John M. Reich - Role in IndyMac Bank Controversy

Role in IndyMac Bank Controversy

The failure of IndyMac Bank on July 11, 2008, was the fourth largest bank failure in United States history. Prior to IndyMac's failure on July 11, 2008, the bank had come to rely heavily on higher cost, less stable, brokered deposits, as well as secured borrowings, to fund its operations. The bank had focused on stated income and other aggressively underwritten loans in areas with rapidly escalating home prices, particularly in California and Florida.

On June 26, 2008, Senator Charles E. Schumer publicly released letters he had previously sent to Reich's agency and others, suggesting that IndyMac bank was in danger of failing and that the danger was being ignored. In the weeks that followed, Director Reich blamed Schumer's release of the letters for instigating IndyMac's collapse.

On July 21, 2008, Reich described "interference with the regulatory process by reporting and disseminating speculation about the condition of financial institutions, thereby undermining public confidence in those institutions and causing serious harm" as a contributor to the failure of IndyMac as well as Fannie Mae, Freddie Mac and Lehman Brothers.

On December 22, 2008, Reich removed his agency's western director, Darrel W. Dochow for allowing IndyMac to backdate a capital infusion of $18 million from its parent company so that the bank would appear "well capitalized" in its 10-Q for the period ending March 31, 2008. According to a source with knowledge of the incident, at another point Mr. Dochow limited the scope of a review by OTS regulators of IndyMac's portfolio of loans and other assets, overruling the advice of others in the agency. Mr. Dochow played a central role in the savings-and-loan scandal of the 1980s, overriding a recommendation by federal bank examiners in San Francisco to seize Lincoln Savings, the giant savings and loan owned by Charles Keating. Mr. Reich called the backdating irregularity “a relatively small factor” in the collapse of IndyMac.

On February 12, 2009, Reich resigned, announcing he would step down February 27.

On February 26, 2009, the Treasury Department's inspector general released a report citing laxity at the OTS under Reich for adding significantly to the $10.7 billion in FDIC losses from the IndyMac failure, as well as the estimated $270 million in losses suffered by uninsured depositors. The report concluded that, under the law, OTS should have taken Prompt Corrective Action against IndyMac in May, 2008.

Commenting on the report, Inspector General Eric Thorson dismissed Reich's claim that Senator Schumer's letters caused the failure. Marla Freedman, the assistant inspector general for audit, detailed a pattern of excess risk-taking and abuse of the lending process at IndyMac and the OTS's consistent and concurrent failure to act. Mr. Reich said in a letter to the inspector general that he agreed with the agency's filings.

On February 27, 2009, Reich stepped down amidst the continuing audit of backdating at IndyMac and four other institutions. Scott Polakoff, OTS senior deputy director and chief operating officer, hired under Mr. Reich, became acting director on his departure.

On March 26, 2009, Polakoff was removed and placed on leave by United States Secretary of the Treasury Timothy Geithner, amidst an announced further review and investigation of the backdating scandal by the U.S. Treasury's Inspector General.