government. Meaning to
say, it has to perform its duties and responsibilities honorably without compromising
the reputation of the government. It collects taxes and fees (the lifeblood or
government's primary source of income) for the utilization of repayment of debt
obligations and funding of developmental projects and programs for its citizens.
Moreover, it forecasts all the possible financial crises the nation needs to face for
the year. The department implements finance and tax laws for its constituents,
national banks, and thrift institutions to eradicate unlawful practices and promote
integrity conducive to a more sustainable economy and financial system.
2. IndyMac Bank was a well-capitalized bank in the United States.
➢ It is one of the nation’s well-known subprime mortgage lenders back then. They
provide loans to unqualified clients for prime lending, which means they offer loans
for higher interest than the charged rates prescribed by federal reserves for
commercial banks.
3. The Treasury Department fraud scandal, consisting of the conspiracy of IndyMac and its
regulator, Darrel Dochow, was revealed.
➢ The public disclosure of financial statements remains relevant in the industry. The
stakeholders, such as depositors, creditors, investors, employees, and the general
public, utilize these records to know the institution's financial standing and analyze
these figures to comprehend if they would trust their money in the bank. The
controversy caused IndyMac to cease its operations and Darrel Dochow to step
down from his post. If the issue got dragged on further, financial damages would
have been unimaginable for other government agencies, such as FDIC, that
regulate and insure bank deposits. Moreover, the investors would remain unaware
of the situation, causing IndyMac to entice more people to fund failing operations.
WEAKNESSES
1. Damage the reputation of the U.S. Treasury Department and it might lose the public
trust.
➢ Since the U.S. Treasury Department regulates the economic and financial system
of the country, it may weaken public trust. The assumption that the department was
not efficiently managing public funds and avoiding fraud might have long-term
consequences for the government's capability of carrying out its purpose.
2. IndyMac Bank depends primarily on wholesale funding.
➢ Wholesale funding is a sort of short-term financing that can be challenging to get

under market volatility, which made IndyMac Bank susceptible to liquidity issues
during the financial crisis.
OPPORTUNITIES
1. Revitalize the U.S. Treasury Department's reputation by reinforcing stern alliances
between government regulators and financial institutions.
➢ Although a good relationship is an answer to a smooth-sailing regulatory operation,

on the other hand, having a lax bank and regulator relationship could lead to the
deception of the general public, especially those direct stakeholders of the involved
institutions. Therefore, it is relevant for both parties to set boundaries in fulfilling
their responsibilities as reputable institutions.
2. Strengthen the rapport within the banking or financial industry by providing reliable
financial records.
➢ Banks' vital source of income comes from loans, and they can provide loans through
bank deposits. They act as an intermediary between those people with idle funds
and those that need them. That being the case, it is relevant for the industry's
stakeholders, such as investors and depositors, to have accurate access to the
institution's financial records. As mentioned, banks can aid loans through deposits.
People put their idle funds in the bank to safe-keep it, and at the same time, expect
interest returns although low. This way, banks can fund their lending activities and
gain interest from circulating it. In addition, an institution's financial standing is
crucial to its investors. In finance, investment is the process of putting your money
in financial assets with the expectation of gaining profit from it in the end. Therefore,
the stakeholders or the general public have the right to know the financial capability
of the institution, so they can decide whether to trust their funds with the institution
or not and if their goals are coherent with the institution.
3. Appoint an upright government regulator to bolster efficiency in the financial system.

➢ Since the government could not directly deal with the public's concerns, there are
regulators to keep order in the economy. These officials need to perform their duties
and responsibilities honorably while keeping in mind not to taint the government's
image. Moreover, they are elected to be the voice of the masses, weighing both
sides and not the only one that could make things look biased.
4. Tighten the loan procedures for IndyMac bank and strictly comply with the capital
requirements.
➢ Even though IndyMac bank was known to cater lending services on a large scale,
the bank should be mindful of the risky assets pledged along with the loans.
Moreover, it relied on its brokered deposits, which consist of about one-third of its
assets, and borrowed funds from the Federal Home Loan Bank. The bank often
granted loans without proper verification of the borrower's income and assets or
those borrowers with poor credit histories, exposing the entity to high credit risk. Its
aggressive growth strategy became the reason for its undercapitalization, which
resulted in the backdating of financial records. Regardless of the mentioned
circumstances, the bank should be responsible for keeping the entity in check to
retain its “well-capitalized” title.
THREATS
1. The Fraud Scandal may lead to an additional investigation from regulators that may be
time-consuming and expensive to the U.S. Treasury Department.
➢ This threat might be in the form of heightened monitoring, audits, and inspections
to ensure that the issue is effectively addressed and that similar incidents do not
recur in the future.
2. The Fraud Scandal provided a threat to the quality of government operations, public
trust, and funds of taxpayers.
➢ The controversy can lead the public to question the reliability of the government
regulators. As what have been mentioned on the previous parts, the stakeholders
considered the U.S. Treasury department as ineffective in carrying its duties and
responsibilities to maintain a sustainable financial system of the federal
government.
3. The IndyMac Bank experiencing a liquidity crisis.
➢ The bank was unable to fulfill the expectations of its depositors because the
IndyMac experience declining liquidity ratings wherein as result, the federal
government took over the company.
4. Alternative Courses of Action
Option 1: Heighten policies and/or procedures with regard to the selection and
appointment of U.S. Treasury employees, as well as the accuracy of financial reports,
to maintain the integrity of the department itself and for the benefit of various
stakeholders.
One of the main problems that have been seen in this case involves the lack of
accountability and commitment of a banking regulator in the U.S. Treasury, Mr. Dochow, same
with the manipulated financial reports made by the bank, IndyMac, which were accepted, and
the worst thing is that a government employee suggested such an unethical practice in order
to hide the real status of the bank when it comes to its financial stability. Thus, the researchers
have come up with the said alternative course of action as a way to solve the problem. It is
vital for the U.S. Treasury to have stricter guidelines in selecting and appointing employees,
as they will be the ones to play different roles that are essential to the nation’s welfare and
development. Specifically, a banking regulator is tasked with supervising and regulating
banks operating in the country, and this role has an important part in ensuring the accuracy
of financial reports and the stability of the entire banking system, according to an article
entitled, "Financial Regulators: Who They Are and What They Do”, written by Michael Schmidt
(2021).
Moreover, according to Amanda Nieweler (2022), potential risks that are associated
with certain activities can be calculated and managed through policies and procedures.
Therefore, if the policies and procedures in accordance with the selection and appointment
of the U.S. Treasury employees, as well as in ensuring the accuracy of financial reports, are
heightened, then risks, such as a banking regulator failing to do his job in securing that banks’
financial records are not manipulated and banks committing accounting fraud, can be
prevented from occurring. Hence, accountability, consistency, and better quality of service
among U.S. Treasury employees can also be expected through this action. Also, banking
regulators and banks having a cozy relationship are one of the main causes of this fraud
scandal in the U.S. Treasury in 2009, as seen in various reports, which is why this kind of
relationship must also be prevented. Regularly performing audits in order to ensure fair and
accurate financial information is also part of this action, and it is important in maintaining the
integrity or reputation of the government and the trust of the general public and other
stakeholders. Furthermore, imposing intensified sanctions or legal consequences on
government officials who violated the law should also be implemented. This is to stand as a
lesson to every government employee, specifically for U.S. Treasury employees, not to abuse
their power and authority, because if unethical practices continue in the government, the
public trust might perish and a lot of individuals relying on the government will be immensely
affected.
1.1. Selection and Appointment of U.S. Treasury Employees
Conducting a thorough investigation on every employee in the U.S. Treasury
Department helps in aiding fraudulent activities. The qualifications for a treasury
officer must not only include the skills, knowledge, and expertise for the role, but most
importantly, the officer must have good character and ethical standards. It is important
that they align their principles to the goals and objectives of the institution they are in.
That is why, regularly conducting seminars or webinars that talk about work
accountability, good character, and good governance can be a huge help in reminding
them that they must always play their role and purpose in the organization in an ethical
way.
1.2. Ensuring the Accuracy of Financial Reports
According to Will Kenton (2022), the Sarbanes-Oxley (SOX) Act of 2002 is a
law established by the U.S. Congress on July 30, 2002, that aims to prevent fraudulent
financial reporting from occurring in different corporations. This also helps protect
investors from fraud. Over time, this law has improved to address various financial
scandals that happened in the early 2000s, which Enron Corporation, Tyco
International plc, and WorldCom had been involved with. With that, the researchers
suggest that policies like SOX should be regularly updated to ensure that the financial
information shared with the public is accurate. This also helps financial institutions
and other industries be more accountable with the accounting records they provide.
Thus, public trust can always be maintained.
Option 2: The Treasury Department of the U.S. must increase its transparency.
The U.S. Treasury Department strengthening its transparency is one of the alternative
courses of action that can be taken in the IndyMac fraud case. Following the scandal, the
public's trust in organizations such as the Treasury Department was decreasing, and people
began to believe that organizations responsible for preventing fraud and protecting the
general public's welfare were ineffective. The Treasury Department's actions in response to
the scandal drew criticism because they did not go far enough to hold those involved
accountable, prompting calls for these regulatory agencies to be more open and dependable.
The U.S. Treasury Department must increase transparency, for example, by issuing
periodic reports on investment performance. This means that the Treasury Department must
provide up-to-date information about fund performance in a consistent, accessible, and
understandable manner. Investment funds' annual financial statements should include
statements such as net assets, operations, investment portfolios, portfolio investment
summaries, financial highlights, and auditor reports. The performance of investments should
be accurately presented and fully disclosed. In that way, investors can understand their
portfolio's performance and fairly evaluate their investment managers if they have information
about the risks they have taken and the results they have achieved. Transparency and
accuracy in reporting investment performance are crucial for maintaining trust and confidence
in the financial markets as well as ensuring that investors are able to make informed decisions
about their investments. Without clear and comprehensive disclosure, investors may be
exposed to unnecessary risks or misled about the true performance of their portfolios.
Making more information publicly available is an empowering act that will help rebuild
trust between citizens and the government. In that case, the U.S. Treasury Department must
increase transparency to promote accountability and provide citizens with information about
what their government is doing. The Administration should take appropriate action, by law
and policy, to quickly disclose information in forms that the public can easily find and use.
Executive departments and agencies should use new technologies to make information about
their operations and decisions more accessible to the public. The Treasury Department and
other agencies should also solicit public feedback to identify information that will be most
useful to the public.
Option 3: Imposing a limited term of employment to the banking regulators to avoid
unethical practices and biases in work.
Being in the Office of the Thrift Supervision (OTS) for a long time can result in having
a comfortable relationship with the employees and bank representatives they frequently meet.
This is mainly the reason for the fraud scandal in the U.S. Treasury Department last 2009, as
a former federal bank regulator mentioned that Darrel Dochow showed having a cozy
relationship with the representative of IndyMac. Darrel Dochow has been in the Office of the
Thrift Supervision since 1989 as a Senior Deputy Director, Supervisory Operation and
became the Regional Director in the same office until 2009 which enabled him to connect
with other officials, employees, and bank representatives and develop a bias to those he had
relations with.
With that, an alternative action to avoid unethical behaviors and bias with bank
representatives is to impose a limited term of employment to banking regulators. Limited term
of employment pertains to a method of employing a person that is contracted to work in a
position for a limited set of time. In the article “Preventing Public Sector Corruption” by the
United Nations Office on Drugs and Crime (UNODC), it was stated that staff rotation is
believed to help prevent the development of corrupt relationships and intercept those who
already established unethical relationships. Rotation may also limit the enticement in
engaging corruption for the employees from the private sector because there will be no
expected guarantee of the continuation of the unethical partner’s position. Even though the
suggestion in the article is a job rotation, it still showed that staying longer in a position,
especially in positions that are prone to corrupt practices, can enforce bias and unethical
practices. With a limited term of employment, a banking regulator can stay in the position for
five (5) years since the average time in job positions under the financial activities industry is
four and a half (4.5) years and the average time in job positions from the public sector is 6.8
years according to Jack Flynn (2022).
Since banking regulators will have limited time to showcase their skills and reach the
performance standards, they will make sure to perform accurate financial reports, promote
transparency and accountability, and will follow ethical practices so they can leave their
position with a good legacy.
An example of public positions under financial activities that had limited terms is the
governor and members of the Monetary Board under Bangko Sentral ng Pilipinas (BSP).
Where in the New Central Bank Act, the Governor and the members of the Monetary Board
will serve terms for six (6) years and can only be removed for cause.
5. Decision Matrix
In this section of the case study, researchers seek to identify which of the possible
courses of action will be the most effective in resolving the U.S. Treasury Fraud Scandal in
2009, or at the least, in mitigating a solution that might prevent it from reoccurring.
Alternative Courses of Action (ACA)

Criteria
Option 1 Option 2 Option 3
Reliability
4 3 3
(perform its intended function adequately)
Practicality
3 4 4
(usefulness or convenience)
Effectiveness
4 2 3
(capability of producing a desired result)
Sustainability
3 2 3
(ability to maintain at certain rate)
Total 14 11 13
Based on the data shown in the figure above, the Option 1 obtained the highest score,
making it the best Course of Action.
Legends
Heighten policies and/or procedures with
regard to the selection and appointment of
U.S. Treasury employees, as well as the
Option 1
accuracy of financial reports, to maintain the
integrity of the department itself and for the
benefit of various stakeholders
The Treasury Department of the U.S. must

Option 2 increase its transparency
Imposing a limited term of employment to the

Option 3 banking regulators to avoid unethical
practices and biases in work
The factors to be taken into account fall under the following four categories: (a)
reliability; (b) practicality; (c) effectiveness; and (d) sustainability. Each alternative will be
scored according to the categories, which will then be ranked according to their rates.
Reliability Practicality Effectiveness Sustainability

• Potential effects • Ease of • Root causes • Cost to maintain
on clients implementation addressed by (e.g., money,
• Training factors • Ease of this solution time)
(regulators and maintenance • Extent of • Safety, health, or
bank • Time until resolution of environmental
employees) solution is fully problem factors
• Support or implemented • Difficulty of • Return on
opposition to solving investment;
the solution availability of
• Extent to which resources (e.g.,
the action is people, time)
consistent
In order to provide quantitative response possibilities that simplify data analysis which
can determine the rating of alternative courses of action, the Likert scale based on the
likelihood is utilized.
The researchers employed a 4-scale pointing system to rank potential courses of
action and calculate the ratings for each factor. Four (4) is the highest score and, most likely,
the best solution in the matrix given, while one (1) is the lowest value.
Likelihood of Solving the Case

(Likert Scale)
1 Very Unlikely
2 Unlikely
3 Likely
4 Very Likely
6. Action Plan
This part of the study is to lay out the steps for the implementation of the most effective
alternative course of action.
Falsifying records done by the ex-regional director at the Office of Thrift Supervision,
Darrel Dochow is the main reason for the scandal that tarnished the public image of the
institution. Hence, to prevent the occurrence of a fraud scandal again in the U.S. Treasury
Department, based on the decision matrix, the institution should heighten policies and/or
procedures regarding the selection and appointment of Treasury employees as well as the
accuracy of financial reports.
STEP 1: Administer an investigation and identify the misconduct by the U.S. Treasury
Department Office of Thrift Supervision Regulators.
In 2009, the U.S. Treasury Department, specifically the Office of Thrift Supervision,
faced a controversial issue regarding the IndyMac's falsification of financial records. However,
the focal point of this matter is because of the misconduct of the regulator in charge of the
bank. Darrel Dochow, on May 9, 2008, had allowed the IndyMac bank to fabricate its financial
records, that the capital infusion they received from their parent company on that day was to
be recorded at the end of March instead. That way, the external auditor of IndyMac, Ernst &
Young, found some malicious records within its books, and that is when the conspiracy was
known to the public.
The first and most prominent concern in this study is the regulator, Dochow, the act of
dereliction of duty in allowing IndyMac to backdate its books - when in fact, it had already
slipped below the minimum level to be considered a “well-capitalized” bank that regulators
allow. This kind of misconduct or the act of falsifying accounting records is a huge issue,
especially when it is misleading the general public, as well as the bank's depositors, investors,
and even the taxpayers of the United States. Also, the fact that IndyMac was only one of the
five banks approved by the Office of Thrift Supervision to backdate its financial records makes
it more alarming.
Another irresponsible act that needs to be highlighted is the lack of boundaries
between the bank and regulators. A former examiner pointed out that Darrel Dochow was
known to be “bank-friendly” within the Office of Thrift Supervision. He treated banks as if they
were his clients because his approach to dealing with them showed more negotiation than
regulating banks, which was the opposite of how regulators should treat people or institutions
that needed to comply. In addition, the Office of Thrift Supervision probably must have seen
the red flags happening within the institution but still chose to turn a blind eye to them. With
regards to the investigation of the U.S. Treasury Department Inspector General, OTS have
identified all the problems and risk that IndyMac had with its operations, consisting of the large
quantity and poor quality of mortgage products, but still did not take action to stop the
malpractices that should have been halted a long time ago and helped the bank to slowly
stand again. Regardless of IndyMac’s culpable actions, it was shown that the U.S. Treasury
Department Office of Thrift Supervision regulator, Mr. Dochow, neglected its duties and
responsibilities in regulating bank or thrift institutions, contrasting its policies and mandates.
STEP 2: Heighten or reform policies to eradicate acts of dereliction of duty.

As the researchers analyzed the case, the law violated would fall under the Sarbanes-
Oxley (SOX) Act of 2002. This Act tends to pursue good governance within the organization,
hinder the dominance of fraud, and promote the reliability of financial reporting. The Sarbanes-
Oxley Act refines the reliability of financial reporting for various stakeholders, maintains public
trust, or establishes the confidence of investors to maintain the viability and integrity of the
U.S. financial system. Moreover, this Act includes intensified control inside the environment
for more dependable documentation and partaking of the audit committee to maintain the
righteousness of institutional internal control. Additionally, after a year of its implementation, it
instilled fear and gratitude in the industry participants. Fear that the burden of enactment could
impair their operations and gratitude because executives were able to pinpoint, at last, the
gaps or the weaknesses that called for the needed internal reforms and effectively comply
with the government regulations. In connection with this, the institutions that are revealed to
disobey this will face a fee of $1 million and will be imprisoned for 10 years. Therefore, the
researchers suggest that the institutions who will be found guilty shall be suspended from
operating its business activities so that they will not be tempted to violate this law (Find Law,
n.d.).
Regardless of the IndyMac issue of falsification of financial records, this was an
unfortunate example of a regulatory failure, as stated by James Barth. There were some
warning signs in the banking operations, but, Dochow considered the bank a “well-capitalized”
one. And even if the regulators have done something wrong, they could not be penalized for
it. They enjoy absolution from allegations of illicit acts under the Securities Exchange Act,
which says that a case cannot be filed against an officer of the United States Agency for
infringement of securities law, especially if the officer is performing his job (Story &
Morgenson, 2011). For financial regulators, a dispute would be present if banks were to run
into trouble, and at the same time, they are only doing their job to help banks maintain their
stability. However, it is necessary to implement sanctions or legal proceedings in the case of
dereliction of duty or simply going against the mandate of the government to regulate
institutions they are accountable for, even if there is no bribery or any form of corruption
evinced. Through this, the regulators will be encouraged to carry out their responsibilities
honorably and annihilate the unethical practices within the organization that could tarnish the
eminence of the U.S. Treasury Department. Therefore, the best solution for this starts with
building a reputable administration for the betterment of the government regulators and the
concerned institutions.
STEP 3: Establish a strong audit and compliance committee.

The problems seen in the case are the result of a cozy relationship with the regulators,
which results in falsifying their financial records, allowing them to hide their ill health, and
making it appear to the government filings that the bank had more deposits than it actually
did, allowing them to maintain their well-capitalized threshold and continue to attract large
deposits vital to its operations.
In that case, a quality auditing system should be implemented, and performing it
should be done by a credible and reputable internal auditor, to ensure that financial information
is presented fairly and accurately. Financial institutions should implement internal controls to
reduce the risk of errors and improve fraud prevention and detection. The goal of the internal
audit process is to identify any weaknesses in internal controls that could increase risks for
the company. This serves to protect the company from these issues as well as to ensure there
are no red flags. The operations of a business are heavily reliant on gathering reliable financial
data, detecting or avoiding fraud and the misappropriation or misuse of assets, and minimizing
expenditures. As a result, implementing a quality auditing system ensures that banks and
other financial institutions are following laws and regulations and accurately recording
financial information. It also ensures risk management and protects institutions from potential
issues such as fraud, waste, or financial abuse. Therefore, auditors should fulfill their
professional responsibilities by using an appropriate fraud lens throughout the audit, as well
as other auditing standards relating to identifying and responding to the risk of fraud in the
audit, so that the auditor should obtain reasonable assurance that there is no material
misstatement to the financial statements caused by either fraud or error.
STEP 4: Reassess the work history of U.S. Treasury employees, particularly the
banking regulators.
In the IndyMac Scandal, regulators are to blame for everything that happened, which
is why reassessing their work performance should be taken. The importance of an employee
evaluation is that it helps determine whether an employee's vision is appropriately matched
to their responsibility. Regulators conspire with the bank rather than supervising them,
reassessing their work history is necessary to ensure that employees perform according to or
exceed the expectations of the taxpaying public and for ensuring a good-quality performance
from the employees and regulators. It is critical to figure out the weak links and negative points
and understand how much the employees are aligned with the vision of the bank and the
government. Also, it is essential for them to prove their innocence from being involved with
unethical practices or misconduct. Thus, it will make them trustworthy and honorable with their
designated positions, that will also maintain public trust.
STEP 5: Raise the qualifications for U.S. Treasury Department officials based on the
organization’s standards.
Specify the requirements: The first step in improving the credentials of U.S. Treasury
Department employees is to specify the credentials that are necessary for each position.
Reviewing current credentials and any holes that need to be filled should be part of this
process. Thus, it is very important to consider is the organization's standard certification.
Create training programs: After defining the requirements, the following step is to
create training courses that will prepare personnel to meet the new requirements. In order to
ensure that employees are morally and ethically upright, training should not only emphasize
technical capabilities but also ethical and moral ideals.
Establish a certification procedure: A certification procedure should be put in place to
make sure that the potential candidate has met the necessary requirements. Employees
should be needed to pass an exam that confirms their knowledge and understanding of the
requisite requirements as part of this procedure, which should be based on the organization's
standard certification.
Conduct background check: Background checks should be performed on all applicants
before they are recruited in order to further guarantee that workers are honorable. This should
entail looking through their educational background, career history, and criminal histories.
Implement a performance evaluation system: To make sure that workers adhere to the
necessary standards, a strong performance evaluation system should be implemented. The
assessment should take into account both technical competence and moral behavior, and it
should be carried out on a regular basis.
Establish a code of ethics: The U.S. Treasury Department has to have a code of ethics.
This should set forth the moral standards that workers are expected to uphold, and
management should enforce them.
Strengthen Management: Management needs to be enhanced in order to guarantee
that staff members satisfy the new requirements and uphold the code of ethics. This can be
done by giving managers more training and resources, setting up a system for reporting
ethical transgressions, and encouraging an environment of accountability and openness.
Follow developments: It's critical to keep an eye on developments and assess how
well the new certification and qualification system is working. By carrying out routine audits
and reviews and making the required adjustments, this can be accomplished.
By putting these measures into place, the U.S. Treasury Department may improve the
credentials of its employees and guarantee that they uphold moral standards in addition to
technical competence, lowering the likelihood of fraud and scandal in the future.
STEP 6: Implementation of employee-oriented programs.

It is relevant to develop and implement new training programs for U.S. Treasury
employees on financial regulations, fraud prevention, and ethical behavior. These programs
should be mandatory and should be updated regularly to reflect changes in laws and
regulations.
The first stage in creating new training initiatives is to evaluate the existing initiatives
for U.S. Treasury personnel in the areas of financial rules, fraud prevention, and ethical
conduct. This will entail evaluating the current programs' structure, content, and efficacy. This
includes all employee-focused activities, such as webinars and team-building exercises
Finding knowledge gaps is the next step after evaluating the current training programs.
These gaps in information must be filled. In order to do this, it will be necessary to determine
which subjects are not sufficiently covered in the current training programs and what additional
knowledge employees need to have.
Create new training materials: New training materials should be created based on the
knowledge gaps that have been found. Employees should be given a thorough awareness of
financial regulations, fraud prevention, ethical conduct, job accountability, morality, and good
governance. The use of these resources that will aid in employees' skills and knowledge
development.
Implement obligatory training: All U.S. Treasury personnel should be required to
complete the new training sessions. By doing this, every employee will be expected to acquire
all the information and abilities needed to follow rules, stop fraud, and act morally.
Training programs should be continuously updated because ethical and financial
requirements are always changing. As a result, it is crucial to continually update the training
programs to account for changes in laws and regulations.
Use a variety of training methods: Using a variety of training methods will help to
ensure that the new training programs are effective. These could include workshops,
seminars, online courses, and more that will cater the U.S. Treasury employees’ demands
and tastes when choosing the delivery mechanism for the webinars and team-building
exercises.
Plan the training: To guarantee that all the U.S. Treasury Department regulators have
the chance to participate, the training sessions should be organized in advance. Locate a time
that works for everyone as this may entail working with several departments or teams.
Check attendance: It's critical to check attendance at training sessions to make sure
all Treasury Department regulators are taking advantage of the chances presented. This can
be done by keeping track of attendance at the webinars and team-building exercises.
The effectiveness of trainings should be evaluated on a regular basis for the new training
initiatives. Employee input will be gathered, performance metrics will be reviewed, and any
necessary adjustments will be made.
Reinforce learning: Ongoing assistance should be given to ensure that the knowledge
and skills acquired through training programs are reinforced. This could incorporate coaching,
mentoring, or follow-up sessions.
The U.S. Treasury can guarantee that its staff members have the knowledge and
abilities required to adhere to rules, avoid fraud, and conduct ethically by putting these steps
into place. This will safeguard the U.S. Treasury's reputation while lowering the danger of
fraud and other financial crimes that may foster a culture of ongoing learning and development
while also encouraging employee responsibility, virtue, and good governance.
STEP 7: Performance evaluation of appointed U.S. Treasury Department officials.

After imposing an employee-oriented program, a regular performance evaluation of
the officials of the U.S. Treasury Department must be an important next step. Performance
evaluation of employees can help close the gap between the expectations and the actual
results and can help officials align with the goals set up by the institution. It also acknowledges
good performances, records the progress of an employee, and provides feedback that can
improve the areas that lack performance. With the help of regular performance evaluations of
the officials, decisions can be made regarding promotions and removing officials from their
positions (Synergita, 2022).
According to an article by Villanova University, performance evaluation can be broken
down into four (4) different approaches that can be used by different companies and
institutions, like the U.S. Treasury Department, which are the Top-down Review, Peer Review,
The 360-Degree Review, and Self-Assessment. Supervisors, unit managers, and executives
can be included, and are positioned directly to be in charge of the performance evaluation is
a type of Top-down Review, Peer Review is simply the employees being evaluated by their
colleagues, The 360-Degree Review is a process where the performance evaluation will be
collected from all perspectives such as superiors, peers, subordinates, and sometimes
customers and these evaluations can be done anonymously, and lastly is the Self-Assessment
where employees are allowed to evaluate their performance in the institution. Out of the four
(4) approaches, the researchers agreed to recommend the 360-Degree Review since the
assessments are from different perspectives of how people interacted with the officials and a
good basis to monitor their performances. It can also be done anonymously which encourages
the evaluators to write their honest assessments.
Psychological behavior tests are also a good addition to the regular performance
evaluation of the officials in the U.S. Treasury Department. Normally, psychological tests apply
to job applicants so that employers can have a glimpse into the beliefs, personalities, and
habits of an applicant that can affect the vacant job position (Ritchie, 2019). Adding
psychological behavior tests in regular performance evaluations can help the U.S. Treasury
Department to identify if there are changes to the beliefs, personalities, and habits of the
officials that might lead to unethical practices.
STEP 8: Assess the effectiveness of the heightened policies and qualifications for the
upcoming U.S. Treasury Department officials.
The final step in implementing the action is to check the effectiveness and progress of
the improved policies as well as the qualifications of the officials. With the help of regular
performance evaluation, the U.S. Treasury Department must identify if the heightened policies
influenced the performances of the officials to perform their responsibilities with the constant
intention to protect the taxpayers, public trust, and the reputation of the institution.
The U.S. Treasury Department should also monitor the newly hired officials who
undergo the heightened qualifications. This helps them to recognize if the improved
qualifications are enough to minimize the chance of fraud happening again between banking
regulators and bank representatives.
The Fraud Scandal of the U.S. Treasury Department of 2009 showed that despite the
policies and qualifications that are being set to promote and maintain ethical practices, official
committing violations is unavoidable. Therefore, the U.S. Treasury Department must re-
evaluate regularly their policies, procedures, and qualifications to lessen financial scandals
that can upset the interest of the citizens.
V. CONCLUSIONS AND RECOMMENDATIONS
Conclusions
The following conclusions are constructed to solve the problems through the chosen
alternative course of action:
1. The detrimental consequences of the U.S. Treasury Fraud Scandal of 2009 to various
stakeholders and the proper action to alleviate its adverse effects.
The U.S. Treasury Fraud Scandal of 2009 caused a lot of trouble for different people and
groups involved. The Treasury Department is supposed to keep the economy healthy, create jobs,
and protect the country's financial system, but this scandal made people lose trust in it. Basically,
the Office of Thrift Supervision (OTS) let a bank called IndyMac do some sneaky stuff to stay in
business without telling the Federal Deposit Insurance Corporation (FDIC). When IndyMac
eventually failed, it cost the FDIC billions of dollars. This was a big deal because the FDIC is
responsible for insuring people's money in case a bank goes under.
The scandal affected a lot of people, including IndyMac employees, clients, and investors.
Many workers lost their jobs when the bank went under, and clients were worried about losing
their money. But fortunately, the FDIC made sure that everyone's insured deposits were safe, and
the government raised the amount of money it would insure for individual accounts. So, in the end,
people did not have to worry about losing their money.
Overall, this scandal showed that some people in power were doing shady things and not
following the rules. It hurt a lot of innocent people and made it hard for them to trust the
government and financial institutions.
In conclusion, it is vital to the U.S. Treasury to have tougher criteria in selecting and hiring
workers, particularly its regulators, because they will play the most important role in sustaining the
nation's welfare and progress. In that case, stakeholders will be unharmed, and their faith in the
government and financial institutions would be restored.

2. The essence of instilling work accountability, good character, and ethical standards
among the regulators in the U.S. Treasury Department to maintain the public trust of the
masses.
The US Treasury Fraud Scandal of 2009 occurred due to the cozy relationship with the
regulators, which resulted in the fabrication of IndyMac Bank's financial records. With this, the
researchers concluded that it is important to instill work accountability, good character, and ethical
standards among the US Treasury Department regulators.
Imposing stricter rules on appointing officials will help in ensuring that each US Treasury
Department employee is working with accountability and high ethical standards. This includes
reassessing each employee's work history and performance to make sure they are exceeding
expectations and that their ideas are in line with the goals of the bank and the government.
Furthermore, raising the qualifications for US Treasury Department employees can help
in the proper selection of each official, ensuring that everyone has not only technical capabilities
but also moral and good character at work.
To conclude, the researchers found that by ensuring that each employee has work
accountability, is of good character, and works with high ethical standards, a recurrence of this
type of scandal can be avoided, and public trust can be maintained because the masses will be
confident that each appointed official will do their job with righteousness.
3. Significant policies and/or regulations to ensure the accuracy of financial reports to
promote transparency and accountability within the industry conducive to the welfare of
the bank stakeholders.
In 2009, the Office of Thrift Supervision (OTS) found itself embroiled in a controversy
involving IndyMac's falsification of financial records. The bank's regulator, Darrel Dochow, had
allowed IndyMac to fabricate its financial records, which caused outrage among the public,
depositors, investors, and taxpayers. Such misconduct is a significant issue as it misleads people
who rely on the accuracy of financial records.
Moreover, this case brought to light a more profound problem - the lack of boundaries
between the bank and regulators. Regulators are supposed to act in the best interest of the public
and the government, but Dochow's actions showed that he treated banks as clients instead of
regulating them. The OTS, responsible for regulating thrift institutions, failed in its duty to prevent
unethical practices from taking place.
To prevent such dereliction of duty in the future, policies need to be reformed to eradicate
it. The Sarbanes-Oxley (SOX) Act of 2002 was enacted to promote good governance, prevent
fraud, and ensure the reliability of financial reporting. It focuses on intensifying controls within the
environment and audit committees to maintain institutional internal control. By implementing such
laws, regulators can be held accountable for any dereliction of duty or going against the
government's mandate to regulate institutions. This accountability will encourage regulators to
carry out their responsibilities honorably and eradicate unethical practices within the organization.
It is essential to build a reputable administration that works toward the betterment of
government regulators and the concerned institutions. This includes setting clear boundaries
between regulators and the institutions they regulate, enforcing laws and policies that hold
regulators accountable, and investing in educating regulators on ethical practices. This way,
regulators can operate effectively and impartially, leading to a better-functioning financial system.
In summary, the case of IndyMac's falsification of financial records highlighted a broader
problem of unethical practices in the banking sector. Policymakers need to reform policies to
eradicate such practices, and regulators need to be held accountable for their actions. Building a
reputable administration that promotes good governance and ethical practices will lead to a better-
functioning financial system that benefits everyone.

Recommendations
The researchers came up with various recommendations for each stakeholder
involved and impacted by the event to avoid its reoccurrence in the future. The following
measures are suggested:
1. Stakeholders
The public disclosure of problems affects a significant number of stakeholders and
influences the process's outcome. Authorities frequently face difficult trade-offs when it comes to
public disclosure because they must balance two opposing social interests. The researchers
advise stakeholders to exercise their right to know the institution's financial stability so that they
can determine whether or not to trust their funds with the institution. Information transparency is
critical for stakeholders' decision-making, public trust in the integrity of trading markets, and
reducing the potential for non-public information misuse. On the contrary, such disclosure may
result in bank runs, reduced access to financial markets, and financial instability in the system. As
a result, the timing, content, and methods of the disclosure are critical for both the authorities and
the bank's contingency planning. The researchers also recommend the stakeholders to determine
when public disclosure can be made, whether by the bank, the supervisor, the resolution authority,
the central bank, or the government, and the contents of such communication.
2. U.S. Treasury Department Regulators and Bank Authorities
Abuse of bank relations by Treasury Department regulators and bank authorities can have
serious repercussions. In relation to that, the researchers recommend the U.S. Treasury
Department regulators and bank authorities to establish specific guidelines in order to avoid
abused bank relations, such as having cozy relationships, that may lead to fraudulent actions.
Having a relationship between regulators and bank authorities is not bad but it is important to set
boundaries because both parties have obligations to each institution. The researchers also
suggest to conduct trainings for the Treasury Department regulators and bank authorities on the
need of adhering to ethical norms and avoiding conflict of interest and promote honest and
forthcoming communication between the parties. In addition, the researchers suggest that both
sides should establish and implement specific interactions and communications procedures and
guidelines.
3. Future Researchers
In this case study, the researchers focused on the Treasury Department, and with
that, the future researchers should explore different angles that were not fully explored or
addressed. The future researchers, for instance, could focus on the perspective of IndyMac,
such as the topic about Alt-A mortgages, to prevent becoming overwhelmed by the massive
quantity of resources available. Thus, it is important to limit research inquiries to specific
areas.
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Case Study On Financial Fraud in The US Treasury Department

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P O LY T E C H N I C U N I V E R S I T Y O F T H E P H I L I P P I N E S 1

THE FRAUD SCANDAL OF U.S. TREASURY DEPARTMENT OF 2009

A Comprehensive Case Study Analysis

In Partial Fulfilment of the Requirements of the Course Subject

Prof. Daren D. Cortez, CFMP, CATP, MBA

I. ABSTRACT OF THE CASE 3

III. STATEMENT OF THE PROBLEM 7

3.1. PESTLE Analysis 14

3.2. SWOT Analysis 19

4. Alternative Courses of Action 22

V. CONCLUSIONS AND RECOMMENDATIONS 37

I. ABSTRACT OF THE CASE

accountability, good character, and ethical standards among government regulators in

accuracy to promote transparency and accountability; and suggested recommendations to

of government regulators and the concerned institutions.

accuracy. The repercussion of falsifying financial records can have far-reaching

shareholders, investors, and depositors.

not doing anything shady.

finance sector but also for the welfare of various stakeholders.

III. STATEMENT OF THE PROBLEM

The fall of IndyMac Bank, a merger between Independent National Mortgage

IndyMac could not fulfill its capital needs.

indulgence demonstrated the Office of Thrift Supervision's persistent reluctance to assume

stakeholders and the proper action to alleviate its adverse effects;

3. Significant policies and/or regulations to ensure the accuracy of financial reports to

of the bank stakeholders; and

Treasury Department regulators and bank authorities in order to prevent negative

its employees, clients, and investors.

involvement in the case.

1. The U.S. Treasury Department

federal savings organizations covered by the Federal Deposit Insurance Corporation

next two years to increase credit lines at the Treasury.

According to the investigation of Treasury Department Inspector General Eric Thorson,

relationship between the parties.

that he was "specifically directed" to backdate IndyMac's report to regulators to give it an

image of being financially sound.

values, stricter mortgage requirements, unfavorable buyer psychology, excessive

negotiators concurred to permanently raise the Federal Deposit Insurance Corporation

of Inspector General's 2009 review.

6. Investors and the New York Stock Exchange

collapse in the IndyMac stocks.

3.1. PESTLE Analysis

3.2. SWOT Analysis

➢ Wholesale funding is a sort of short-term financing that can be challenging to get

➢ Although a good relationship is an answer to a smooth-sailing regulatory operation,

3. Appoint an upright government regulator to bolster efficiency in the financial system.

4. Alternative Courses of Action

appointment of U.S. Treasury employees, as well as the accuracy of financial reports,

development. Specifically, a banking regulator is tasked with supervising and regulating

stakeholders. Furthermore, imposing intensified sanctions or legal consequences on

1.1. Selection and Appointment of U.S. Treasury Employees

Conducting a thorough investigation on every employee in the U.S. Treasury

Department helps in aiding fraudulent activities. The qualifications for a treasury

1.2. Ensuring the Accuracy of Financial Reports

According to Will Kenton (2022), the Sarbanes-Oxley (SOX) Act of 2002 is a

Thus, public trust can always be maintained.

provide up-to-date information about fund performance in a consistent, accessible, and

understandable manner. Investment funds' annual financial statements should include

statements such as net assets, operations, investment portfolios, portfolio investment

useful to the public.

Option 3: Imposing a limited term of employment to the banking regulators to avoid

unethical practices and biases in work.

representatives is to impose a limited term of employment to banking regulators. Limited term