welcome to brookings, mr. president. and thank you for your wise and constructive leadership of russia. my question is about iran. i wonder if you could describe for us how you view russia's nuclear program? is it a threat to russian national security interests? and now are you concerned about it triggering a nuclear arms race in the middle east. and now you and president obama are on the same page when it comes to sanctions. ... >> the talks about iran with mr.

obama and my other colleagues are a part of our agenda. we do that regularly and on a full basis. this means that iran is a problem. and what is important that we find evidence of what their nuclear program is, as any society. they do have the right to develop the civilian nuclear program. but the problem is how they convince us of the community that it is and lately we did not bring any improvement to the situation. >> it has aggravated iran endorsed the question addressed to it. they keep saying small phrases

and make small suggestions. so we deal with this together, talking about the future, would not favor sanctions because of sanctions is a repression, and am posing of some action. if nothing happens, we'll have to deal with sanctions. the question is what kind of sanction are these? many times i've answered this question, what sanctions we need. i do not favor paralyzing, crippling sanctions who make people suffer in a humanitarian sense. this is immoral and a great negative results. , negative feedback. and i have grounds to believe that some people need this. they are waiting for a real clash of position, but sanctions must be intelligent.

and the question is, how we understand these words, what is acceptable and what is unacceptable. sanctions must be universal. they must be discuss with the main participants of international process and on this question, and the sanctions must be a at one result. that's why you position upon the sanctions, not only on the united states, europe, russia, but also on china, latin america. in this case only, these decisions, if it is needed, are able to give result, and talking about middle east and what can happen over there. if the nuclear programs is implemented and a nuclear

conflict arises, that would be a gigantic catastrophe. we all can imagine what can happen on the middle east if just one terrorist act happens there, or nuclear arms is used. middle east is called middle east because it is so small, and it is enough for bombings happen in one place for it starts spreading all over the world. and that would trigger a humanitarian catastrophe, and huge exodus of people from different countries. and the bad thing that it will trigger the nuclear arms race. many colleagues from iran will say that if iran gets nuclear arms, they will have no scruples

with having as well. and this will in large the nuclear club, and then no summit will help if all of those countries have nuclear arms. that will open a new page in the history of humankind, which will be very sad. and i hope that we will be able to agree and managed to solve this issue by political and -- >> mr. president, i really want to thank you for being here. i come from a generation of american people who were involved in the second world war. and we certainly had great pride when we went into great britain and france. but i don't think we really thank the russians enough for the fact thing on the east coast and having 25 divisions i think

made a difference. so what i wanted to do was thank you and the russian people for that. the question i'm going to ask is the same question i want to ask -- wanted to ask general petraeus today when he spoke at lunch. and that was, as the military decides that we had to go into afghanistan, what would have happened if we, the military, had said to the russians, will you join us? after all, you had a big battle there. i think you still have problems there. [speaking in native tongue] >> translator: if i understood you rightly, you are talking about military presence of russia in such operations. do i get you right? >> joining the united states and

its allies and the military operations. [speaking in native tongue] >> translator: well, i haven't talking about afghanistan as a common concern. and every country has their own history, and sometimes it is very sad. our country has also history of work in afghanistan back in soviet times, and that was a very hard page of our history. and i'm not sure that our society is ready to, once again, open the page. but that doesn't mean that we would like to stay on the sidelines, and we have agreed upon all questions of operation afghanistan, starting with military transit and socioeconomic projects, restoring of its economy. we should cooperate in this realm, but what is more important today is given an

opportunity to the afghanistan political system developed. because we understand that america cannot be there all the time. it cannot be lasting forever. it's a very hard burden, but if america leaves afghanistan and the alliance leaves this place, then how will the political system live in -- political system must become independent. it must gain some momentum, and that's what has to be on common aim. what i mean to president karzai, the first thing i ask is how is the political process going on? because this is absolutely important. and this is the thing which the soviet union failed to do.

and no matter what values we brought there, but our country try to create a political system. we fail to do that. and afghanistan rejected this political system and the political experiment. so today's aim is that the modern political system of afghanistan would be created an effective government would appear there, and then we may say that our aim has been done. >> i might insert her a question about her is expand, which has a pertinence of course to the effectiveness of allied coalition operations in afghanistan. you refer to your own countries help in helping transport was. what is your assessment of the current situation in kurdistan?

[speaking in native tongue] >> translator: the situation in kurdistan is difficult. once again, turkestan is living there a stage of a legitimate development and unfortunately, i believe that the responsibility for that is born by the turkeys authority themselves, who haven't taken effort earlier to consolidated civil society to agree with the opposition to settle the numerous conflicts under way. and to organize normal economic development once the former

kyrgyzstan president was outcast by the opposition, and he was forced to leave the country. and one of the approaches he received was economic crimes and corruption. a couple of years later, we see the same slogans and the same people there. only they switch to places, which is quite sad because kyrgyzstan is a close neighbor of ours. and least of all, we would like to see kyrgyzstan turn into a failed state, the risk of kyrgyzstan falling into two parts, northern and southern part is still there. and it is important to prevent bloodshed around 100 people have been killed already. and now the question is not about who started the whole thing, though certainly an investigation should be held to

see who triggered all this robbins. the most important thing is to prevent a civil war now. and i believe that kyrgyzstan is on the verge of a civil war now. and all the forces in kyrgyzstan should realize the responsibility towards the kyrgyz nation and kyrgyz people, and towards the future of the kyrgyz state. we ourselves understand perfectly what a civil war means today if, god forbid, it is started. it will immediately attract terrorists of all kinds because in the course of such conflicts, the best possible conditions are created for radical movements. and in this case, instead of kyrgyzstan, afghanistan of some years ago can emerge, a

different afghanistan before the military operations there. so our task now is to help our kyrgyz partners to find the columnist possible way to overcome this situation. how can we do that? we need, we should form a government that would be viable, and some political leaders will need to assume important decisions as to their future. a decision that should be motivated by the interests of the kyrgyz people come and not by their personal palooka conditions. >> mr. president, i'm darrell west, vice president of studies here at brookings. i was very interesting to hear in your talk in a section about technology and how that broadens your source of information.

and i'm just curious how technology has changed your leadership style. and when you go online, what do you look for? and also, do you and president obama ever e-mail one another? [speaking in native tongue] >> translator: we don't e-mail each other with president obama, but it is a good idea indeed. that would be the fastest possible way to talk to each other, because until we coordinate our communications with our assistance, then we get communications in writing. it takes a lot of time. in this case, we could just have a couple of typos and we could just exchange text messages or e-mails. i am quite familiar with that, as well as president obama, as far as i understand. but speaking about the changes that occurred in my life, to the new information environment, i should say that a lot of things

have changed. and it's not a figure of speech. this is about our habits, and habits are the things we are made up. is sometime ago i started my morning reading a newspaper or a digest, or just watching the tv, i don't do that anymore. i just go online come and i find all the things they're. there are newspapers, tv channels, russian media, foreign media, media that are favorable to the russian president. media that hate russian president. and they certainly speak what ever they think. which is very important, because i don't have a perfect picture of what is going on. the picture that many predecessors of mine and in other countries used to have. this gives an opposite effect.

very often i review some requests or comments of desperate people who talk about corruption, law violations, about other problems. i certainly cannot answer all those comments, but the most outstanding things, due to internet, can trigger support from people. and then a whole open letters are written by many people at the same time, and this is certain a a reason for feedback from a. and then i instruct my agency, the ministries and the government, to attend to that. are regionally, it cost some kind of a surprise, but now people are used to that. moreover, i have started a blog that is run at my presidential website. and now governors have started

doing this as well. somebody is a totally formal thing, others communicate with people and earlier if officials were threatened by some addresses to their bosses, to the kremlin. now they are threatened by such comments that people can write on the president's website. this is becoming a part of our lives. they cannot help us in all the things, and all the problems, but it is certainly helpful. and in our society, in russia, it is probably even more important than anywhere else. in our society, this is bureaucratic traditions have a just long history, and always authorities have been too far from the people, and probably it

originated some political traditions as well and this type of communications helps us address this type of bad tradition. and i like this thing. >> i don't know if it will be possible to have simultaneous ratification on the new s.t.a.r.t. treaty and arson and your parliament, but i am sure that your opening proposal about how you and president obama are going to communicate is going to cause a simultaneous nervous breakdown in the white house and in the kremlin. [laughter] >> but i'm sure you're up to handling that. >> emerging markets management. if i may, i would like to switch to the economy. two questions. looking back and looking for. looking back, after the global crisis, russia was hit by quite a steep and fast economic

recession. did that surprise you? and also how fast russia bounced out of the. the second question is russia is well known to have the largest reserves of gas in the world. is that changing now that so much gas, i mean, huge quantities of gas are being found in the all over the world. how will that change relations with europe and even china? [speaking in native tongue] >> translator: speaking out on the global recession, if i was surprised, i will be frank. well, i was surprised. every one of us has their own stereotypes, their own understanding of what are the weak places of economy and what are not. so the thing that's happened

after the crisis, the beginning of the crisis in our country was a surprise, because of the extent to which it fell was more than i could have expected. i'm not talking about other economies. i talked to mike european counterparts and american counterpart. all of them were surprised, but that was outrageous, i mean. how our economy depends upon raw materials. i never understood that we are so much dependent, raw materials. and this baby talk about -- made me talk about other technology. but for the crisis, probably we would live by our own inertia,

and living with high prices on oil and gas. i'm happy that this crisis happened. this is bad that the economy has fallen down, but it is bad that this crisis made people suffer, many people lost their jobs. it hit people very hardly. but this crisis should change our mindset, our economic approach. and as far it hasn't changed much. many businesspeople and ordinary people are waiting for high oil prices. $85 a barrel not that it's okay now, which made it will be 140 sunday, and then we can do -- we can rest easy doing nothing, but the problem is that this is a

top down development. and one day the price will fall, and the prices will harmonized somehow. and being unable to reconstruct and reequipped our economy will fail so we have to use this chance. the main challenge today is how fast we can do that. would like to do it as soon as possible. but this is difficult. so we have outlined five priorities of technological reforms, not because they are universal, because they are quite important. and if we are successful in these months, like space, atomic energy, pharmaceutical, drugs, energy efficiency, new technologies, energy, we will have some advances in these realms that it will be very

good. although, high prices for energy carriers is good, we're not going to lower them. it gives us some advantage. the main thing is not to rely on gas and oil only. and the fact that america has found new gas opportunities, this is not bad. that will help us be more attentive to what our possibilities, our opportunities, whatever we say. once 50 years energy revolution happens, first it was cold, then oil, then gas, and nuclear power, and i believe in 30 to 50 years from now, the situation in energies here will be different in both of our country. i don't know if we will use

hydrogen power, but but being complacent with the gas and oil is not good today. >> you mentioned in your opening remarks, and you may from time to time and are going to be meeting shortly with your fellow leaders of that grouping. when you get together with them, do you talk about these issues and compare perspectives and plans? and what do you see as the future of that grouping? [speaking in native tongue] >> translator: i not only speak to them, after this many i am going to latin america where the brick summit will be held, and this group, this community of countries today is formed

already. this doesn't mean that this is a full-fledged organization. but these are for countries developing at a fast pace. and if we are able to find consolidated approaches, we can do that on many questions, not on all of them, but the things we discuss, like economy and politics, is very important. today, bric has become a factor of international development. does that mean that this is a community having and a turtle shape and it is rigid? i don't think so. but in order to change it, we have to reach common approach. we have to agree. last year when we met each other

and discuss the issues in russia, with all of the statesmen of bric, we discussed national measures and economic development. this is very good for us. and the outlook of our society is positive and we're going to develop this structure. >> ambassador, the last question will be yours. >> this is probably the first brookings event at which two questions about kyrgyzstan have been asked. this is number two. [speaking in native tongue] >> translator: kyrgyz will be happy. >> some analysts including in russia have noted how critical

russia was of him. and said that russia was angry that kyrgyzstan had not kicked the americans out of space. can you clarify this? can you say that russia has no objection to american access to the base in kyrgyzstan to support our operations in afghanistan? [speaking in native tongue] >> translator: mr. ambassador, how can russia even object against southern decisions made by other states. this is their decision. we can either like it or not. but it's a decision made i the kyrgyz leadership. and the president. is a coherent person. he first said that he was going to make a decision to eliminate

the american base in kyrgyzstan. and then he made the very same coherent decision to maintain the center for transit movement i believe that coherency and consistency is always the best characteristic of a politician. the more coherent a person is, the better his results are. and we can see the results of the incumbent kyrgyz presents them. it does not mean that we in some way are trying to impede that. on the country when i met president bakiyev, i always told him it is necessary to assist our u.s. partners in addressing the tasks in afghanistan. the other question is how effective this assistance is. therefore, all the possibilities were there.

>> mr. president, before i say a few words of thanks to you, i just want to ask our friends in the audience, please remain seated after we have concluded the program so that i can escort president medvedev out of the building. to you, sir, i would just like to expressparticular act appreciation, not just for the substance of what you have said, which was remarkable in its breadth and depth, and in its candor, but also the spirit that you brought to this discussion. you opened your remarks, first of all, by quoting our founder, robert s. brookings. he would be very proud indeed to have his name associated with this event today. you also said some kind words about the summit that president

obama hosted, and i'm sure you've had a chance to express those to him, but obviously that meeting set a very high standard, a very unusual standard. but you have done the same thing here with this discussion, and i can sense, i know enough people around the room, i know the body english and the body russian, to have a pretty high three of experience that we are all in your debt for spending this much time with us and covering as much ground as you did. so i would ask all of you to please join me in thanking president medvedev and hope that you have safe travels. [applause] [speaking in native tongue] >> translator: i would like to say a couple of words more. . . to listen to my long answers. secondly, indeed, two questions

about kyrgyzstan were asked today, which is quite unusual. on the other hand, i didn't hear the questions that i always like and appreciate and that i am always asked, like the question about the development of our political system, the development of our media, our relationship with mr. putin. i haven't heard none of and i believe that is a reason for me to come back and discuss again our domestic political life as well. [applause] >> i have a very simple proposal since you've already given nervous breakdown to your staff. why don't we give them another and we'll just have everybody stick around for another hour. [laughter] >> and we'll discuss all of those issues. >> no. [applause] >> thank you.

[inaudible conversations] [inaudible conversations] >> coming up next on c-span2, live coverage of a senate homeland security subcommittee hearing looking at wall street and the financial collapse. this is looking at regulators from the fdic and other government organizations including fdic chairwoman sheila bair. the hearing is expected to go some six hours or so.

carl levin is the chairman of the subcommittee. on investigations. it should get underway shortly. also today we're covering this morning a discussion on the 15th anniversary of the oklahoma city bombing. the senate for american progress action fund is holding that discussion. former president bill clinton will speak to that. and that is coming up -- he is the keynote speaker. he'll speak about 10:00 eastern in about a half hour. the event is getting underway live now. you can follow that on c-span2. another senate hearing for you this morning the judiciary committee hearing for a california law professional. the associated press writes that the professor will be a test case of president obama's ability to win confirmation for a liberal appeals court nominee. round one is today when professor lu nominated for a san francisco based appeals court will appear before the senate judiciary committee. it will begin live at 10:00 am eastern on c-span.

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[inaudible conversations] >> good morning, everybody. this is the second of four subcommittee hearings examining some of the causes and consequences of the 2008 financial crisis. earlier this week our first hearing used washington mutual bank wamu as a case history to illustrate how from 2004 to 2008 u.s. financial institutions loaded up on risk and churned

out hundreds of billions of dollars in high risk poor quality home loans to wall street in exchange for big fees. together they initiated the economic assault. as regulated entities most of these financial firms couldn't have done what they did unless their regulators let them. today's hearing asks why federal bank regulators saw the shoddy lending practices, saw the high risk lending, saw the substandard securitizations, understood the risk but let the banks do it anyway? washington mutual was a thrift. so its primary federal regulator was the office of thrift supervision or ots. wamu is the largest single financial nutrition that ots oversaw with $300 billion in assets, $188 billion in deposits, and 43,000 employees. wamu's fees alone paid for 12 to 15% of the ots budget.

because wamu's deposits were insured the if i had was a backup to ensure the safe deposit fund. like other bank regulators ots was the first line of defense against unsafe and unsound banking practices. but ots was a feeble regulator. instead of policing the economic assault ots was more of a spectator on the sidelines. a watchdog with no bite. noting problems and making recommendations but not acting to correct the flaws and the failures that it saw. at times it even acted like a wamu guard dog. trying to keep the fdic at bay. to document what happened, we are releasing today another big book of documents as well as a joint report by the treasury and fdic inspectors general examining shortcomings in fdic

in and ots oversite. -- oversight with a lack of oversight and agency infighting. before its fall washington mutual held itself out as a well run that was a pillar of its community but tuesday's hearing showed that behind closed doors, the bank's management was surrounded by deep-seated problems including shoddy lending practices and poor quality loans. this chart which is exhibit 1i from tuesday's hearing shows how over a five-year period from 2003 to 2008, washington mutual and its subprime lender long beach loaded up with risk. the bank dumped low risk 30-year fixed roads in favor of high risk subprime option arm and home equity loans. low risk loans shrunk as we can see from that chart frominatns . high risk loans grew from

one-third to three-quarters of the bank's home loan business. those high risk loans were problem-plagued. tuesday's hearing examined voluminous example of wamu internal reviews finding of poor quality loans, fraud, errors and other deficiencies. in one instance a year-long internal wamu probe found that two of wamu's top loan-producing offices were issuing loans with fraud rates of 58% and 83%. another wamu investigation two years later found that one of the office's fraud rate was 62%. and still another loan office, a sales associate acknowledged, quote, manufacturing documents to support quick loan closings. washington mutual's shoddy lending practices affected more than its operations. wamu and long beach sold or securitizeded most of their loans. as this chart shows, from 2000

to 2007, wamu and long beach securitized at least $77 billion in subprime loans stopping only when the subprime secondary market collapsed in septemr of 2007. wamu sold another $115 billion in option-arm loans together wamu and long beach dumped hundreds of billions of dollars of toxic mortgages into the financial stem like polluters dumping poisoning in a river. so where were the bank regulators? the painful fact is that they had a front row seat to washington mutual's high risk lending strategy, its poor quality and long-standing securitization practices but did little to stop it. the documents reviewed by the subcommittee showed that ots new all about washington mutual's high risk lending strategy. in fact it was ots that required the bank to get board approval of it in january of 2005. ots knew about wamu's shoddy

lending practices having repeatedly identified problems with the bank's operations in examination reports year after year. every time ots listed a problem, it also told wamu to take corrective action. but when the problem didn't get fixed, ots failed to force change. instead, ots wrung its hands as the bank sank into deeper and deeper waters. this chart 1-c provides a quick summary of some of the findings made by ots over the years regarding failings in the underwriting, meaning lending, practices at washington mutual. now, these are not all of the findings. but here's a few. start with the year 2004. quote, underwriting remains less than satisfactory. quote, not successful in affecting change. then in '05, quote, underwriting exceptions. evidence lack of compliance with

bank policy, increasing with risk.deterioration in these long beach securitizations. now, these 2005 findings came from a report on examination which stated more broadly, quote, we remain concerned with the number of underwriting exceptions. and with issues that evidence lack of compliance with bank policy. quote, the level of deficiencies if left unchecked could erode the credit quality of the portfolio. our concerns are increased when the risk portfolio is considered including concentrations in arm a.r.m. loans to higher risk borrowers in low and limited documentation loans and loans with subprime or higher risk characteristics, closed quote. now, unfortunately the level of deficiencies were left unchecked. in those, those deficiencies continued to run rampant. here's 2006, quote, continuing weakness in loan underwriting in long beach. quote, numerous risk and/or errors.

quote, now 2007 too much emphasis on loan production tuexpense of loan quality, quote, subprime underwriting practices remain less than satisfactory, quote, underwriting exceptions and errors above acceptable levels and then finally in 2008, the year the bank failed, quote, not in compliance with the interagency guidance on nontraditional mortgages. quote, high losses due to in part to poor underwriting, quote, actions should have been taken sooner. now, those are not all of ots' observations above problems at wamu. excuse me, let me start that again. those are all ots observations about problems of wamu year after year. in 2008, the year the bank collapsed, ots said, quote, actions should have been taken sooner. well, actions should have been taken sooner also by ots. ots raised the concerns listed

on this chart with wamu's top executives and boards of directors for five straight years. each year wamu promised to do better but it didn't. and ots never took action to change that. at our tuesday's hearing even wamu officials expressed surprise at ots' reluctance to act. the chief officer testified, quote, while i -- what i cannot explain is why the superiors in the agencies didn't take a tougher tone with the bank given the degree of negative findings. now, this is wamu's own risk officer. there seemed to be a tolerance there or a political influence on senior management of those agencies that prevented them for taking a more active stance. by a more active stance he said i mean, putting the banks under letters of agreement and forcing change, closed quote.

his successor at wamu testified on tuesday, quote, the approach that the ots took was much more light handed than i was used to. it seemed as if the regulator was prepared to allow the bank to work through its problems and had a higher degree of tolerance than i had seen with the other regulator. regulations work best when regulators stay at arm's length for those they regulate but too often in this case wamu's regulators were not at arm's length. they were arm in arm. over time, ots allowed washington mutual and long beach to load up on risk and engage in a host of unsafe and unsound practices. this chart, which is exhibit 1-b lists some of them. targeting high risk borrowers, steering borrowers to higher risk home loans. offering teaser rates,

interest-only and negative amortizing loans. not verifying income. offering higher pay for making higher risk home loans. that's to their staff. that's just a few that i've read. now, the documents show that more than one ots examiner expressed lending practices but never got the support of ots management to end them. one wamu examiner wrote that stated income loans, throws loans in which borrowers state their income without any verification were, quote, a flawed product that can't be fixed and never should have been allowed in the first place. another ots examiner tried to object it off so-called nino loans. that means loans in which there's no income and no assets numbers required to be provided by the borrower. an ots official agrees writing in a 2007 email that nino loans are collateral-dependent.

lending and deemed unsafe and unsound by all the agencies. but the ots west region dismissed that analysis, allowing nino loans and called the ots policy official a, quote, loan ranger. another example is the option adjustable rate mortgage. wamu engaged in a host of shoddy lending practices that vastly increased the risks associated with its option arms such as permitting virtually every option arm borrower to make minimum payments which resulted in negative amortizing loans in which the loan principal actually increased over time. washington mutual relied on rising house prices and refinancing. to avoid payment shock and loan defaults. for years ots said that wamu should reduce the increased risks while watching the bank originate 30 to $60 billion or more on option arms each year. it never took action to enforce its judgment.

in 2004, ots founded wamu incentive compensation for loan officers failed to provide any money for loan quality. volume and speed were king. and loan officers got paid more money for more risk. ots recommended that wamu, quote, enhance its system to emphasize loan quality and close the finding based on wamu's promise to redesign its pay system. in 2005, ots discovered that wamu had discovered it had not changed its compensation plan and again asked the bank to fix it. well, 2008 came and they discovered fraud at it's largest loan producing center and put process before loan speed before loan quality. in four years wamu did not fix the problem. ots had multiple enforcement tools to force change. in wamu. it could have required, for example, a private board resolution or a public memorandum of understanding.

it could have imposed a monetary fine or issued a cease-and-desist order but ots did not take any of those steps it acted like a spectator. ots didn't take enforcement action on its criticisms of the bank until 2008 which is the year that wamu failed. why was ots so reluctant to act? well, an 2007 email by ots director john rich, exhibit 78, supplies part of the answer. he wrote to his staff, the ceo of washington mutual, wamu, will be in town friday and wants to have a lunch meeting. he's my largest constituent. closed quote. ots viewed wamu as its constituent losing sight of the fact that ots's real constituents was not the bank it oversaw but the american people

it was supposed to protect from unsafe and unsound banking practices. a 2005 email by ots examiner in charge at washington mutual is also telling. the examiner in charge wrote to his bosses, quote, this is just one of several symptoms of the ongoing broader problem of getting their house in order from an underwriting standpoint. it has been hard for us to justify doing much more than constantly nagging. okay, chastising through reports of examination and meetings since they have not been really adversely impacted in terms of losses, closed quote. think about that. the wamu bank examiner felt he couldn't do more than nag the bank unless wamu was losing money. the ots handbook by the way states explicitly that losses are not necessary for an examiner to take action. but the ots examiner saw himself not just as a civil servant

enforcing the law and protecting the banking system, but as a nag. still another part of the answer may be that wamu was ots' largest bank and supplied the largest amount of fees. of any bank. wamu's downfall began in 2006 when the value of its subprime loans began falling. in 2007, july, after two credit rating agencies suddenly downgraded hundreds of subprime mortgage back securities the subprime -- excuse me, the subprime market froze and banks like wamu were left holding billions of dollars of suddenly unmarketable home loans. the value of those assets began plummeting. washington mutual recorded a $1 billion loss in the fourth quarter of 2007. and another billion dollar loss in the first quarter of 2008. finally, in late february of 2008, ots downgraded the bank from a 2 to a 3 so-called camels rating.

now the camel's rating system is used by all the federal bank regulators to rate the safety and soundness of financial institutions and measures capital, asset quality, management, earnings, liquidity and sensitivity to mask risk. -- market risk. use asscale from 1 to 5, 1 being the best and 5 the worst. the ratings are not made public. washington mutual had a 2 rating for many years which signifies a fundamentally sound bank. once ots assigned the 3 rating, which signifies a troubled bank, ots policy required it to issue a public memorandum of understanding at the same time. to correct the bank's deficiencies. but ots indidn't. they accepted a nonpublic board resolution in which wamu's board promised to fix problems but provided no specific plans or

deadlines for doing so. it was a kid gloves approach that made absolutely no sense given the bank's problems, the intensifying financial process and the ots's own policy. in the meantime, the fdic expressed increasing concerns about the bank with its internal large insured deposit institution, its liddy reports showing to be -- showing the bank to be deteriorating. fdic told the ots that the bank should consider an outside purchaser in march of '08 wamu invited potential buyers for its internal data. in april wamu announced it had lost another $3.2 billion in the second quarter. jp morgan chase made an offer to buy the bank but wamu turned it down after raising $7 billion in capital to reassure the market. in july, 2008, indymac another high risk thrift on the coast closed its doors. wamu's large depositors fearing

a similar fate at washington mutual withdrew about $9 billion in a quiet run on the bank. two months later on september 15th, 2008, lehman brothers declared bankruptcy. and over the next eight days wamu depositors another $17 billion triggering a liquidity crisis. off september 7th, 2008, ots took its first formal enforcement action against the bank but it was way too little too late. after more than a month of trying to persuade ots that wamu should be downgraded to a 4 rating, the fdic independently downgraded the bank on september 18th and ots reluctantly followed suit that same day. by then the fdic was contemplating whether the $300 billion thrift if it failed might exhaust the entire federal deposit insurance fund which then contained a total of about $45 billion. on september 25th, 2008, due to

the bank's intensifying liquidity problems, the regulators finally pulled the plug. they felt the bank couldn't even make it to the end of the week. as their usual practice instead moved on a thursday. ots closed washington mutual and appointed fdic as its receiver. the same day the fdic sold the bank's assets and deposits to jp morgan chase for about $1.9 billion. critics claim wamu should not have been shut down. that it should have received a taxpayer bailout under the t.a.r.p. program, emergency lending from the federal reserve and sec protection from short selling. our focus, however, here is not on the regulators decision to close the bank about on how regulators let the bank deteriorate to the point where its failure threatened to bust it. ots failed to stop washington mutual from engaging in high risk lending practices that created a mortgage time bomb.

it failed to force the bank to correct years long deficiencies. it failed to cooperate with efforts by the fdic to evaluate the bank's operations and it failed to stop the bank from sending toxic mortgages into the financial system and poisoning the secondary market. these failures were not limited to washington mutual. but were symptomatic role in the crisis. the washington mutual case history makes it clear that ots had brought into the view -- had bought into the view that as long as washington mutual was profitable, the bank could continue its high risk lending strategy. ots management saw no reason to tighten lending standards even after its fellow regulators decided to issue joint guidance to strengthen lending standards for so-called nontraditional mortgages. ots argued against strong restrictions noting internally

that they needed to go, quote, on the offensive to stop them. and then presenting data supplied by wamu showing how stronger lending standards would reduce the bank's business. the guidance was promulgated by all the banking regulators in october of 2006. other agencies told their financial institutions to comply promptly. but ots did not. in 2007 when the fdic asked ots to review wamu loan files to evaluate its compliance with the guidance, ots refused and disclosed it was giving its thrifts more time to comply. meanwhile, wamu had calculated that comprised applying with the guidance would reduce its loan volume by 33% because fewer borrowers wouldn't qualify for loans. in an email to colleagues, wamu's chief risk officer argued, quote, in favor of holding off on implementation until required to act for public relations or regulatory reasons, closed quote.

by that time ots made guidance effective -- excuse me, by the time ots made the guidance effective for its thrifts the subprime secondary market had frozen and wamu's loan originations had already dropped. at the same time the documents show that ots' reluctance to wamu. . ..

>> and rejected his request to review bank loan files. the fdic are joe jessica lower wamu trading, ots resisted. ots fought this turf war, and at the same time the largest financial institution it was supposed to regulate was losing value, capital and deposit. out he has also took a mere a few of its responsibility of the u.s. banking system as a whole. the documents show that ots allowed washington mutual to engage in lending in part because the bank did not plan to keep the high risk loans on its books. but sold them into the marketplace. ots never considered how dumping billions of dollars in toxic mortgages into the stream of commerce would weaken the financial system, and could even

come back to harm its own institutions. one ots examiner commented on the agency's approach in a 2008 e-mail as follows, quote, we were satisfied that the loans were originated for sale. sec and the fed were asleep at the switch and the securitization and repackaging of the cash flows irrespective of who they were selling to. ots examiners knew that washington mutual and long beach were notorious for selling bad loans. as early as 2005, and ots examiner sent an e-mail to colleagues with this description of long beach's mortgage-backed securities. quote, securitizations prior to 2003 had horrible performance, long beach finished in the top 12 worst annual lies net credit losses in 1997 and 1999 through 2003. in february 2005, long beach was

number one with a 12% delinquency rate, industry was around 8.15%. yet ots took no steps to require long beach or washington mutual to clean up their securitizations with the bad loans underlying them. ots just didn't see it as part of its job, even while the flood of those toxic mortgages was slowly poisoning the secondary markets leading to the collapse and the financial crisis of 2008. finally our bank regulators were not blind to the problems building up in the mortgage banking system. they knew. instead of getting in the game, they sat on the bench. ots in particular didn't act on what it knew. it appeared to have been too close to the banks that it oversaw. the bottom line is that ots never said no to any of the high-risk lending or shoddy lending practices that came to undermine wamu's portfolio, its stock price, its depositors

base, and its reputation. the result was a bank failure, a financial system that had helped to poison with toxic mortgages, and an economic meltdown. today we are examining what happened in this case history. the question for congress is how do we strengthen our regulatory culture? on that somber note, i turn to my ranking member, senator coburn, and i thank him again and his staff for their great support for this investigation. dr. coburn. >> mr. chairman, thank you for the great work for the committee and a step in the bipartisan way it has been done on this. i will summarize my thoughts about this so that we can get onto business. and then i have a comment that i think we ought to pay attention to, because what we heard just under testimony is that the regulars are not necessarily any

better than the virtuous banks that they have been regulating. because both wamu and ots, by the record we have established, failed miserably. and motivations can be questioned on both of their parts. the story of washington mutual's relationship with ots is a classic example when a bank captures its regulator, rather than a regular doing its job. ots had done over 31,000 examination our sat wamu, equivalent to 15 full-time employees per year. the institution was not lacking in federal regulars. between 2000-2003 and 2008, 545 separate find the problems at wamu were discovered and noted. 41% of those were still outstanding at the time of wamu's failure. ots noted weak risk management, poor underwriting in 2003.

they never even took one in formal enforcement action against wamu until 2008. and that was only after experiencing losses on products. and they never took a formal enforcement action against wamu. ots is the primary regulator of 780 thrifts with assets of 1.07 trillion approximately 452 thrift holding company with assets of 5.5 trillion. ots's budget is derived from the fees it is charging its banks. wamu was by far ots is largest regulated thrift, 330 billion. during the time of question. the lesson of ots is not that we necessarily need more regulators. because clearly regulators can suffer the same flaws as banks,

selfishness, shortsightedness and ineffectiveness. we need better incentives or both good investments and good regulation. now, the questions that need to be raised here where was the congress in looking at ots? what was the last time congress did an oversight hearing on the effectiveness of the ots? or the fdic. prior to this downfall. you see, next week will put a financial reform bill on the floor, and we won't even have completed these hearings until april 27, which are critical to understanding what's going on. we have asked a formal commission for which we're spending a lot taxpayer money to give us a report on what happened with the bank failures and the run and economic collapse that we experienced. and it's reported isn't even done until eight months. i would put ford we're about to make the same mistakes that we are claiming and accusing those that are coming before us.

so with that, mr. chairman, i look forward to hearing what eyewitnesses have to say. i will be in and out because of the ongoing judiciary meeting at the same time. and appreciate against the work that you have done and the other staff. thank you. >> thank you very much, senator coburn. and i will call senator kaufman. we're so glad to have here with us on the subcommittee. >> i think the to do that pretty much summed up the problem and i'm looking for to the testimony, the questions and answers that i will pass. >> thank you so much, senator. now we will call on her first deal of what witnesses for this morning's hearing. eric thorson the inspector general of the department of treasury, jon rymer, inspector general of the federal deposit insurance corporation. thank you both for being with us today and for your work. we look forward to your testimony as you both know, pursuant to rule six, all witnesses who testified before the subcommittee required to be sworn. so as to both to stand up, raise your right hand.

do you swear that the testimony you are about to give will be the truth, the whole truth, and nothing but the truth so help you god? thank you very much. we will be using a timing system so that a minute before a red light comes on you see the light changed from green to yellow. giving you an opportunity to conclude your remarks. your written testimony will be printed in the record in its entirety. we would hope that you would attempt to limit your oral testimony to five minutes, and i think, mr. thorson, we'll have you go first, and then mr. rymer. >> chairman levin, senator coburn and members of the committee, we thank you for the opportunity to be here today with my colleague, mr. rymer, to testify about our joint evaluation of the failure of washington mutual savings bank. over the past two years our country has found itself immersed in a financial crisis that started when housing prices stop rising and borrowers could

no longer refinance their weight out of financial difficulty since then we're seeing record levels of delinquency, default, foreclosures and declining real estate values. as a result securities tied to real estate prices have plummeted, financial institutions have collapsed. in many cases, the financial institutions seem financially sound. but the warning signs were there as they were in the case of wamu. at the time of its failure in september 2008, wamu was one of the largest federally insured financial institutions operating 2300 branches in 15 states with assets of $307 billion. a very brief background. my office performs on its and investigations at most treasury bureaus and offices, and that includes ots. we are required to conduct what is known as a material loss review, or mlr, whenever a field treasury, wrigley bank or thrift result in a loss of 25 million

or more to the fdic deposit insurance fund. these mlr determine the causes of institutions failure and assist the supervision exercised over that failed institution. since the wamu failure did not result in the loss, it did not trigger an mlr by my office. nonetheless, given the size of wamu we decide an mlr like review was worthy. we completed that review on april 92000. i will discuss the principal findings regarding the causes of wamu's failures and ots is supervision. mr. rymer will follow with a discussion of fdic's role. of wamu failed because its management pursued a high risk business strategy without adequately undermining its loans or controlling its risks that wamu so high risk strategy combined with the housing and mortgage market collapse in mid-2007 last wamu with loan losses, borrowing capacity

limitations, and a falling stock price. in september 2008, wamu was unable to raise capital to carry significant depositor withdrawals sparked by rumors of wamu's problems and other high profile failures at the time. and, mr. chairman, as you point out in your opening statement, during the eight days following the collapse of lehman brothers in 2007, in eight days they experienced net deposit outflows of $16.7 billion. with the severity and swiftest of the financial crisis, while it contribute to wamu's failure, it is also true that wamu was undone by a flawed business strategy. in 2005, it shifted away from originating traditional single-family homes towards the riskier subprime loans, and option adjustable-rate mortgages, also known as option a.r.m.s. they pursue this new strategy in anticipation of higher earnings and to compete with countrywide

financial corporation, who if you'd as its strongest competitor. to give the subcommittee a sense of the profits that could be made at least in the short term with the type of nontraditional loan products that wamu pursued, in 2006, wamu estimate that its internal profit margin on option a.r.m.s was more than eight times that of the government-backed loans, fha, va, nearly six times that of normal fixed-rate 30 year loans. wamu saw these riskier loan vehicles as an easy way to substantially increase its profitability here unfortunately they expanded into these riskier products without the appropriate level of risk management controls needed to effectively manage that risk. with respect to ots is supervision, wamu was the largest institution under ots is regulation that at the time it represented as much as 15% of ots revenue. and i should point out that like

the other bank regulars come ots is not taxpayer-funded. it is funded with fees collected from those it regulate. so that meant that ots was collecting more than $30 million from wamu annually. ots conducted regular risk assessments and examinations that rated their overall performance satisfactory to the early part of 2008. those supervisors have efforts, however, did identify the for weaknesses that eventually led to wamu's demise. high risk products, poor underwriting, and we can risk controls. issues related to poor underwriting and we'd risk controls were noted as far back as 2003, but the problem was ots did not ensure that wamu ever corrected those weaknesses. we had a hard time understanding why ots would allow these ratings, satisfaction rates to continue given that over the

years they've done the same things over and over. even in wamu's asset quality and the reports of examination, they wrote we believe the level of deficiencies, if left unchecked, could erode the credit quality of the portfolio. we are concerned further that the current market environment is masking potentially higher credit risk. and despite what i just read to you, which was out of their own reports, it was not until wamu begin expensing losses in '07 and in two '08 that they begin to downgrade their rating. and i will speed up your. when we ask ots examines why they did this, and why they didn't lower it earlier, they told us that even the underwriting risk management practices were less than satisfactory, they were making money and loans were performing. as a result, they thought it would be difficult to lower the asset quality rating. and this position surprised is because their own guidance

states, if an association has high exposure to credit risk, it is not sufficient to demonstrate that the loans are profitable, or that the association is not experienced significant losses in the near term. given his guidance, those things should have been done much sooner. in fact that ots did not take a single action and till 2008, even than what they took was quite weak. as troubling as that was, we became even more concerned when we discovered that ots is west region director over ruled issues raised by his own staff with regard to one of those enforcement actions, which you mention, mr. chairman, the march 2008 board resolution. the board resolutioresolution only addressed wamu's short-term liquidity issues and did not require it to address systemic problems repeatedly noted by ots. despite the concerns of his own staff, the ots west region

director approved the version of the board resolution written by wamu. in his previous reported by my office, this was the same ots official who also gave approval for indy mac to improperly backdate a capital contribution to maintain its well-capitalized position, just two months before indy mac collapsed. as a final note, i just want to make one comment quickly about the contributions of our outstanding staff, which i always do in these things. i want to mention mara friedman, bob kidder, jason madden and marianne costello, because it's their work that allows me to come here and read the statement that i think you for the opportunity to be here, and will answer whatever questions you have. >> your appreciation of staff comes from long experience on capitol hill some years ago. we remember you will. mr. rymer?

>> good morning, mr. chairman, ranking member cockburn, senator kaufman. thank you for the opportunity to appear here today and present the results of the federal interest. ever deposit insurance office of inspector general work relating to washington mutual bank. wamu represents the largest bank failure today. at the time of the to wamu operate over 2300 branches in over 15 states and assets of $307 billion. because of wamu's size, the circumstances leading up to the failure, and the nondeposit insurance fund losses, such as shareholder value, we initiated a review of wamu to indict what the actions of the office of thrift supervision and the fdic. we very much appreciate the cooperation we received from the ots and the fdic and conducting our work, and we appreciate the contributions by my colleagues at the department of treasury, oig. as mr. thorson did, i would like to recognize a few mems of my staff to participate in this review. they are peggy wolf, and lewis, andrea him and are led by

marshal jd. this is a very important project for our staff. i report is unique that it provides a look at a failed institution for both the primary and backup i regulatory perspectives and has resulted in significant insights regard the effectiveness of each. and the interplay between the two. we released the report yesterday afternoon on our public website. as you just heard mr. thorson say, treasury oig focus on the causes of wamu's failure and the ots supervision of the institution. my office focus on the fdic's role as in shirt and act up supervisor. my statement discusses an overreliance of an institution safety and soundness, or a campbell's rating come and capitals level, and to the risk that the institution may pose to the insurance fund. and it also highlights the fdic's repertory tools to mitigate risk, no significant

limitations in the interagency agreement related to information sharing and backup examination authority. the fdic was a deposit in shirt of wamu and is responsible for monitoring and assessing wamu's risk to the fun. prior to his failure water was the eighth largest institution insured by the fdic. the fdic conducted its required monitoring of wamu for the period covered for our review in 2003 to 2008. and identified risk with wamu that ultimately cost its failure. namely, a high risk of any strategy, liberal underwriting and inadequate internal controls. fdic's monitoring indicated more risk at wamu than was reflected in the ots c.a.m.e.l.s. written. fdic identified the significance of those risks are prevent ots. however, the risks noted in the fdic marjah air reports were not recited in wamu's fdic pain is that this is got a occur because of the deposit insurance regulations were allowing ots

c.a.m.e.l.s. ratings and revelatory capital levels to gauge risk and ss related deposit insurance premiums. because ots examinations result, result rated wamu as funny sound, increases in the posit insurance premiums were not triggered. additionally, because the statutory limitations and addressing mandated credits, wamu paid $51 million, or only about a quarter of a $216 million in deposit premiums it was assessed during the part of 2003-2008. the fdic estimates that wamu is that it could have cost as you said earlier, mr. chairman, $41.5 billion loss to deposit insurance fund. the fdic has three primary tools that at its disposal that it identified in wamu. one is backup examination authority, do is challenge the ots a.r.m. ratings and the other is actions that the fdic made

use of some but not all of these tools. back at examination authority allows the fdic to conduct its own examination of not fdic super biased institutions when fdic believes it is necessary to determine the condition of the institution for insurance. the opposite of the comptroller currency and the federal reserve entered into an interagency agreement in 2002 that provided guidance on and poking backup examination authority, including the sharing of institutional information. according to the terms of the interagency agreement, the fdic needed to request a mission from ots to a backup to begin backup examination authority. this would have allowed ots examiners to review information on site at wamu citi to better assess wamu's risk to the fun. the interagency agreement required fdic to prove to ots that wamu exhibited one of the following, either heightened level of risk many wamu was

rated a three, four or five, or was undercapitalized. woodhead material deteriorating conditions, or that, or other adverse developers that could result in wamu is becoming troubled in the near term. the logic of his interagency agreement is the circuit that fdic might show a specific level of risk and institution to receive access but the fdic's needs access to the information to determine the risk to the fun. ots resistant fdic examiners -- examiners on site -- greater access to wamu on site. because they didn't feel the fdic met the requisite need for information, according to the terms of the interagency agreement. and believed that the fdic could rely on the work performed by the ots examiners. ots did when fdic greater access at wamu but limited fdic's review of wamu's residential loan files. the fdic want to review these

files to assess underwriting and wamu's compliance with the nontraditional mortgage guidance. in may 2009, at the icd can for the first time it's second -- using its second revelatory tool, challenging the transcendent to challenge the sound, however odious was reluctant to lower its rating of wamu from a three to four in line with fdic's view. ots and fdic resolve the ratings disagreement six days prior to wamu's failure. went ots lowered its rating, and agreed with fdic's rating. by that time, the rating downgrade had no impact on wamu's insurance premium assessment or its payments. finally, the fdic chose not to invoke its third tool, its enforcement powers that fdic has statutory authority to impose its own enforcement actions on an institution to protect the fund. provide statutory and revelatory procedures are followed that according to the ots, according

to the fdic had not use those powers for wamu because it believed the steps to take those, use those powers were cumbersome. key conclusion, our report highlighted two major concerns related deposit insurance regulations and the interagency agreement governing backup authority. we recommended -- we made two recommendations to address these concerns that the fdic is compared with both recommendations and is working to implement these recommendations by year end. mr. chairman, this concludes my statement and i would be happy to answer any questions you may have. thank you. >> thank you both, and thank you for your reports, which, of course, will be made part of the record. they are invaluable and very objective assessments, which are important for congress as we consider regulatory i ninja reforms. of course, you're so going to be very, very helpful to us. exhibit 14, mr. franklin, one of wamu's former examiners said

that stated income loans were called a flawed product that can't be fixed and never should have been allowed in the first place. ots management told him that that was not ots's policy. although stated income loans are where income is dated in an application, but there's no verification for it, and if you look at exhibit 14, a letter from mr. franklin, not only does he say that these loans are terrible mistake, but he also says i concur totally on the w-2 borrowers. the worst cases i saw were instances where the w-2 was in the file, and the information was redacted out. how is that for a believability? you've got a w-2 in the file,

and the income is reacted. that's what was going on here. and then you look at exhibit 79, another ots official voiced his concern over another kind of loan where there is no income and no asset figures that are shown. this is may 2007, saying that these are unsafe and unsound. we had mr. vanasek on tuesday, wamu's former chief risk officer testifying that loan application forms without their vacation lead to fraud. and, in fact, on some loan application forms, he also testified that wamu loan officers were coaching the people who were filing of forms. now, my question of you is, any banking regulators now ban the practice of no -- stated loans, and these nina loans?

in other words, where income is not state, the so-called stated loans that there is no proof and where nina loans are allowed? do you know of any current regular that disallows those kind of loans speak with sir, it was not in the nontraditional mortgage guidance. so other than that, i'm not aware of any. >> do you know the me, mr. thorson? >> i'm not have -- not aware of any. >> is any proof of that nina loans are risky loan? >> the ability to stake your own income, especially -- i've not seen before, but redacting out w-2s, we talk a lot about risk here. you are just increasing the risk exponentially when you do something like that. i guess it still comes down, if

i were on the other side trying to argue, the strength of the borrower, et cetera. but the problem is you can't assess the strength of the borrower. and that's got to be at the foundation of underwriting, risk assessment, risk management of any of this. >> without that information. do you agree with that, mr. rymer? >> yes, sir. i do. i really can see no practical reason from a banker's perspective, or lenders perspective, to encourage that. that just to me as an opportunity -- it is initially encourages fraud, in my view. speck on the option a.r.m.s issue, ots allowed washington mutual hundreds of billions of dollars of these optional just will rate mortgages, these option a.r.m.s, they were also allowing ots was allowing the bank to engage in a set of high-risk lending practice in connection with the option a.r.m.s. . . in 2008 that was one of

the major reasons that investors and depositors pulled their money from the bank. and my question to you is, did those option a.r.m.s particularly in connected with those other factors race a real safety and soundness problem at wamu? well, let me just leave it at that.

mr. thorson? >> the first thing they do is, of course, they lend to a negative amortization and building up of the principal. that's one. second of all, they mask the ability of the borrower to repay. if i can elect as the borrower, i can elect a payment that is even less than the interest, what does that really tell me about my ability to make normal payments or to pay down the principal? the other thing and one that i think you all are dealing with in the reg reform is you're not doing the borrower any favor either. they may be very tempted to take this loan which as you termed it teaser rate. but these rates jumped up in a year -- a very short period of time. while a lot of people may believe that they could handle that or they'd figure a way around it or refinance or whatever the truth is, they couldn't. and the only people who really benefited from these loans were the people who made the commissions off them. certainly the borrower -- and you see it today in all these

foreclosures, they didn't get benefit from those loans. >> mr. rymer? >> i think what you have here is a combination of not only very aggressive loan products, the option a.r.m.s, the purchased subprime loans that they did coupled with lax underwriting standards and over that very -- very lax enterprise risk management processes. and so i think -- the products themselves were risky. the administration of those products and underwriting of those products were risky. and then the management and control after those loans were originated was really inadequate. >> bank regulators banned amortized credit card loans about five years ago. should we do the same thing relative to home loans?

>> sir, the -- i certainly think it should be considered. i think there could be cases where if there's sufficient -- sufficient collateral, sufficient loan-to-value circumstances that it might be considered. but certainly we saw here that they were extraordinarily risky. and coupled with the -- with the -- well, coupled with the option a.r.m. and then the -- they were extraordinarily risky for the banks. but i think you should consider that. >> any comment, mr. thorson? >> i agree completely with that. i think the strength of the borrower and tremendous strength of the borrower may make in some odd situation i can't really think of worthwhile but in that case you would have a borrower so strong they wouldn't need that. yeah, i would agree. yes, sir, i would agree with mr. rymer on that. >> all right. take a look at exhibit 1-c, if

you would. now, this chart summarizes some of the key criticisms that ots made of wamu each year for the years 2004 to 2008. that chart is really not the half of it. i want to read you what those excerpts come from. this is what ots found in those years. in '04, is exhibit 1-d underwriting of sfr loans remains less than satisfactory. one of the three causes of underwriting deficiency was a sales culture focused on building market share. further down in the level of underwriting exceptions in our samples has been an ongoing examination issue for several years.

and one of the management has found difficult to address. the review of 2003 originations disclosed critical error rates as high as 57.3% of certain loan samples. 200 2005, 2005, single family residential loan underwriting. this has been an area of concern for several exams. next quote on exhibit 1-d. securitizations prior to 2003 have horrible performance. and then february '05, long beach is number one with 12% delinquency rates. and evidence lack at compliance with bank policy. next quote, the level of

deficiencies if left unchecked could erode the credit quality of the portfolio. our concerns are increased with the risk profile of the portfolio. our concerns are increased when the risk profile of the portfolio is considered including concentration in option a.r.m. loans in higher risk borrowers in low and limited documentation loans and loans with subprime or higher risk characteristics. then in 2006, first quote, on that exhibit, near the bottom, underwriting errors continue to require management's attention. next, overall we concluded that the number and severity of underwriting errors noted remained at higher than acceptable levels. next, the findings of this judgmental sample are of particular concern since loans are risk-layering. '07, underwriting policies, procedures and practices were in

need of improvement particularly with respect to stated income lending. next, based on our review of 75 subprime loans originated by long beach, we concluded that subprime underwriting practices remained less than satisfactory. given that this is a repeat concern, we inform management that underwriting must be promptly corrected or heightened supervisory action would be taken. next, 2008, high single family losses due in part to downturn in real estate market but exacerbated by geographic concentrations. risk layering, liberal underwriting policy, poor underwriting. year after year after year we have these kind of findings by the ots. would you agree these are serious criticisms? mr. thorson? >> what it points out is that they were actually finding -- the people on the ground, the

people in the banks were finding things. i wrote down two points you made in your statement. in your opening statement. you said -- you talked about a.r. a.r.m. -- arm's length and they were finding these things they were just hesitant to do anything about it. >> were they serious criticisms? >> are they serious? >> absolutely. >> mr. rymer, would you agree? >> yes, sir. i agree with what mr. thorson said. i think the examiners from what i've seen here were pointing out the problems, underwriting problems, riskier products, the concentration and distributions and markets that may display more risk were all significant problems. and they were identified. at the end day, though, i don't think -- forceful enough action was taken. >> but they're serious enough that enforcement action was needed because management was not addressing them; is that a fair conclusion? >> yes, it is, it is.

-- mr. thorson, do you agree with that? >> yes, sir. >> we can't find a single formal enforcement action that ots took against wamu from '04 to '08. no board resolutions. no memorandums of understanding. no fines. now, the question is, whether or not that is typical. for ots. and i would ask you on this, mr. thorson, since you're treasury i.g., you've done, i think, a number of similar reviews. and would you say that -- what were your findings relative to the speed with which examiners were reacting? >> as you've said, we've completed 17 of these and we have 33 in brogue. -- progress. and this is both office of comp

patrol -- comptroller. this is pretty common place. it's more than ots. and it's a matter of they find these things and they hesitate to take any action whether it's because they get too close after so many years or they're just hesitating or maybe the amount of fees enters into it. i don't know. but whatever it is, this is not unique to wamu and it's not unique to ots. >> does the fdic want to comment on this? you have similar findings at fdic? >> well, sir, we've done 56 material loss reviews so far. i would say that the comment made earlier about examiners ability to identify problems is consistent. and i think they've done a good job.

i wouldn't necessarily say of those 56 that we haven't seen -- we have seen enforcement actions in many of them. so i wouldn't say that the fdic was not taking or not acting on enforcement actions. >> in that regard, you have a somewhat different conclusion or experience than does mr. thorson; that's fair enough. now, if you look at exhibit 32. here you'll see lawrence carter, who's the examiner in charge at wamu writing to his boss, darrel dochow who will be testifying later, writing in 2006, quote, at some level it seems we have to rely on our relationship. and their understanding that we are not comfortable with current underwriting practices. and don't want them to grow

significantly without having the practices cleaned up first. i'm sure we made that very clear. now, my question is, what is your reaction to the comment of the examiner in charge that ots has to rely on its relationship with wamu to get them to clean up their underwriting practices? does have it to rely on its relationship? what about enforcement power? what about the tools that it has to enforce? >> you're exactly right. and we pointed out, i think, in the testimony that one of the problems here was when they would point these things out, they relied on wamu's systems to tell them whether these actions were ever taken. and clearly in any oversight role that's unacceptable. the very foundation of how they were approaching whether or not these actions were ever corrected or these recommendations were ever corrected is improper.

>> and as i think you just testified a moment ago you observed a similar reluctance to use enforcement tools at other banks overseen by ots? >> correct. >> now, if you look at exhibit 6, ots apparently felt it couldn't force wamu to change its ways as long as it was profitable. we've already commented on that. and you have commented on that. exhibit 6, the ots examiner in charge lawrence carter, wrote on page 2, quote, it has been hard for us to justify doing much more than constantly nagging, okay chastising through roe and

meetings since they have not been really adversely impacted in terms of losses. i think you already testified to this. but i think it's got to be really driven home. is it proper for an examiner to say that we really can't do much more than jawbone or nag because they have not yet really adversely been impacted in terms of losses by the flaws and the mistakes that we have identified? is that proper? >> no. in fact, i think i quoted a small excerpt from their own guidance that mentions the fact that profitability and performance of loans is not a qualification to withhold any enforcement action. >> all right, and mr. rymer, do you have a comment on that? >> yes, sir. just to follow-up. mr. thorson was alluding the guidance, the ots guidance says if an association has a high

exposure of credit risk it is not sufficient to demonstrate that the loans are profitable or that the association has not experienced significant loan losses in the near term. that's directly from the ots handbook. >> now, in a departure from its usual practices, ots did not independently track its findings in wamu's responses. instead it relied on wamu's e.r.i.c.s. system. does that make ots reliant? >> i believe it does. >> did you have trouble, both of you, i guess, tracking ots' findings and whether wamu implemented them? in other words, because of the use of a different tracking system, did that give you trouble to track the ots findings? >> it would in any case because

it is the fact it is not an independent system and to be really effective it has to be independent. and why -- i can't tell you why ots doesn't have an independent system for tracking these measures of compliance. i don't know. >> okay. do you have any comment on that, mr. rymer? >> just to follow-up, sir. there were, i think, as you mentioned 548, i think, observations or recommendations that were made by ots examiners. and we tried to track most of those down. i think there were 50 or so that we really couldn't determine what had happened with them. because they were in the -- the books and the records of the bank and not ots. >> and not independently able to track them? >> yes, sir, that's correct. >> thank you. >> thank you all for your testimony. you know, as i sit here and listen to both the opening statement of the chairman and to your statements, i come to a conclusion that actually investors would have been better

off had there been no ots. because it, in essence -- the investors couldn't get behind the scene to see what was essentially misled by ots because they had faith the regulators were not finding any problems. when, in fact, the record shows there's tons of problems. there were no action taken on it. so i guess my question was ots behavior is that we see in the record and as outlined by the chairman worse than not having or not doing anything? i mean, we had people continually investing in this business on the basis -- as a matter of fact, they raised an additional $7 billion before the collapse on the basis that ots said everything was fine when, in fact, ots knew everything wasn't fine and wasn't getting it changed. would you agree with that statement or not? >> yes, sir.

i pulled back a point in my statement a satisfactory rating when conditions are not is contrary to the very purpose for which regulators use the rating system. and i think that's what you're saying. >> any comments on that mr. rymer? >> i would agree with mr. thorson. >> okay. mr. thorson, in your testimony, you say that wamu failed because its management pursued a high risk business strategy that loosened underwriting too much. is it your your belief that high risk strategy could have been okay with strategies in place? >> i think by definition proper risk controls would say, yes, we can -- we can control that. so i guess to some degree, yes, you could say that. but the real life examples are, once you begin to institute those kind of policies and become much more lax -- and especially in underwriting which is really your safeguard. your final look before you do these packages, it's pretty hard

to really understand what kind of system you'd put in place to control that. but i mean, in definition wise, yes, in the real world probably not. >> yeah. and also the amount is relative to the risky investments that you're procuring and selling. on page 6 of your testimony you said ots relied largely on wamu's accepted acceptances and it's boards of directors that problems would be solved do you mean to imply that ots had no system in place to find out if wamu was correcting the problems it said it was? and was there any evidence that if wamu said it was correcting the problem they went back in to see if, in fact, that, in fact, happened? >> it's my understanding that they relied on wamu's system for tracking that. >> so there was no secondary follow-up by ots to changes that were requested by ots?

they took the assurance that wamu had completed and they trusted wamu? >> not to my knowledge. but i will check that to make sure because i want to give them credit. if they did have a system -- and i'm not just not aware of it i want to make sure you know that. so i'll certainly double-check it and provide it for you. but i'm not aware of one. >> to your knowledge was it common practice at ots to issue recommendations to banks and then simply take their word? >> yes. >> okay. was wamu an exception to that? in other words, did they do that with the rest of the thrifts? >> i prefer you to make sure i'm accurate on that. i'd like to give you a follow-up answer -- >> i want to make sure i'm correct. >> i'm sorry. go ahead. >> i believe, sir, as far as i can tell that wamu was unique in the fact that ots does have a tracking system at least in place now and perhaps it was put in place recently.

but wamu was the only bank, i believe, ots said that it was allowing to track its own recommendations. >> well, that's an interesting question for it. i would have no doubt that ots has a system today. especially in light of the hearings that have been held. it would be important if you all could give us what your findings were in terms of when that -- when you saw that. because if, in fact, you're looking at wamu, you got to be looking at ots when you did that. when, in fact, did they institute that system or did they have that system in place all along and ignore it? with wamu? because now we've become criminally negligent. if we're, in fact, using selective tools of enforcement for one thrift organization as to another, is it true in your findings that there was no internal tracking system at ots to look at all of their

enforcement actions against wamu? >> no. in fact, as i go back and look at the overall -- the longer statement, one thing i think i can make pretty clear with that as the examiners told us they had a process for reviewing the corrective actions but they took the -- as you've termed the e.r.i.c.s. reports they divided them among the ots examiners based on each area of examiner's area of responsibility. then each examiner was responsible for determining whether the e.r.i.c.s. reports and wamu reports properly reflected the status of the findings and then if satisfied they would just sign off. >> without a follow-up check-up? >> right. >> mr. rymer, you note in your testimony some of the parallels between indymac which failed in july of 2008. washington mutual. how should the indymac failure have been informed of fdic's handling in the washington

mutual -- >> with the issues we raised to access to information and backup examination authority, i think we had similar issues at indymac and i think that's why we brought that -- made that comparison. >> now, for both of you and i'll finish up here real quick, mr. chairman. in your joint report today, you lay out the problem of third-party brokers. wamu had only 14 employees overseeing 34,000 third-party mortgage brokers. what would have been the right amount of supervising employees for third-party brokers? >> the one thing too remember each one of those brothers was certainly providing more than one loan. so you can multiply that but some other unknown factor depending what the average number of loans that though brokers provided so now you're way above 34,000. i can't even guess what the supervisory number would have to

be. but it probably would have required them moving to a building roughly the size of the pentagon. >> we see over and over again that ots dedicated a great number of hours and personnel to the supervision of wamu. yet, problems never got truly addressed. in other words, the folks were on the ground identifying the problems but the problems essentially weren't getting resolved. and that's not to say some weren't. but obviously the fundamental problems that led to their demise were not getting solved. any summary of where you look or where the -- was it western manager? was it guidelines? was it the failure to follow the guidelines that would account for the ineffectiveness of the ots? >> i really think that based on -- i mean, we talked about quality and we talked about underwriting and also management.

all three of those -- it's not any one thing. i mean, it was really something pervasive. and it really comes down, you know, following a greater desire to do whatever you could do to increase profits. i mean, you know, when you really get down to it, that's what this is about. we're going to increase the risk in order to increase our profitability -- >> but i'm talking about ots. i'm not talking about wamu. by your statement it would imply almost that ots is an enabler of this effort rather than an enabler of making sure that the american people's taxpayer dollars and trust in institutions that are supposed to be regulated by agencies of the federal government can be trusted. >> right. i'll end with this mr. chairman, in both of your assessments as you looked at this and this is a

great example of regulatory failure. a huge example of regulatory failure. where was it? is it in their guidelines? is it in their management? is it in their upper management. is it in their auditing of their own processes? where is the failure that allowed them to allow their largest, quote, customer which i reject to continue to do things that were to the detriment to the institution they were supposed to be safeguarding? >> i think that question really comes down to the core of what all this is about. because the truth is, it starts at the bottom where there's interaction. ...

>> the fact is you all have look at this. you have done the study. where was the problem? if it wasn't with the people on the ground reporting and identifying the problems, where was the problem? i try to get you all to see. we will eventually say it, but you all have look at this. >> and i'm sorry not hesitant to say that i found exactly that. we did point out the one case, which was very much a concern to

us where the regional director did override his own people, and accepted what they saw as a much more lax board resolution that was written by the bank itself. that's a good example of what you're talking about. whether that continued above them are below them, i can't tell you, but that's certainly one example. and as i pointed out, we found that same example, same individual involved in indy mac. >> i think, doctor coburn, you have made the point very well that the examiners in the field in my view are identifying problems. this was a very large institution, and the ultimate determination about what the c.a.m.e.l.s. rating was going to be would be made at least at the regional level if not at the national level. thank you. >> if you don't mind i would like to just add that one piece. i was being generic when i said it starts at the bottom, that's

an overall in any regulatory group. that was not aimed at -- >> i understand it. and the record is pretty clear. i'm sure there's some of that that goes on even within bank examiners, et cetera. but overall, i think the management of the regulatory framework failed miserably. >> and i think in the chairman to documents, you point out a whole list of finding after finding after finding. those wouldn't have come forward if you didn't have good people on the ground. >> if i could add a comment, senator kaufman will forgive me, just throwing in my own comment here. response to the questions that dr. coburn raise. the culture is set at the top. this culture here was that these banks are constituents. they are not constituents. they are supposed to be regulated by the regular. they are supposed to the top. when you deal with folks as

though these are your constituents, it says exactly the wrong tone. when you revise documents which have teeth in them, as they did at the top, and pull those teeth out of the document that sets a tone which is transmitted to people below. in the field. would you agree with that? >> absolutely. >> thank you. >> yes, sir. >> mr. rymer, do you agree with that? >> yes, sir. >> i'd like to make a statement. we have trouble sometimes getting bipartisan agreement. i would say without a doubt we have incredible bipartisan agreement on this specific issue. i think senator coburn put his finger on something, and i like to go -- the other day when we had hearings, the risk managers repeatedly said that the examiners on the ground were doing a great job of pointing out what the problems were and reinforcing opinions that they

were presenting to the management of wamu, and they said uniformly, uniformly the people higher up the level at ots were not following up with the examiners were saying. now i think when we start talking about what the problem is here, that is a big problem. and so i think senator coburn is right on point, and i would like you to search with mind one more time. why did this happen? we've got the examiners on the ground saying there are problems. one year right after another, and yet every time he goes up the chain, there is no -- there's a lot of allegations of what went wrong but i would like to view to think, what are the one or two reasons why the risk management yesterday said as we go up the chain we have more and more of a problem at ots? repeatedly over all these years. >> senator kaufman, let me start by saying i think the problem in

'05, '06 and into '07 was a problem was the banks were profitable and i think is a great reluctance to, even though problems were there, there were identify problems in underwriting, product mix, distribution process, the origination process, all in my get extraordinarily risky. not things perhaps i shouldn't be done but certainly if they are done they need to be done in some moderation, certainly with some control environment. and i didn't see in this banks case and adequate control environment. >> let me ask you this. i don't -- that's too scary. if you are running ots, your largest customer was having reports like this from the examiners, and they were raising money. let's say we are a year from now. what would you do, would you say, they're making money, it's going to be difficult politically to move forward on

this. >> my view is, oftentimes examinations, if asset quality is sufficient in the c.a.m.e.l.s. rating, the a being as equality and the gamma the management, oftentimes if the bank is profitable and is not yet showing significant delinquency charge-offs, the asset quality piece is sometimes hard to downgrade if it's profitable. if i could, the management, even despite the fact that the bank is showing current profitability and the management peace should be in my view downgraded if management has not demonstrated the fact that it is built the aggregate systems and control processes and government process to help manage problems when they eventually do occur in assets that in this case i can see really no reason at all once the problems were identified and the concentrations were identified, and the type of assets, distribution processes, all those things, once those were identified i find it

difficult to understand why the management categories, at a minimum, were not lowered much earlier on. >> the other part here, too, i think, and you put it an interesting way, what would you do, one of the things that jump from what senator levin said, don't forget about the earnings. that's not our -- it's part of what we measure as far as validity, but unfortunately it lends to the fact i'm looking at these guys as a constituent. he goes i think in my testimony i mentioned, they pay us on ots, $30 million a year. so you know we want to kind of be careful about that. that should be made very clear from the top to bottom. that is a factor. it just isn't -- second of all, you want to look at what is guidance and what is regulation. and maybe you need to tighten some of that up. guidance is optional. maybe we don't necessarily have to do this if we don't want to take this action regulation needs to be enforced, emphasized

that enforcement of those regulations is also mandatory. that's what it's called a regulation. and maybe that's something that, as you look at reg reform, that you look at as to what should be guidance and what should be an actual regulatory reform. >> let me ask you a question. isn't it important for you. ahead of these agencies with the state of mind? someone that has the internal makings to say i know you're making money what you're doing is really, really bad. and you've got to stop doing it. how much of a role does that play and how we get around solving this problem in the future? mr. rymer? >> i think that people in leadership positions have to be willing to make the tough calls. and be experienced enough to

know that today's risky practices may show did a profitability, but to explain and enforce management at that risky profitability will have a cost that it even has a cost, a control process, we have an institution would have to invest in now or it's going to have a cause of ultimately into the bank profitability and perhaps eventually to the deposit insurance fund. that's a tough decision i think it has to be made or have to be enforced constantly. >> i just think, you know, i have been around this place for long time, not as a senator but as a staff person. we can only write the law so much. but it's truly scary when you read this report. and really, the report where it seems to me clear that the problem here was that we had, good federal employees, examiners out there saying there is a problem here. and the management not doing it. i just don't see in the report, and i think it is key as we move forward, we have got good people out there doing their jobs and being examiners, career

employees that we have. i'm a political guy, but if you put the wrong people in charge we can write the laws anytime we want to be but they're not going to go after a company because they're making money, i want to shift to something a little different. but it's on the same point. that is i read your causes of why was there. and i see it fail because management is at a high risk business strategy without undermining its loans or controlling its risk. you know, i want to business school. that sounds great. i don't think that's what went on here. i really don't. and i think i'm fortunate you are here for the the other day but i think he sat there and watch what went on and listen to the question and went to the exhibit, you would think that's not why they feel. right, mr. chairman? they didn't fail because management pursued a high risk business strategy without adequately undermining or controlling its risks. with both of you comment on --

is that really what you believe happened here? spent it is a certainly contribute doctor. >> but the thing is that's the censorship that it does is a contributing factor was. it says, and i'm not parsing words that i'm not trying to parse words and i'm not even critical. i'm just trying to say it seems to me there's all kinds of things going on here that were just, i don't know. i will get into characterizing it later, but it wasn't just a high business strategy. they were doing things that reported up you. this is not high business strategy. they were doing bad things. and examiners were saying they were doing bad things. you see, do you understand my frustration with reading pursuit of higher risk strategy? isn't that kind of a cold-blooded way to covet everybody off the hook? this is a bad business decision. >> i appreciate your very much straightforward limit on it, and certain i can tell you myself on that is not to let anyone off the hook. >> by the way, i appreciate what

you're saying. i guess what i'm saying i completely agree with you and your frustration. because, i mean, this is what we deal with everyday biblical and measure against the regulations and rules, and how did they do this and how did they do that. but the bottom line is just what you're talking about, and especially the comment you made to mr. rymer, which was did they have the guts to say knock it off, stop? and that's really what it comes down to when you are hiring regulars, that's what you want. and i think what hot is all this paper really says is no, didn't happen. >> mr. rymer, sending. >> yes, sir. >> really, i'm not going to put words in your mouth, and really i'm not. but in retrospect maybe there is another sentence that could have gone in there. a failure to please what they're doing that for all kinds of things that were highly questionable, and the people at the top at the office of thrift

supervision didn't do what everybody, what you would have done faced a similar situation with a record like this. this wasn't a six-month record that this was years of people, and for whatever reason, they did move forward. is that a fair -- and i'm looking for an honest correction if i'm saying something that's not. >> no, it is big and in the fact i think it mentions the fact, very small amount because we don't get into that, but we do talk about fraud indicators and that those are being investigated and leave it at that. i think that's part of what you're talking about. >> and so, just kind of the poster child for this, the poster child for this was a stated income loan. i mean, the first time i heard that i thought someone was kidding me. i go into a bank, and i tell them how much delay, $500,000 a year. they say okay, you get a 2 million-dollar mortgage. moving right along, what's the

next question? i would just like your view, what you said earlier because i want to put it in context, but both are used said stated income loans. what to do to get into about state income loans? >> i don't think they should. i don't think they should be allowed. i think that if the bank is going to advance funds, secured or unsecured, they certainly need to verify who they are lending to and verify even the repayment sources. >> at the very core of this is the ability to repay, and that is the big part of the ability to repay is how much income does this individual have. and if i just tell you, i was very surprised when i first saw these. nobody's ever given me that opportunity. so i just figured there's no way. evidently it is heard a lot. >> i'm going to do something tricky here. in your report, what percentage do you think of all wamu's home

equity loans were stated income loans? take a wild guess. mr. rymer, take a wild guess. >> as i remember, that number was somewhere inhe 70% range. >> mr. thorson, what he thinks the? 60. >> would you be surprised if i told you approximately 90% of all wamu home equity loans were stated income loans? now, folks, when you're writing a report, and again, i have spent a lot of time on this plus i've got the better convince the other day and the rest of this. i have a different view. you are doing a good job and i'm not being critical. if you have a company where 90% of the home equity loans are stated loans, a practice which you both define as just exactly my -- you almost -- you get much more particularly, but you shouldn't be doing that in a

bank. that has to be -- you to think that that was one of the cause is the way things went the way they did. the option a.r.m.s, these are high risk loans, option a.r.m.s, right? 73%. 73% of all option a.r.m.s were stated income loans. >> i wish you asked that when, center. i knew that what. [laughter] >> so did i expect i'm going to shut up for a minute. and 50% of subprime loans. here you're dealing with, someone comes into your office, who is classified as a subprime loan, and you say to them, what's your income? and you write it down, and that's it. would you say that's one of the causes of this meltdown, that -- not -- now -- >> no, clearly there is, in any

profession banking operation, that's not acceptable. i mean, you have to be able to verify. and i think all of us have experienced loans to our lives were the verification process of almost everything, every piece of paper that we submitted was rigorous. and where we parted ways with that philosophy, i'm not sure. but the number -- i do remember now, the 90% number. and it is staggering. that's the only way to say it. >> mr. rymer, isn't that a systemic problem speak was taken to get all those product were very risky, and when you look at the fact that was the banks -- that was the bank's business, certainly great a very risky loan portfolio. >> when you have something like this where 90% of the home equity loans, 73% of the option a.r.m.s and 50% of subprime are stated income loans, that has to be policy right at the top of the organization, right? that's not happening because somebody down in long beach

decided they're going to do this. this is the very top of the organization. and when you have cases like the chairman state where every decade the w-2, you know, state income low to begin with, now they have redacted the w-2. so i'm going to ask you a series of questions. what do you do as a regular when you detect fraud? first off, do you think at least there's potential for fraud when you find 90%, 73% and 50%, is that on its face? >> i think you could easily determine a target rich environment. >> i like that. target region find that just you know, what did you as a regular when you find a target rich environment in one of the institutions that you're regulating? >> in this case, the numbers, because state income program, the numbers were huge.

the bank was a victim of a fraud. because of their lax controls. now, the fix to that is to increase the controls, all the recommendations that were made of a 500 or so were to improve those controls. but the bank was a victim of that front. fraud in the case is an indicator of just how lax the controls were. >> you say the bank, people get, it was the people running the bank were somehow suffering. i think the ceo made, because of the fact are able to withstand their mortgages, have more mortgages do mortgage-backed securities, everybody in the bank was making a lot. >> the bank was the initial victim but certainly as those mortgages were passed to the system, there were lots more people harmed from that fraud than just the bank. >> and what -- co-head. >> we comment in the report at

2007, wamu itself identified fraud losses of 51 million for subprime loans, and 27 billion for prime loans. that's a big number. and at some point, as you say, top management, 70 million right there, somebody is going to want to take a look at how that happened. and what are we doing to stop it. >> but beyond that don't have kind of an obligation at some point when you get numbers, that was the good times. godot knows it will back and look at what happened to mortgage-backed securities that ultimately went toxic as the chairman says. some point you to say the bank is getting hurt, but there's some people involved in this who are committing fraud. this just seems to me to be so, you know, so -- at some point when you come across fraud, you refer to the justice department, is that how it works? >> the regulator referred to us and to justice, the bank can refer it certainly. there's a number of ways to go

here. my guess is a number of those were followed. so yes, and there are active cases. >> so bank regulars could make criminal, not uncivil but also criminal referrals? >> yes. >> if there was fraud involved. mr. rymer, is this normal? >> yes, sir it is. >> when is it inappropriate not to make criminal referrals to justice? is there anyplace? if you find fraud, it's pretty -- >> i think the bank would have an obligation to complete a suspicious activity report, and that would work its way up through, up to the justice department. >> but if they didn't, with the regulars -- in this example, everybody in fact was doing well. we have a report yesterday which showed the compensation for people that did the option a.r.m.s and subprime, they were compensated better and the

fact they could turn out more mortgages in that market. it and nobody's interest in the bank -- i mean, you don't even hear about. this isn't even a. on the things people are talking about. the regulation did report they're doing way too many stated income loans, as far as i know. it wasn't raise the other day and i've not seen anywhere else. nobody in the bank was worried about this stated income loan policy. excuse me, the risk regulator. mr. vanasek and mr. cathcart were concerned. so how does it work then? is it up to ots to make the referral? >> in some cases, they find an indicator of fraud, they can make a referral. and will. and i have no doubt that they do. and, in fact, obvious the people inside the bank could also do that, not necessarily -- i mean, there's all kinds of avenues to do that anonymously and otherwise. as a regulator or as a bank

employee or frankly, almost anybody associated. but i never founded every two that have been redacted. i figured we hit a gold mine. >> especially engaged in a business practice where both of you admit -- >> what possible reason would you have to reject a w-2, except for the fact that the number doesn't match what you have reported? >> mr. rymer? >> yes, sir, it is a significant problem. the attorney's office and still task force for wamu front. they are aware of it and working on and our office has folks contributing there. i have special investors working that task force as well as the fbi has folks working. >> and so when you have situation and not just, 90% of all wamu home equity loans are stated income, i -- the target-rich environment. it seemed so systemic, so --

90%. i mean, it seems so systemic that clearly the top management of the company was well aware of what was happening here, stated income loans. they may not have known about the redacting down the field, but essentially they were saying, okay, stated income loans, that's my. it doesn't matter the size of the mortgage. they testified yesterday i think, didn't they try to there was no limit on the size of the mortgages that you get understate income? and so basically whatever mortgage we've got, we will have state income, it's going to be the policy. than what we do is we say to people, look, you want to make a lot of money? these are the product that we're willing to sell, you know, in order to do that i will compensate you a heck of a lot better if you do that. then we see an environment where wall street says the faster you can put these mortgages backed securities, just it is mortgage-backed securities, get

us the mortgages. and we can put them together and we can sell them. and they're out of your hair. repurchase agreements, and you're down the road and we are all going to come out of a lot together. does that sound like -- i'm just finishing with that. either of your thoughts on that. >> my general view is there are a lot of true points there. there was the idea that these mortgages passed through so many hands so quickly, the idea was that no one was going to be really harmed by the front. or if they were harmed, it wasn't the originator. it was someone down the line. >> mr. thurston? >> i completely agree. and also as i mentioned earlier, too, these loans, these types of loans really didn't help the borrowers at all. look at the state of foreclosures we have in this country now, the pain and suffering that goes with it. and whether people thought that

they could figure a way around this when finally it was time today. i guess maybe they did, but the only reason that this exceeded was because of the financial gains that were made by the people making these loans. >> you know what scares me most about this? is i think that not just here, but in credit default swaps, so much more went on on wall street, we have rewarded people who essentially said i know what's gone wrong here, but, you know, i can't stop doing it because i'm making so much money. and, you know, when all goes bad, it's okay to leave it to the taxpayer, but i will have my money and i'll have my second home, and i will have my pool. i love everything i need, if the bank is under. like you said, mr. rymer, the bank goes under, people lose their jobs in the banks, shareholders lose their jobs. people lose their homes. but, you know, what?

i got mine. and i don't think we have done in a. we're doing some things in this regard but i don't think we're done enough to let people know, you can do that in this country and get away with it. because if you can, they will just keep doing it that they will come up with a different way to kind of push the product down the line. some new way to wrap it up in something special that no one understands, sell it and i'm out of here. i made the piece that i may. so if you know it's one of those things, mr. chairman, that i think runs through so much of this. we have created an environment where people know they can make a lot of money. you just have to read the too big to fail, 13 bankers, so anyway, i want to really thank you, not just for this but for your service, and i really wish that one of you have been the head of ots during this period. thank you. >> i want you to take a look at exhibit 44, if you would.

we're going to hear later on from who was then the director of ots, mr. reich. this is an e-mail from mr. reich to mr. challenger. this is now dated in july, 2008. and i want to give you a little bit of the background to this memo. this is where he is telling, he calls them by first name kerry. start to committed by e-mail. left couple of messages onto office on. he is wrestling with the issue of m.o.u. versus a board resolution. understanding versus board resolution. as a result of a conversation in his office and he's decided

m.o.u. is the right approach is as we almost always do and m.o.u. for three rated institutions. now there are three rated because february of '08 they downgraded them from a queue to a three. then he says we almost do and m.o.u. for three red for three greatest additions, and if someone were looking over our shoulders, they would probably be surprised that we don't already have it in place. i guess the head of ots didn't think there is anybody looking over his shoulders. got to be shocked that there's not a memorandum of understanding in places, that was their common policy. now i want to go a little bit of the background, because it is worse than that. we will come back to this. go back to february of 2008, talked about this in my opening statement. ots downgraded wamu from a two

to a three. now, once you go from a two to a three which signifies a troubled bank, ots policy required it to issue a public memorandum of understanding, and at the same time and that correcting those efficiencies. and ots did not do that, i will ask mr. ridge about that when he testifies. but instead of ots waited until the next month and accepted a non-public board resolution. that's the background. so first, instead and memoranda of understanding, which is public, it's a nonpublic board resolution.

september 7, as we know, ots finally, after being prodded by fdic, went to a four. let's go to his memoranda. i find this to be an extraordinary document. first of all, an apology, kerry, commuting by e-mail. this is the regulator who is head of the organization that's been presumably pointing out defects, and this banks operations, including fraudulent operations for four years. starts off with an apology. tried a couple messages on your office phone. didn't reach you so i'm going to send you any know. he's been wrestling come he says, with the issue of the m.o.u. versus board resolution. i don't know how much more wrestling you've got to do. he has been wrestling with the issue. he's decided m.o.u. is the right approach to the situation. and then he says we almost always do that m.o.u. for a

three rated institutions. and if someone were looking over our shoulders and they probably would be surprised we don't already have one in place. they sure would be. and then they say a few other things. and then he says as much as i would like to be able to say a board resolution is appropriate regulatory response, i really don't believe it is. i don't know why he would like to be able to say board resolution is appropriate instead of and m.o.u., when his own policy provides for m.o.u. and they have been dawdling for all these months. that's what he tells kerry. then he says, near the bottom, i believe we need to do and m.o.u. i don't consider it a disposable event. and we also think the investment committee won't be surprised if they learned of it that they will probably only be surprised to learn one didn't already exist. they sure would be.

then he is apologizing again. i'm sorry to communicate this decision by e-mail. best regards. kerry your science at john. i find this to be kind of a cozy relationship, to put it mildly, that is reflected in this memorandum, very deferential apologetic e-mail, long overdue by years, months on the up or down grading of the bank, apologetic, deferential. and then a few months earlier, apparently this document, proposed m.o.u. had been shared out the chain. and you get an interesting reaction. back in july i guess when it first putting this m.o.u. together, this came from mr. dochow, who will hear from later

ongoing of the changes mr. ward. this is exhibit 44 by the way -- i'm sorry, 45. let me point you to exhibit 45. down at the bottom of page one you will see mr. ward to mr. mr. dochow, saying on the wamu m.o.u., why did we run it by fdic but not me? this is the first question he asks. then mr. dochow answers you make a good point. i apologize. here is the m.o.u. for your review. i didn't make -- i will make any changes you wanted it has not yet gone to the company. the m.o.u. came up yesterday in a call i had with mr. reich, scott, and then by mr. reich,

mr. franken it went to the fdic because i committed to the deal i guess is the fdic to consider the comments in an effort to minimize their letterwriting and posturing. this is the beginning of a very strange relationship, which i will get to in a minute. the point of this is at the top of that exhibit 45, where he was high up in the ots says thanks for the document. and the knows what he says, is unfortunate another example of a benign supervisory document. it's still benign. apparently. according to the higher up at ots. isn't not that whole m.o.u. issue, does it not strike you as simply incredible, first of all, you don't have and m.o.u. to begin with. although policy provides you

have a downgraded, from a two to three, it is delayed they accept instead of board resolution which is not public. months and months go by. finally, they decide okay, apologetically, twice in an e-mail, people that are supposed to be regulating, sorry, we could reach. we tried, tried twice. why the hell isn't the bank getting back in 10 minutes to the regular? -- regulator? does this strike you as being a very cozy relationship with much too much different, much too much apology. >> any other party or is the decision as to whether to do an informal or nonpublic action versus a formal or public action. again, he is sort of apologizes to the previous document about this could become known.

this is -- this gets right to the heart of what you talk about, the culture. that's what you're talking about. we don't want to do anything to hurt them, and is not an acceptance of the fact that a strong regulatory control helps. >> and helps the public. and is their job and protect the economy. >> correct. >> so far too cozy to you as well as to? sorry? >> is this far too cozy? >> absolutely. as far as i'm concerned. >> mr. rymer, any reactions because it does, it does indicate a letter -- a level of familiarity that makes me uncomfortable. now let's talk about the relationship between treasury and the fdic, or the ots more accurately and the fdic, because there was a real strain which occurred here and i want to get to it with them by want to first ask you about it.

ots and fdic, the ss the risk at wamu come somewhat different perspective to give ots looking at safety and soundness, and why much of a c.a.m.e.l.s. rating that they use the fdic is assessing the risk of the insurance fund with the libby rating it's called. the ratings differ somewhat, and i will go into the detail on them, but the point want to get to is, is whether or not from what you saw, you had ots and fdic working together here, or whether or not there was something appropriate blocking of access by ots to fdic's access to the bank. we've gone through some of the documents i believe already, and i think you're familiar with them. are you, mr. rymer? both of you, in your judgment,

whether or not ots should have allowed the fdic to help your? >> yes, sir. , i think -- it's good to me that they should have. i think the fdic in backup backf examination authority in requesting 2005, six, seven and eight indicated their concerns. and those concerns were principally driven by its own lending analysis. not to go into too much of the detail, but the analysis is looking a little bit broader and broader indicators than just the internal operations of the bank that is looking at competitive factors and michael economic factors. in an attempt to identify the risk of failure, the risk of the failure would cost or lost. but is no question in my mind that the fdic's request for backup authority simply given the sheer size of wamu, was to me enough reason for fdic to ask

for backup authority. >> and, mr. thorson, are you somewhere with these? >> i agree with mr. rymer. i think as he pointed out in his last since there, the sheer size of the bank would say that there should be a maximum cooperation and not to mention the fact that it is dictated by statute as well. >> are you familiar with the documents that show the ots locked fdic access to bank data? >> i look at the ones that you have come up with. >> they refuse to allow the fdic to participate in bank examinations, reject request to review bank loan files. and you think they should've allowed of those things to? well, it's a matter of policy, i think they should allow that. no matter what everything was, it's a matter of policy so they should have, yes. >> we will get into that later

on. while you're doing that, if i can make one comment going backward for a second. despite the, that said that we need to move forward with that in july, the m.o.u. was a sign in to september the. >> that is asap. the s. is misplaced. it's probably delayed as much as possible. that would be a delay as much as possible. instead of asap. thank you both. we appreciate your work. we appreciate your testimony.

it's been a long -- long insofar. it's going to get longer. but thank you for kicking it off. [inaudible conversations] [inaudible conversations] >> let me now call our second panel of witnesses. john which former director of the office of thrift supervisi supervision, darre darrel dochow former west regional director of the office of thrift supervision, and lawrence carter, the examiner in charge of washington mutual at the office of thrift supervision from 2004-2006, currently the national examiner at ots. we appreciate you all being with

us. we look forward to hearing your testimony. i don't know if you are here at the beginning of the first panel, but personal to the rules of this subcommittee, all witnesses who testified before our subcommittee are required to be sworn. so i would ask that each of you now, pleased in and raise your right hand. do you swear that because when you're about to give will be the truth, t who truth, and nothing but the truth, so help you god? so we'll use a tiny system and let you know when five minutes have elapsed. one minute before that time comes, the light will change from green to yellow silk you can try to conclude your remarks. we appreciate your trying to keep those if you could, to five minutes. and, mr. reich, we will have you go first and then mr. dochow

second, and mr. carter, i know i pronounced mister carter's name record. but i don't know about mr. reich. >> it is mr. reich. >> mr. dochow? thank you. mr. reich, why don't you begin. >> good morning, chairman levin. i would like to say i'm delighted to be your but don't be a bit of an overstatement. in my retirement i would much rather be home reading the "washington post," thinking coffee and ruminate over the caps lost to montréal last night that i did retire in february of 2009, little over a year ago after a 49 year career. i was in the banking business for 25 years. i was ceo of the bank in sarasota for 12 years. i worked on capitol hill after we sold their banking organization. i moved to washington, d.c., went to work for senator connie mack, longtime friend and former banking colleague of mine, was

his chief of staff for the last three years of his term in the united states senate. i was appointed to the board of directors of the fdic, served on the fdic board for eight years from 2001 through february, then of february, 2009. i served as the vice-chaivice chairman of the fdic for the first five years of my eight years on the board. was in fact acting chairman of the fdic for several weeks or it during 2002 during which time a bank failed in illinois. when i was asked to move by the white house to fdic in 2005, i had some concerns about it. the path had been allowed, there been no new hiring and there was sort of a feeling in my opinion among the staff of the ots that it was going out of existence. it sort of has lived under the

threat of elimination ever since it was created by statute in 1989. i'd like to depart from my prepared remarks and address a couple of statements that have been made in the press yesterday and again this morning. my reference to washington mutual as a constituent is solely attributable to the fact that i spent 12 years here on capitol hill, where the use of the word constituent is done hundreds of times a day every day. and it is not, in my vernacular, in reference to an institution that we supervised, intended to reflect any sort of sinister or inappropriate relationship with an institution that we supervised that it was a bad habit that i picked up year that carried over when i became a

regular. it certainly did not imply to me that, whether as a 300 billion a institution or a 30 million-dollar institution, i refer to it as a constituent that and it was not in any sort of a cozy reflection. i think it's important to point out that, although washington mutual has been referred to as the largest failure in american history, that, in fact, the largest in american was allowed to bail and not bill that would wash taxpayer money. it was being systemic and was not bailed out. another reference, -- >> largest thrift in one. number two, i don't think citi fail. >> it didn't fail. it would have had it not been

bailed out. >> i think the reference here was the largest thrift failure. >> okay, thank you. three points that i -- >> i will correct myself again. i said it was the largest bank there. that is true, thrift or otherwise. >> that is true. >> thank you, sir. >> three points i would like to make. the asset quality was a growing continuing concern in washington mutual, this was a liquidity feather, not a capital failure. it was brought on because of to bank runs, 10 billion-dollar bond after the failure of indy mac and a 16.4 or 16.7 i heard you say this morning, billion dollar bond on deposits during the 10 day period preceding september 20. with a zero cost to the deposit insurance fund, and a zero cost to the taxpayer. there have been over 200 bank

failed in the united states since january 1 of 2008. many of which did in fact, to millions of dollars to the deposit insurance fund. this institution was not one of those. there was no cost to the taxpayer or to the deposit insurance fund. my second point is that a majority of washington mutual mortgages were in california, florida. to other states that were particularly hit hard with the most severe price declines in real estate. and a third point i would make that i think is very important is that washington mutual suffered from a lack of diversity in its asset portfolio because of restrictions imposed by the statute under which it operated the diversification that took place was all in area of real estate related loans that if you added all of the assets together, with the 800 approximate institutions that ots supervisors, it would total probably a trillion dollars, maybe a little bit more today.

and you would criticize that institution today because of its concentration in real estate loans. it is a problem that i believe congress needed to address come in my opinion that my personal opinion that thrift charter is obsolete because the statute requires that two-thirds of the assets be invested in risky related loans which is a concentration. many of the larger institutions are wrestling with diversification of assets and it's an issue that i believe needs to be addressed in the regulatory reform. i will stop here, mr. chairman, and be glad to take questions. >> thank you very much. mr. dochow. >> thank you, mr. chairman. i will take a short bit of time here to read and oral statement if i may. by way of background i would type in office of thrift supervision in march 2009 after 36 plus years of career bank examiner and regular. i begin like her as an assistant

national bank examiner with the office of the control of the currency in 1972. i examine national banks and those who position of bank examiner in washington, d.c.. during my 13 year old cc service. in 1985 i became senior regulate with the federal home loan bank in seattle and subsequent with the office of regulatory out opportunity i became an odious employee in 1989 and served in various regional examinations working out of the seattle, washington, office report to various regional line managers and also like to the regional director. i was brought to the reach of director west region in september 2007, and there after report directly to the ots career bank supervision executives in washington, d.c.. over the course of my 36 plus years of service i saw some of the nation's most notable financial and economic crises and worked very closely with sister regular agencies got such as the federal reserve, fdic, occ and state regulatory authorities.

i also saw changes in response to such crises that these help define my approach to supervision. i have always believed that interagency cooperation both appropriate and beneficial as as an examine i found it with alexander to any of the agencies understood the same set of facts, their issues agreement on the banks condition and appropriate regulatory corrective action. in addition and houses is often improved by collaboration and constructive teams and i also found it is analytical so the conclusion support by raiders or action that are appropriate. i generally consider unlimited fdic staffing as a welcome aid to the ots west regions limited resources. after i became regional director, my predecessor and i both love the direction given us by ots, career executives in washington, d.c., and the interagency protocols governing participation and examinations. bank supervision is regulation

and agency policies, but can about significant judgment and discretion. my approach was to have open discussion of examination and supervisory strategy, binding and actions at all levels at ots. and with the fdic at high risk institutions. we conducted regular briefings and case discussion include examiners, regional managers, agency executives, out came direction and board concurrence under proposed next steps and actions. supervision was a collaborative process. examination findings and ratings typically formed the basis for bank supervisory actions. i worked vigorously with the other reasons in washington, d.c., to the most highly touted and expense examiners assigned to the west region institutions posing significant risk that i consider the ots exams to be some of the very best. they are well-trained, highly experienced, and extreme hard-working, independent in thought and were supported by me

in some of the final specialist from the capital market, mortgage banking, accounting, appraiser, legal and paralympic discipline but i also welcome washington, d.c. per to the patient supervision. i expected line managers that were responsible for daily supervisory oversight to meet with examiners can banking centers, risk managers, auditors and directors on a regular basis. in this regard i also attended board meetings with the regions largest and most troubled institutions whenever possible. i believe in supporting examiners and taking supervisory action in accordance with agency policy to address weaknesses. the then ots philosophy should be firm but fair. generally the prevailing ots practice was to calibrate the action based on the competence of obtaining correction and within the parameters of the ots then in existence enforcement policy. i have seen many instances where simple request for examiner or supervisor was effective in

obtaining timely correction. in health insurance to provide enforcement actions were taken in accordance with ots policy, the west region long fault a practice of having a committee of possible enforcement action. ots participate in the most enforcement committee reviews, and was always consulted. national tracking system for following enforcement actions examination findings and violations work in various states of refinement, development, or completion during this time of ots. mr. chairman, thanks. -it is a good data that are things i wish i could change. i am always deeply saddened when an institution fails because of the impact of our customers, communities, employees, and other stakeholders including taxpayers. over my years in public service, i worked very hard to do the very best job possible in accordance with agency policies and procedures. thank you again. i would do my best to answer all

your questions the. >> thank you very much, mr. dochow. mr. carter? >> good morning, chairman levin. thank you for the opportunity to testify on the matters concerning the supervision of washington mutual, also known as wamu, headquartered in seattle, washington. i'm presently a national examiner for ots. and i'd like to do a little bit about my background so that you understand how my experience underlies my testimony today. my college education includes an associate degree from northern virginia community college, which have received mega come lot in 1980. i then moved to southern california and i obtained a bachelor of science degree in economics from university of california at riverside in 1983. 1987 i graduated from california state university los angeles with an mba specializing in finance. while in graduate school i worked at truscott and the west known as tcw, working with

investment account management for pension fund clients. after i receive my mba in the 1987, i went to work for what was in the federal home loan bank, still is your federal home loan bank a of separatist to where i work as a supervisory analyst. shortly thereafter in 1989 i became an examiner for the ots when the examination functions that the home loan bank board were transferred to ots as part of the financial institutions reform recovery and enforcement act of 1989. i served in the examination rules for many years at many large and small saving institutions, some of which were troubled. i also served in support roles performing in all the c.a.m.e.l.s. area of the exam. capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk. i supervise on site stats of 70 or more examiners, including the gentlest safety and soundness

examiners, compliance examiners, information technology, or i.t., examiners. accounts, capital market examiners, and washington-based quantitative specialist that were well-versed in the emerging basel requirements. throughout my career i worked closely and effectively with my counterparts from the fdic, the office, the office of the comptroller of the currency, the federal reserve and state regulators. it should be noted that with few exceptions can ots examiners do not work exclusively examining a single savings institution, but are generally involved in a number of different institutions over the course of a year. examination of small banks, as you might guess, pay considerably less examination resources and large institutions, like wamu. from 1999 through 2002, i was what you would call the loan portfolio manager on the annual wamu egg examination that the loan portfolio manager,

overseeing the asset quality or the a component of the c.a.m.e.l.s. in this role i implemented the statistical sampling process for our review of law most homogeneohomogeneous alone propose, which include the home loan portfolio. and oversaw the more judge bell sampling of lowered activities for other types of loans in multiple geographic locations. from 2003 through 2006, i was a dedicated examiner in charge are what we call the eic, for wamu. and as the ici was responsible for exams, scoping and planning prior to our examinations, or feels this is that i was response will for overseeing the work of all examiners and managing communication of findings during the exam process. and then preparing the examination report and leaving what we call exit meetings with both management and the board of directors after the end of an examination. of course, i performed these possibilities under the guidance and oversight of my superiors both within the region and within washington, d.c., as well

as with the support of numerous senior examiners and specialists. late in my tenure i worked to develop our continuous examination process, which we did after the large bank supervision programs of the occ and the federal reserve. i supervise an expensive team of examiners and supervisory professionals that thoroughly analyze the issues and challenges concerning this very large financial institution. . .

>> in your opening statement at the top of page 9 you wrote that stated income, low document and no-document loans were anathema to you because of your experience as a former banker. you were concerned about those types of loans for some time. you then came to ots, your examiner on the ground said that stated income loans was a flawed product. your staff in d.c. said that loans where there's no income and no asset figures given were imprudent. you had the authority of directer as ots to do something about it, but you didn't. so what stopped you?

can you put your mic on, please? >> most of what you said is absolutely correct. i don't recall, though, hearing from my examiner on the ground saying it was a flawed product. what i do recall is that -- >> well, you believed it was a flawed product yourself. >> i did. and i questioned it at the outset -- >> you were the directer, weren't you? >> i was the directer. >> so why not change it? >> from the outset the argument against making any sort of immediate change was that this was a product that had been in existence on the west coast of the united states for more than 20 years dating back to the 1980s. and that the institutions which offered this product had minimal to no loss experience with it. it was also a common product that was used -- >> are you referred to stated income loans or option a.m. r.p.s? >> most stated examine and option instruments. >> all right.