Adult Political Discussion

[DewDiligence]

FDIC Banked Significant Savings in Brokering WaMu Sale

[This is reposted from #msg-32482668. Note: unlike FDIC, which is a separate legal entity, the Office of Thrift Supervision (OTS)—the agency charged with regulating Savings & Loan institutions—is part of the federal government.]

http://online.wsj.com/article/SB122247247562180981.html

›By DAMIAN PALETTA
SEPTEMBER 27, 2008

WASHINGTON -- Brokering the sale of Washington Mutual Inc. without putting a dent in the roughly $45 billion deposit-insurance fund was a big achievement for FDIC Chairman Sheila Bair.

Without a seamless sale of WaMu to J.P. Morgan Chase & Co. on Thursday, the costs to the Federal Deposit Insurance Corp. could have been significant. "It was very fortunate that we had time to bid it out and we had a high bid," Ms. Bair said.

Despite dodging that catastrophe, the fund remains at historically low levels, and banks are now bracing for higher costs to recapitalize the fund. The WaMu case also revealed tensions between the Office of Thrift Supervision and the FDIC.

The OTS waited until Sept. 18 to designate WaMu as a problem institution, a week before the savings-and-loan giant became the largest federally insured bank to topple in U.S. history. Banks and thrifts identified with problems are put under tighter government scrutiny.

The OTS's reluctance to downgrade WaMu came despite heavy pressure from the FDIC, which was charged with backing a huge portion of the bank's $188 billion in deposits. Tensions between the two regulators dragged on for weeks.

FDIC officials began taking an increasingly aggressive stance with the OTS after the July collapse of IndyMac Bank, which had $32 billion of assets. The agency estimated that IndyMac's failure cost the deposit-insurance fund close to $9 billion, or about 20% of the fund.

The OTS hadn't designated IndyMac as a problem institution until a few weeks before it failed. OTC officials defended their supervision of both banks.

"We don't always agree, but we agree most of the time," OTS Director John Reich said of the FDIC. "And I think that's one of the reasons why I think it's healthy to have multiple regulators involved."

Since taking over the FDIC in 2006, Ms. Bair earned a reputation as a hard-charging regulator who was willing to tussle with bankers, as well as government officials. She began preparing the agency for bank failures even when the industry appeared relatively healthy [i.e. in 2006].

This year, 13 banks have failed so far, the most since 1984. Two of the largest U.S. bank failures ever, WaMu and IndyMac Bank, were in the last three months.

"It certainly reflects well on her," said William Isaac, a former FDIC chairman. He presided over the 1984 collapse of Continental Illinois National Bank & Trust, which had been the largest bank failure until WaMu. "When you get into situations like this, we find out what you are made of. She's handling it well."

Ms. Bair and Mitchell Glassman, the FDIC's director of resolutions and receiverships, had hired more staff, brought back retirees with experience from the savings-and-loan crisis and redesigned the structure of bank-failure teams to make them more nimble.

Still, the WaMu collapse was a challenge for the agency. With more than 2,200 branches and $188 billion in deposits, the deposit-insurance fund could have suffered a huge hit if the bank had collapsed without a deal.

Nine banks have failed since July 1, and regulators have been forced to act much more quickly than they have had to in the past.

"It's very important for us to have time to market an institution before it fails," she said. "It's a much smoother resolution process."

The FDIC didn't have time to find a buyer for IndyMac before they shut the bank, and they are still running the California-based company. Ms. Bair said the FDIC has found several interested buyers. A sale could be completed by November.‹