Downey Savings And Loan Association

A federal thrift regulator bungled its oversight of Downey Savings & Loan, allowing the Newport Beach thrift to pile on billions of dollars in high-risk mortgages and eventually collapse, according to a government report. The regulators from the beleaguered Office of Thrift Supervision also botched their oversight of Pomona-based PFF Bank & Trust, which collapsed along with Downey last fall, according to reports issued this week by the U.S. Treasury Department's inspector general.

Just days after their son was killed by a Taliban rocket while serving in Afghanistan, Steve and Joy Retmier went to Downey Savings and Loan in Hemet to deposit two government bereavement checks to help pay for his funeral. But once inside, they said, a teller put a hold on the checks for 10 days until they could be authenticated. The funeral was in five days.

Struggling Downey Savings said it would eliminate one of its loan departments, cutting 200 jobs, as it scales back the operations most responsible for recent losses. The savings and loan, which has suffered from a massive number of defaults on its adjustable-rate mortgage loans, will no longer offer loans through outside brokers and will cut back on loans it originates itself at its branch offices.

Federal regulators seized Downey Savings & Loan and PFF Bank & Trust late Friday, saying hundreds of millions of dollars in bad loans from the housing bubble had rendered the Southern California banking fixtures unsound. The banks' branches will continue operating as usual under the ownership of Minneapolis-based U.S. Bank, one of the country's largest banks, and no depositors will lose any money because of the failures, regulators said. Newport Beach-based Downey lost $547.

U.S. Bancorp's weekend takeovers of failed Downey Savings & Loan and PFF Bank appear to have gone smoothly for customers and bank employees, a contrast to July's collapse of IndyMac Bank. Federal regulators, who seized the two Southern California thrifts Friday night, already had lined up U.S. Bancorp as the new owner. U.S. Bancorp pledged to honor all deposits, including uninsured funds, and said it would not close any branches.

Shares of Downey Financial Corp. -- already soaring after two strong quarters -- hit a record high Tuesday amid speculation that the long-independent company might be acquired. Analysts said the run-up in share prices and heavy trading volume appeared to be driven by conjecture that Maurice L. McAlister, 80, might finally be willing to relinquish control of the Newport Beach-based parent of Downey Savings & Loan.