When the government seized IndyMac Bank in July, many of its investors and customers wondered why regulators hadn't intervened sooner to prevent one of the costliest bank failures in U.S. history.
An answer came Monday when the Treasury Department's inspector general said a government official had allowed the Pasadena mortgage lender to alter its financial statements in a way that delayed disclosure of the extent of its problems.
As a result of the inspector general's inquiry, which is continuing, Darrel W. Dochow was relieved of his duties as Western regional director of the federal Office of Thrift Supervision pending an inquiry, the agency said in a letter released Monday.
In a May 9 phone call, Dochow agreed to allow IndyMac to record a $50-million capital infusion received that day from IndyMac's parent company as if it had been received before March 31, the inspector general said.
The move allowed the savings and loan to report that it was "well capitalized" at the end of the first quarter, meaning it was financially strong enough to stay in business.
Two months later, IndyMac failed at an estimated cost to the federal deposit insurance fund of $8.9 billion.
If the backdating had not been allowed, the Federal Deposit Insurance Corp. might have been able to facilitate a sale of the company at no cost to the insurance fund, as it did in September with Washington Mutual Bank.
Regulators at the Office of Thrift Supervision, which oversees savings and loans, "did not want to lose control of IndyMac and hand it over to the FDIC, so they let IndyMac play this game," said William Black, a former Office of Thrift Supervision attorney who teaches law at the University of Missouri in Kansas City.
The Times had reported in October that Dochow had returned to a senior post after having been demoted because of his role in the 1989 collapse of Lincoln Savings & Loan, at the time the biggest bank failure ever. Two years earlier, Dochow, then the head of supervision and regulation at the Federal Home Loan Bank Board, had rebuffed recommendations from regulators in California and other states calling for Lincoln to be put out of business.
"This guy is the most infamous banking regulator in the country, and somehow he ended up back in charge," Black said.
In a letter to the Treasury inspector general dated Sunday, John Reich, director of the Office of Thrift Supervision, called the backdating "a relatively small factor in the events leading to the failure of IndyMac." A spokesman for the agency said that Dochow would not be available for comment.
Representatives of IndyMac, which is being run by the FDIC as it tries to sell the bank's assets, declined to comment.
For the backdating to be permissible, there would have to be documentation from before the end of the first quarter showing that IndyMac's parent, IndyMac Bancorp, had intended to give the banking unit the money, the inspector general, Eric Thorson, wrote in a letter Monday to the Senate Finance Committee.
"However, in our work thus far, we have neither found nor been shown any indication that this intent existed," he wrote.
Banking experts said IndyMac, at a minimum, should have disclosed the date change to investors and to the FDIC. Without the date change, the thrift would have been forced to ask the FDIC for a waiver allowing it to take brokered bank deposits. That would have been a red flag to the agency and investors that the thrift was having problems, experts said.
IndyMac subsequently lured depositors with some of the highest interest rates on the market on certificates of deposit, increasing the eventual cost to the deposit insurance fund.
"They had lost all of their own money, so then they were able to gamble with other people's money, knowing that the FDIC was just going to come in and cover the losses," said James Barth, a former chief economist of the Office of Thrift Supervision and now a finance professor at Auburn University in Alabama. "You want to protect investors and allow them to sell their shares if they want to get out, and you want to protect the FDIC so it can minimize its risk exposure by taking action sooner."
In his letter, Thorson said his office had discovered that the Office of Thrift Supervision had allowed other banks to backdate capital infusions. A spokesman for Thorson said the inquiry on the backdating would not be completed for at least two months.
Dochow was demoted to a position handling special projects pending the conclusion of the inquiry, Reich said in his letter.
Thorson's and Reich's letters were released by Sen. Charles E. Grassley of Iowa, the Finance Committee's ranking Republican.