Are Federal Regulators To Blame For The Crash?

By: Declan McCullagh
Topics: Who's To Blame?

Here's a question that seems pretty timely: How much of the unsustainable sizes of the stock market and housing bubbles is due to regulatory incompetence or mistakes?

There may never be a definitive answer, especially because there are so many explanations for why the economy became so bubblicious, including the Federal Reserve's excessively low interest rates, tax law changes and garden-variety fraud.

(ots.treas.gov)

But this week's news about Darrel Dochow may provide a partial answer. Dochow was the west coast regional director at the Treasury Department's Office of Thrift Supervision, which is tasked with the job of regulating savings banks and savings and loans. OTS's official mission is "to supervise" such companies "to maintain their safety and soundness."

The problem is that Dochow may not have done exactly that. In fact, he seems to have done the opposite.

Dochow was removed from his job in December after an internal investigation found that he had allowed IndyMac Bank to backdate a transaction, yielding a falsified report that let it be rated as "well capitalized." As we now know, IndyMac subsequently collapsed, making it the second-largest failure to date.

Treasury's inspector general, Eric Thorson, ominously noted in a December letter to members of Congress that IndyMac was not the only example of legerdemain: Dochow's agency let other banks cook the books too.

The Washington Post reported at the time: "It is the second time Dochow has been removed from a position as a senior thrift regulator. He was demoted in the early 1990s after federal investigators found that he had delayed and impeded proper regulation of Charles Keating's failed Lincoln Savings and Loan." That S&L was at the heart of the Keating Five scandal, which led to prison time for Keating and cost taxpayers billions. (Here's a 1990 article with some details about Dochow's role.)

In an August 2007 letter from Dochow to CEOs of banks he regulated, Dochow stressed his intention to "continuing the close working relationship that I have enjoyed with many of you" and said there would be no "significant changed in this office's general philosophy."

Now Dochow has been allowed to retire apparently with his full pension based on a $230,000 annual salary -- as opposed to being fired for cause -- according to an ABC News report this week. Meanwhile, taxpayers are on the hook for even more with IndyMac's failure than they were for the failure of Lincoln Savings and Loan.

As a side note, federal law says: "Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of the... Office of Thrift Supervision... shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both."

Dochow isn't the only recent example of regulatory failure.

There's also the failure of the Securities and Exchange Commission to stop Bernie Madoff, even though Harry Markopolos had tried repeatedly to direct the agency's attention to Madoff's alleged Ponzi scheme. Peter Schiff, president of Euro Pacific Capital, also raised concerns about Madoff.

It probably didn't hurt that his niece Shana Madoff (a former compliance officer at Madoff Investment Securities) married Eric Swanson, a former assistant director at the SEC's Office of Compliance, Inspections and Examination. Another bit of trivia: President Obama's SEC Chairman Mary Schapiro was running the Financial Industry Regulatory Authority when it investigated Madoff -- and failed to stop him.

And then there's the Office of Federal Housing Enterprise Oversight, which was supposed to ensure "the safety and soundness" of Fannie Mae and Freddie Mac. OFHEO had nearly 300 employees, all devoted to this task.

But OFHEO was slow to recognize problems, and when it did, it had limited powers. The result? Fannie and Freddie already have received a $400 billion bailout in the form of stock and debt guarantees; Fannie lost $59 billion last year and has said it needs $35 billion more in bailout funds.

Let's not forget about American International Group, which has already put $170 billion in bailout funds at risk and lost $62 billion in the last three months of 2008. At a Senate Banking committee hearing on Thursday, Scott Polakoff, acting director of the Office of Thrift Supervision, admitted a "failure to recognize in time the extent of the liquidity risk to AIG" and said his agency "focused too narrowly" on the wrong areas.

We're likely to hear a lot in the next few months about market failures by politicians pushing new laws. But regulatory failures can be just -- or even more -- destructive.

Declan McCullagh is the chief political correspondent for CNET. Declan previously was a reporter for Time and the Washington bureau chief for Wired and wrote the Taking Liberties section and Other People's Money column for CBS News' Web site.
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by craigh9 March 6, 2009 11:05 AM EST: YES, YES, a thousand times YES!!! Anyone with a 3rd grade education and a pencil could see that the practices within the mortgage community was unsustainable and would lead us right to this point. However, as those charged with overseeing this mess were getting paid much more than their fair share they decided to just ride the wave - which is now a sunami upon our economy.; Reply to this comment


by punkinpie1 March 6, 2009 2:26 AM EST: In business sector they had a pal in the White House in
G. W. Bush. They wouldn't have been able to speculate
the way oil, the stock market, the banks and businesses
operated. If you remember Bush was in total denial the
country and the world for that matter was in a global
recession. His chief concern was his trumped up war in
Iraq. Even historians at great colllege claimed that Mr.
Bush had blinders on during his presidency. So in all
actuallity I blame Mr. G. W. Bush and Mr. Dick Chaney
on they way they operated this country and how it affected
how big businesses operated. Even Enron tried to keep
their employees in the dark. Well that is exactly how the
Bush administration operated this country. Same lessons
with sad results.; Reply to this comment


by whitemale08 March 6, 2009 12:25 AM EST: It's Wall Street Republicans to blame like Nixon, Reagan, Bush I and Bush II.

Also don't forget your junkyard dogs for the last 8 years like Sean Hannity and Druggie Limbaugh for preaching 'deregulation' every single day.; Reply to this comment


by govwatch2 March 5, 2009 9:42 PM EST: BO has found a sure way to get America to accept his socialism/communism.; Reply to this comment


by ROB-RICO March 5, 2009 9:33 PM EST: Oh, c'mon. Everybody knows that Darrel Dochow (pronounced "Doo-Chow" which is regulator code for "Let's eat") had no authority whatsoever to keep these banks and thrifts from looting the country.

I consulted "Financial Answer Man" who told me there are no laws against banks stealing money and filing false reports. He scolded me for not already knowing this.

He also told me that he knew Darrel Dochow before the accident that put him in a coma. A tragedy that happened when old Darrel (ryhmes with "Barrel") pulled his finger out of his nose too fast and created a vacuum that sucked part of his brain out. A really ugly sight!

He also told me the Treasury Department decided to promote old Darrel when they learned he was in a coma. The upper slots at Treasury are reserved for people in comas.

So you people out there can whine all you want, but until congress passes some laws against fraud, the poor Darrels of Treasury will just have to stay asleep; do lunch, and collect their lousy little paychecks.; Reply to this comment


by stevador39 March 5, 2009 8:27 PM EST: The men and women in the hedge funds and brokerage houses and mortgage companies caused these financial problems. The federal regulators who did nothing should be punished.; Reply to this comment


by tincup356 March 5, 2009 8:00 PM EST: Ross Perot once said"it is time to take the shovel and clean the barn", that statement could never be more true than it is today.,,,,,,congress has gone on a high stakes money giveaway to repay Wall street lobbyists for almost 2 billion dollars in lobby money LAST YEAR ALONE.,,,,,What is happening is TREASON and yes they all..as in BOTH parties need to be removed at once, and banned from politics in this country forever.; Reply to this comment


by philabias March 5, 2009 6:44 PM EST: HAY IF YOU ARE LOOKING FOR SOMEONE TO BLAME HOW ABOUT THE GUY WHO HEADS THE COMMITY THAT WAS SUPPOST TO KEEP THIS FROM HAPPENING. iT WAS HIS JOB, AND UPON BEING ASKED ABOUT HIS MESS HE SAID THAT HE HAD NO PART OF IT BUT THEN FOUGHT AS HARD AS HE COULD TO ADD AS MUCH PORK AS HE POSSIBLY COULD........BARNEY FRANK; Reply to this comment


by philabias March 5, 2009 6:38 PM EST: NO the regulators arnt to blame
it was clinton who relaxed the rules
Bush who didnt stop it
and OBAMA who bails and the market drops bails again and it drops faster , Bails again and drop mu8ch faster
Bails again and we drop even more and Americas to Adept to see the pattern. Here the crook of it all Obama lost as much money as bush in only 1 month ANd he has 46 to go. If he stay we GO BANKRUPT \
YOU VOTED 4 THIS AMERICA; Reply to this comment


by the74blaster March 5, 2009 6:32 PM EST: The simple fact is the politicians and the regulatory agencies do not want to bite the hand that feeds them.

These people have left us down and they should do the honarable thing and resign! The failure to monitor the development of derivatives, energy trading and California accounting to benefit the high rollers is unbelievable!

The simple fact is the failure to regulate on issues like this totally unacceptable. Its time to open the books and jail anyone who participated in this activity or we will never restore investor confidence.

If people feel this is socialism then so be it.; Reply to this comment