RIP, OTS

The administration's new regulatory plan eliminates the Office of Thrift Supervision. Considering that whenever another agency was threatened with extinction a member of Congress made a stink, what, I wondered had the Office of Thrift Supervision done? How did the OTS end up without a single friend in Washington? There must be a story there! It turns out there is a story, and it appeared in the Washington Post. Like the SEC, OTS was the primary regulator of a number of the large financial institutions that failed (OTS regulated IndyMAc, Washington Mutual and Countrywide Financial). Unlike the SEC, OTS colluded with these institutions to make them look healthier than they actually were.

Countrywide Financial Corporation (CFC) migrated to the more lenient OTS regulatory regime to avoid scrutiny and possible FDIC resolution. CFC did most of its business (60% of pre-tax earnings in 2006), through a bank subsidiary called Countrywide Bank, NA (Bank). Bank was a national bank, regulated by the Office of the Comptroller of the Currency, and therefore, CFC was a bank holding company. In December of 2006, Bank applied to become an OTS-regulated savings and loan. When the application was granted in March of 2007 CFC became a savings and loan holding company.

CFC didn't file an 8-K in December when the application was made and it didn't file an 8-K in March when the application was granted. Investors first got word in the 2006 10-K. "On December 6, 2006 we applied to the OTS to convert Countrywide Bank to a federally chartered savings bank." Later in the filing readers are assured that "Countrywide will remain subject to capital requirements that are substantially similar to national banks." The kicker comes in the 10-Q for the second quarter of 2007. After announcing that the OTS had granted Bank's petition CFC allows that because it is no longer a bank holding company it is "no longer subject to specific statutory capital requirements." That doesn't sound like a big deal, does it?