Whenever someone tries to blame the housing price bubble on the Community Reinvestment Act, or suggests that the real reason the financial crisis got so out of hand were all those irresponsible homeowners taking loans they couldn't pay back, or argues that what we really need is less government interference, they should be forced to read this:
A senior federal banking regulator approved a plan by IndyMac Bank to exaggerate its financial health in a May federal filing, allowing the California company to avoid regulatory restrictions only two months before it collapsed, a federal inquiry has found.
...The Washington Post reported last month that OTS allowed thrifts to lend massively while reserves against future losses dwindled. Even as problems became apparent, the agency continued to prioritize deregulation. The latest findings underscore that OTS failed to enforce its own rules.
... The new numbers also averted an intervention by the Federal Deposit Insurance Corp., which could have acted to limit the eventual cost of IndyMac's failure. The FDIC now estimates the cost at about $8.9 billion. The agency is funded by the banking industry.
No doubt to some a regulatory agency failing to regulate is a sign that we need ... fewer regulations on the financial industry. But in the real world, the lesson here is that the incoming administration can improve the situation simply by hiring bureacrats who will actually enforce existing rules and act, as one source in the article puts it, as cops and not consultants. The specific regulator who allowed Indymac to cheat on its statements had previously been demoted for delaying the Charles Keating Savings and Loan investigation. Why was he back in charge? Perversely, that demotion probably a plus when he was considered for the job.
--Tim Fernholz
