WASHINGTON — As the mortgage crisis deepened in California last year, officials in Washington put the fate of thrifts in the West in the hands of a veteran regulator who had a memorable role in the last major crisis in the savings and loan industry.
Darrel W. Dochow was the head of supervision and regulation at the Federal Home Loan Bank Board in Washington when Lincoln Savings & Loan of Irvine failed in 1989, at the time the largest and costliest thrift failure ever.
Dochow and other regulators in Washington balked at recommendations from their regional counterparts that it be shut down two years earlier. Its collapse added billions to the taxpayer-funded bailout of the S&L industry, and its victims included thousands of elderly investors who had bought bonds from the troubled thrift.
Eventually he was relieved of his high-level duties and demoted. Now, Dochow is back on the beat as the top U.S. banking cop in the West amid another financial crisis, one that was underscored by last month's seizure and sale of Washington Mutual Bank, the biggest bank failure in U.S. history.
Critics are complaining that Dochow's approach to the mortgage meltdown as Western region director of the Office of Thrift Supervision evokes the industry-friendly treatment he and other regulators a generation ago were scored for in the Lincoln case.
Dochow declined to be interviewed for this story, but the Office of Thrift Supervision strongly defended him as a seasoned professional.
"The OTS has the highest confidence in Regional Director Darrel Dochow," spokesman William Ruberry said. "Any attempt to draw any parallels between the events of 2008 and 20 years ago is a stretch, at best. There is no valid comparison."
Dochow and other regulators have been criticized for how they handled the July 11 collapse of IndyMac Bank of Pasadena, one of the signature events in the latest crisis, which came after a run on the bank by depositors.
Regulators at the Office of Thrift Supervision, the successor agency to the federal bank board, have blamed Sen. Charles E. Schumer (D-N.Y.) for pushing the bank over the edge by disclosing a critical letter he had written that may have triggered the run on deposits and derailed an effort by regulators to arrange a private sale or bailout.
But a closer look also shows that officials ignored warning signs, former regulators say, allowing IndyMac to continue operations despite growing questions about its viability. The bank is now expected to cost the federal insurance fund nearly $9 billion, up from initial government estimates of $4 billion to $8 billion. Had the regulators intervened sooner, that price tag would probably have been substantially less.
"Clearly, it is an unfortunate example of regulatory failure," said James R. Barth, a former chief economist of the bank board who calls the cost associated with the IndyMac failure "outrageously high."
IndyMac was rocked more than a year ago when the market for "no documentation" mortgage loans collapsed.
Its main business was making the loans and bundling them for sale to Wall Street, a lucrative practice for a time. The market collapse, however, left the bank with a broken business model and $11 billion in loans it couldn't sell.
Analysts soon began questioning IndyMac's survival. Its stock lost much of its value; investor lawsuits began piling up.
In contrast, Dochow and the Office of Thrift Supervision considered IndyMac "well-capitalized" and as recently as January rated the bank a more-than-respectable 2 on a five-point scale used to rank the health of institutions. (A ranking of 1 is the strongest.)
But critics say that was only because regulators looked the other way while IndyMac greatly overstated the value of the $11 billion in loans on its books after the market evaporated. That gave a misleading impression of its financial condition and prevented stronger regulatory action, critics say.
"It obviously was based on questionable accounting and inflated asset values," said Richard E. Newsom, a retired California savings and loan regulator who has studied the IndyMac bailout. Dochow and the OTS "turned a blind eye" to the true condition of the bank, which was deeply insolvent and facing a liquidity crisis long before it was closed, he said. "The $8-plus-billion loss to the FDIC was obviously building for months."
The hands-off approach also appeared to violate the spirit of changes in federal law after the S&L crisis of the 1980s that required regulators to take "prompt corrective action" against shaky banks and thrifts. The approach taken with IndyMac was such that the bank was never hit with formal enforcement action or found to be a "problem bank" until days before it failed.