Federal regulators ignored repeated warning signs about Pasadena's IndyMac Bancorp., and their failure to prevent the mortgage lender's collapse last summer cost the Federal Deposit Insurance Corp. $10.7 billion, according to a government report released Thursday.
The report by the Treasury Department's inspector general said regulators should have seen that IndyMac was built on a house of cards -- shaky loans based on inflated property values.
Underscoring the depth of the failure, the report said the loss was nearly $2 billion more than previous estimates.
The inspector general said the Office of Thrift Supervision should have taken enforcement action against IndyMac more than two years before the bank was finally seized by the FDIC on July 11.
In a 2005 review of the bank, the OTS reported that IndyMac was having trouble with its cash flow. The next year, an FDIC examiner sent a note to the OTS warning that one source of IndyMac's debts -- federal loans -- equaled more than a third of its assets, a huge proportion. Both problems ended up being factors in IndyMac's failure, yet OTS took no enforcement actions against the bank in response.
"OTS waited until June 2008 to issue its first informal enforcement action against IndyMac," said Marla Freedman, the assistant inspector general for audit. "That was much too late. They had a very risky business model, and the OTS should have been making recommendations much earlier about how IndyMac could manage its risk."
OTS Director John M. Reich said in a letter to the inspector general that he agreed with the agency's findings. In response to the report and earlier reports of failings by the agency, the OTS on Thursday announced that it was establishing a large bank unit in its Washington headquarters to oversee institutions with more than $10 billion in assets.
The report also dismisses the notion that Sen. Charles E. Schumer (D-N.Y.) caused IndyMac's failure by writing a letter to OTS that outlined his concerns with the bank. Reich said after IndyMac's failure that Schumer's letter had given IndyMac "a heart attack."
"We found no supporting evidence for that," Inspector Gen. Eric Thorson said. "The bank already was failing by the time that letter was made public."
Schumer said in a statement that the inspector general's report made a strong best case for financial regulatory reform.
