tv C-SPAN2 Weekend CSPAN April 17, 2010 7:00am-8:00am EDT
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it's a library of electronic materials that wamu puts together for the regulators. he had temporarily lost that through the move but you shouldn't have to go four months without having to have that. we have a dedicated arrangement with the banks with all the other regulators and part of it is sharing information so he should have had access to that. and it was essential that that he have access to that information about wamu? >> absolutely.>3a >> now was an explanation given to either of you about that as to any time as that was? >> why that delay happened? >> yeah >> i never received an explanation, no.
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>> did you involved in that also, mr. coreston, i believe. >> i was involved in the access at certain stages. i was very involved in the later stages. >> well, did you have anything to add to that as to what the reason for it, for that denial of access to the fdic? >> no reason was given. >> all right. now, if you look at the bottom of 51-c at the message from you mr. doerr to you mr. carter and here's what it says there. it says, john, we.l÷ received t letter from r.d. mike finn regarding our routine request to join their next on-site exam
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target next fall. mr. finn says no. totally contrary to what vanessa and i discussed with deputy dockhow on august 17th. so here's another situation that came out where there's a refusal from ots to do something jointly with the fdic. again the date of this exhibit 51-c is september of 2006. can you tell us what fdic was seeking to do and why? and why ots was not permitting you to do it. >> we were seeking to join their examination. >> why? >> we followed our normal protocols. under the interagency agreement. and on august 14th, we sent the ots a letter. and we asked to join. under that interagency agreement. we were surprised we got a letter back from them dated
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september 1st. and it said that ots' position was fdic needed to establish a basis upon which we could join an examination. they knew of no disagreements between the agencies. and without a disagreement we had no basis to be there and we were not invited beyond the examination. >> was it important in order for you to have a basis that you have access? >> yes. >> and it's a chicken/egg issue. >> it's circular. we need access to determine the condition of the institution. and they're saying, you know, we have no disagreements. the institution is sound. and so you have no basis. >> chairman, if i could add some background. we had dedicated examiners in six of the largest institutions at the time. washington mutual was one of them. our examiners onsite -- the dedicated examiners worked
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regularly with the primary regulator and participated in examinations and the reason was so we had a good idea of the risk in those institutions. the only way this agency can get that information is acquire it through really direct on-site access to the information. this was a unique situation where we were receiving pushback from the primary federal regulator. >> did ots continue to have this posture towards fdic requests to look through files, mr. corston? >> yes, they did. >> and can you have any examples of that? >> george probably would have the best example. >> all right. mr. doerr? >> yes, we did. we actually got resolution to this 2006 matter both to join the examination and the access for dedicated -- for november. it took several months and we got it.
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we again followed our protocols to join the examination for 2007. only to find out in february from mr. finaro that ots allowed us to look at files. >> they allowed to look at files after the traditional mortgage guidance. >> that's correct >> and ots opposed that guidance. and they gave -- took this position even to the extent that they opposed having the fdic tag along with the ots' own review. and i think you've just described that; is that correct. >> we told them -- or examiners will sit side-by-side with your examiners. no duplication of effort here. we'll work some files and you work some files but we want to work some files. >> you believe ots had a substantive reason for the position that it took in terms of fdic access? or was it in your view just a regulatory turf battle?
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>> i knew of no substantive reason not to take us to look at files. >> i also -- >> from your perspectives it was a turf battle, protecting turf? >> that's a good description of it. there's a binder in front of you there which is -- remains a sealed exhibit because apparently there's -- what's the reason to see it? bank examination reports are apparently confidential so that file is sealed. can you take a look at tab q207, the fdic liddy report.
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can you explain what this liddy off-site rating and scale is? >> essentially, we have a scale that goes from a to e. and what we try to do with that scale is take the risk level of thess institutions. it does not tie necessarily to c.a.m.e.l.s. but it does predict c.a.m.e.l.s. when you get to the c, d and e levels. it would be 2-rated but have higher levels of risk. it could also incorporate -- include three rated institutions. the reason washington mutual would be included as a c stable it had higher levels of risk.
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>> so that in this exhibit, which is based on the second quarter of 2007, is it accurate to say that fdic assigned wamu a c rating? is that correct? >> that's correct. >> which is kind of -- is it fair to say heading towards a 3? is that a fair summary? is that some sort of weakness or concentrations which -- >> a c negative would clearly indicate it's heading towards a 3. a c stable, it would certainly have the risk characteristics of a institution that could if it was under some level of stress. and you can see the areas where it was most vulnerable, most notably in the area of credit risk, which was increasing in nature. that is probably the first red flag on this report. >> and what's the date of this? >> this was actually done in october.
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there's something wrong with the date. it says 1899. it was done in october of -- >> that's a computer error. we saw that too. but the information was based then on the second quarter? >> that's correct. >> and so is it accurate to say that fdic had a more negative outlook for wamu at that time than a simple 2 c.a.m.e.l.s. rating? >> correct. >> so what were you looking at that would not be inside that ots 2 rating. were there some additional things you were looking at? >> essentially we would be looking at the level of risk and the direction of risk. when we look at this it's a 2 in nature. you will see the mitigates for higher levels of credit risk
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such as risk practices and things like that were not in this institution, that was a concern. and this is one of the reasons that access to clear information at the fdic in that situation was more critical. >> just to make sure i understand that. that's why you just said as the access to their information. >> to their information. >> was more critical. >> more critical. >> because of the situation there. okay. if you look at the credit issue or rating at the top right-hand corner of that document, a-1 or a; is that correct? >> correct. >> now, look forward a few more tabs to the q-2 second quarter, liddy. okay? >> yes.
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>> the credit ratings receive being a1 or a have gone down to b2, bbb; correct? >> correct. >> this is the information in the second quarter of '08. >> correct. >> as of '08, the credit ratings continued to go down to noninvestment grade in september. >> yes. >> how important were those rating agency downgrades between those two documents? is that significant? >> it is significant. and it is significant in the fact that the funding mechanisms that this institution had had some triggers that could be triggered by the outside credit rating agencies. so when we looked at washington mutual, we had to consider these outside credit rating agency because it could impact its access to liquidity. >> so fair to say that those
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credit rating agencies' ratings were of great significant to you? you put great stock and significance new mexico? -- in them. >> absolutely. >> now, what is the relationship between asset quality and liquidity? >> it has everything to do with liquidity. if you have strong asset quality, you will not have liquidity issues. because your assets -- you can borrow either against them or you can sell them. if you have weak asset quality, you are going to have liquidity issues at some point. >> now, there's some that said wamu's liquidity problems were unexpected and were the results simply of market forces. isn't it the case, however, looking at these documents, that since liquidity is based on
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significant measure on asset quality, that wamu's liquidity problems arose at least in significant part because of bad quality of their mortgage loans which were the bilk of their assets? -- bulk of their assets? >> correct. >> do you have a conclusion as too why washington mutual failed? >> asset quality, weak asset quality, it brought on the liquidity problems. >> and those -- that lack of sufficient capital was something that reflected embedded losses in their asset portfolio? >> it has been discussed earlier with the optionality and their payment structure in their assets, they're extremely hard to value. that makes it very difficult for us as an insurer to deal with. but it also makes it very difficult for investors to value
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the company and put capital in. so the type of business they were involved made it very difficult for them to go out actually, one, and raise capital. and then, two, when the liquidity became squeezed, the assets again with the asset quality deterioration, they could not fund themselves. >> okay. take a look finally -- i think this will be my last question at exhibit 1-b. this is a chart that we've used to show some of the high risk lending practices that were going on not just in washington mutual but a lot of other lenders across the country. and bank regulators allowed these unsafe, unsound mortgage practices to go on. now, 1-b is in your book. you won't be able to read that unless you've got phenomenal eyes, which probably you do given your occupation.
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at least you used to. >> i can read the chart, is that where it's at? >> it's also in your book, exhibit 1-b. these are some of the practices that we've talk about. one is low document loans. teaser rate loans. stated income loans. interest-only rate loans. negatively amortizing loans. those five that i just rattled off, what's the status of those practices today? are they permitted? are they frowned upon? >> they certainly are frowned upon. to the degree -- as far as the traditional loan guidance, the extent that it's b at this point there is not near as much market acceptance. a lot of these types of
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characteristics were targeted towards a securitization market that doesn't exist anymore. >> right, but that could come back again. the question what in the rules, guidance, regulations is there today a relative to those five elements? >> there's nothing to prevent them in the rules today. >> are they discouraged in any guidance? >> unless they're strong risk mitigation, there's a right way and a wrong way to make some loans. a negative amortization loan, if the borrower has the financial capacity and you can verify that to pay that loan to maturity, you know, okay. if all you're doing is finding a way to get them a loan and not worrying about what comes later, that's wrong. so it's a question of not strictly discouraging all negative am loans but there has to be a right way to handle them. >> how about a stated income loan? >> stated income loans, i guess -- >> is that -- >> well, if you went back to
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what mr. darrel dockhow mentioned of high risk borrowers and it's limited to that, i can see some circumstances where a person has $100,000 worth of securities, you know, that they own for free and clear. you might not worry about what their income is. other than an income like that, stated income is not right. >> under no circumstances would these be considered acceptable to the level that washington mutual was putting these loans on the books. i mean, if these are a one-off situation i can speak to that necessarily but. but this isn't a acceptable structure for an institution to do in any type of volume. we've seen the type of risk and the results. >> so how do we -- since there's no regulation on the books for these kind of risky practices, how are we going to get them on the books? how are the regulators going to put into the books that you can -- obviously, there may be
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circumstances where you can have a stated income loan under the kind of circumstance you talked about but as a general practice, no. how do we get these kind of important practices and policies in place? they're not there now. should we legislate? i mean, you know, i'm tempted frankly and i may do it ban negatively amortizing loans. but you point out we have a guy who's got plenty of assets and securities, you may want it for some reason i can't imagine have a negatively amortized loan. how can we do it. should we legislate? >> well, policy is not my area of expertise. i will say this as an examiner is in an institution a tool such as a regulation is fairly easy to support. guidance becomes -- you can support it but it's not as strong. just general practices, again, it becomes more something you need to influence.
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so it's something that, you know, certainly from a rules standpoint obviously needs to be looked at. and from an examiners standpoint it's a challenge. >> i had an unacceptable structure from wamu. what was the reasons it wasn't changed from what you've heard. is that there wasn't -- there wasn't clear guidance? that there wasn't good commonsense used? what was the reason? >> at the time when examiners were in these institutions, we knew and in one of the first memos you brought up, we saw the issues. but it became -- it came very hard to influence institutions to change these practices. they certainly were competing against each other and there were institutions outside the environment that were including the underwriting also. and it became difficult from an examiners point of view as a
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one-off to influence, say, washington mutual when there were other institutions in which they exceeded. -- competed. it made it a challenge. and i would say when we were dealing with these institutions at the time, that's what we were facing. >> after a while, i don't have the exact -- i guess it was october of '06, there's a joint interagency guidance for nontraditional mortgages that's agreed upon. i don't know why it was guidance instead of enforced regulation. we've talked a little bit about that. there wasn't a clear effective date but i understand fdic and occ and the federal reserve treated the guidance as effective immediately; is that correct? >> that's correct. >> ots did not. it gave thrifts a year to implement. i don't think that guidance deadly with n.i.n.a. loans, did it? do you remember? >> that's probably what you called layered risk. it would probably be in there.
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one of the elements -- >> how about no document loans? >> same. >> that's a layered risk. >> i guess one of the issues obviously the big issue we'll be looking at in the next two hearings is the dumping of high risk loans into the financial system as a whole. we've been looking at the upstream. where one big bank these mortgages and a lot of toxic mortgages were created and put into the commercial stream. next week we'll be looking at credit rating agencies. how were those mortgages rated. when they were securitized the failures, the flaws the shortcomings in that process and then the week after we'll be looking at the investment banks and the securitizing and the selling of those securities and what were the failures and inadequacies in that process
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that led to such horrific outcomes for our economy. what role, if any, should the regulators have? what guidance should there be relative to a financial institution dumping these kind of toxic mortgages into a financial system? what -- they can come back and bite the institution themselves, obviously, if they turn out to be flawed and there's a claim back on the institution. so that's one area why i hope regulators would see something needs to be done in that area. but in general, i think you know exactly what i'm driving at. what, if any, guidance should be given to institutions by regulators relative to that issue as to putting into the
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stream of commerce the mortgages which are bad mortgages, let's just call them that. >> i don't deal directly. obviously with policy. but i will say this i know there are efforts to have institutions have what they call skin in the game. but i think the most important thing is that loans that are underwritten should be underwritten the same as if you're going to portfolio on your balance sheet as opposed to pushing them off your balance sheet? >> how do you put that in guidance? how do you write that in guidance? should that be a standard? and should that be checked in the institutions? should your regulators -- or some regulator depending on who it is go to the institution and say, look, this is the guiding principle. act as though you're keeping this in your own portfolio. and if there's not a specific amount of skin kept in the game, whatever that percentage might
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be, how would one -- how would a regulator check that out? to see whether that kind of guidance is being followed? act as though you're going to own this instead of just dumping it in a stream? >> through the same exam process we do now. they're underwriting the loans so we can see the underwriting standards. and we can sample. so -- >> the same standards that you're now using to check -- >> same process. >> same process. could be effective in adding that one element of guidance? you want to add anything to that? >> that's correct. it's consistent underwriting on both sides of the equation for the portfolio loans, for the securitized loans. >> thank you both. did you want to add anything? okay. thank you. i appreciate your coming. our final panel this afternoon, sheila bair, chairman of the federal deposit insurance
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corporation, john bowman, acting director of the office of thrift supervision. we are grateful not just for your being with us today. but for your voluntary or involuntary patience. i think you both know what our rules are so under rule 6, our witnesses -- all of them are sworn in so we would ask to you please stand, raise your right hand. do you solemnly swear that the testimony you're about to give to this subcommittee will be the truth, the whole truth and nothing but the truth so help you god? ms. bair, why don't we ask you to go first. >> chairman levin, i appreciate the opportunity to testify regarding the role of regulators in their supervision of washington mutual bank or wamu. the fdic shares the subcommittee's concerns about issues associated with the primary regulation of large and
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complex insured deposit other institutions that pose significant risk to the deposit insurance fund and the fdic's role as backup supervisor. to assist the fdic in carrying out its deposit insurance responsibilities, congress has given the fdic backup authority to examine insured banking institutions like wamu that have a different agency as their primary federal regulator. we have often used this authority in a collaborative process to convince the primary regulator to require corrective measures. however, when the collaborative process fails, our ability to independently access information is governed by a 2002 interagency agreement in which the fdic agreed to conduct a special examination only when an institution, quote, represents a heightened risk, end quote to the deposit insurance fund. as we learned in the case of wamu this is a self-defeating requirement as we must first gain entry before we can decide
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whether triggering conditions exist. wamu management decided to make the decision to change its business strategy from conventional single family loans to nontraditional and subprime loan products. ots management determined fdic should not actively participate in ots examinations at wamu citing the 2002 interagency agreement. in subsequent years the fdic faced repeated resistance to its efforts to fully participate in examinations of wamu even as late as 2008 as problems at wamu were becoming more apparent ots management sought to limit the examiners involved in the examination and did not permit the fdic to review loan files. in the spring of 2008, wamu raised additional capital but the amount raised proved to be insufficient. virtually all other high risk mortgage lenders had closed, gone bankrupt or had chosen to be acquired by other institutions. wamu board rejected an offer from a large commercial bank in favor of a capital infug that
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allowed wamu to retain its independence and management to stay in place but limited future options for raising capital. if both july and september, 2008, wamu suffered substantial deposit runs and liquidity was dissipating quickly. by september 24th cash on hand had declined to $4.4 billion a dangerously low amount for $300 billion institution that had seen average daily withdrawals. the next day ots closed wamu. it has been an extraordinarily challenging time for the nation's banking industry. and we have all learned lessons at many levels. i am very proud of the fdic's role as an early advocate for banning unaffordable abusive lending practices. for fighting against large bank capital reductions. and most importantly for maintaining confidence in the nation's banking systems and ensuring depositors have access to their money. however, we too are learning
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important lessons from the crisis. and the central one is we need to be more proactive in using our backup authority particularly for the larger institutions where our exposure is the greatest. we have welcomed the findings and the recommendations of the inspectors general of the fdic and treasury from their wamu review and have already begun a number of their suggested initiatives. in addition, the fdic strongly supports pending legislative reform efforts to address the orderly resolution of large financial organizations. the ability to resolve these institutions in the same way that smaller banks are treated as we did with wamu is essential to ending the too big to fail doctrine. the fdic also strongly supports the need for an independent consumer financial protection regulator. products and practices that strip personal wealth undermine the foundation of the country. finally we support legislation to require that issuers of mortgage securitizations retain some skin in the game to provide added discipline for underwriting quality. in fact, the fdic board will
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consider in may a proposal to require insured banks to retain a portion of the credit risk of any securitizations that they sponsor. the fdic would always like to see troubled institutions return to health and safe and sound practices. however, as was the case with wamu when an institution is no longer viable, closing resolution represent the best course. further delay by the government would have significantly raised the cost to the fdic. and imposed losses on uninferred depositors. the resolution went smoothly. the fdic was able to cover wamu's depositors. it left branches open and preserved many jobs and allowed seamless transition for customers the day after the bank was closed. in other words, most of wamu was saved. as with fdic resolutions. it was not bailed out but bid to the private sector. we were able to sell it at zero cost to the deposit insurance cost fund. in cast had the fdic been forced
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to liquidate wamu, the fdic estimates it would have suffered approximately $41 billion in losses. thank you for the opportunity to testify and i'm pleased to answer your questions. >> thank you very much, ms. bair. mr. bowman? >> good afternoon, chairman levin. my name is jo john bowman who was office of the thrift supervision a little over one year ago. during the height of the financial crisis after about five years as the agency's chief counsel. it is not a role that i sought. but i am honored to serve. my written testimony summarizes ots's supervision of washington mutual or wamu and the reasons why wamu failed. it is important to note that this failure came at no cost to the deposit insurance fund and at no cost to the american taxpayer. unlike recent failures of other financial institutions and the near collapse of some of the nation's largest banks, which were deemed too big to fail and, therefore, provided government assistance.
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the demise of the wamu of 200 banks and thrifts during this crisis. lifelines such as the treasury's t.a.r.p. program and the fdic's increase in the indeposit insurance coverage came too late for wamu. during the real estate boom before the crisis, wamu and other financial firms made a critical error by widely underwriting home mortgages based more on the value of the collateral represented by the homes than on the borrower's documented ability to repay. as home prices continue to rise, these practices supported a widely praised initiative to increase homeownership in america. it reached unsustainable levels and became too much of a good thing. like all the players in the home mortgage market bank managers at wamu and elsewhere mistakenly believed that they were effectively averting risks by moving loans off their books and securitizing them.
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similarly, homeowners perceived little risk in their adjustable rate mortgages because they thought they could sell their homes at a profit before rate resets kicked in. investors believed mortgage-backed securities carried little risk because credit agency -- credit rating agencies rated them highly. those proved misplaced when the market collapsed and the risks turned out to be all too real. the fallout hit financial institutions large and small with state and federal charters overseen by every bank regulators. since wamu's failure the ots has taken lessons to heart from our own review to the thrifts and the inspector general's mature loss reviews and we have made strides to address the resulting recommendations. we have instituted controls to better track problems identified in our examination reports. and to take timely, effective action when necessary.
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we have established a large bank unit to keep close watch over our largest regulated institutions. strengthened oversight of our ots regions, enhanced supervisory consistency among regions, tightened scrutiny of problem banks and set deadlines for taking enforcement actions after safety and soundness downgrades. in short we have made meaningful changes. although some thrifts helped to overinflate the housing bubble, traditional thrifts whose managers stuck to their conservative business practices of lending to people they knew and keeping loans on their books weathered this economic storm and continued to provide badly needed credit in their communities. because consumer and community lending remains important for american families, and the need for thrifts to have a separate regulator. with the changes we've instituted i believe we've made the ots significantly wengyour
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questions. >> thank you very much, mr. bowman. throughout the last few years of wamu's operation, the fdic as the backup regulator made repeated requests to participate in exams and was continually rebuffed. we heard in the second panel how the fdic sought to participate in exams of washington mutual and was limited in terms of staff, forbidem to do file review. for periods of time, ots blocked fdic access to exam material. mr. bowman, are you familiar with that? was that the right course of action? >> i can't say that i'm familiar with it, mr. chairman. given my responsibilities prior to becoming the acting director. but i have read enough about it and i've been watching these proceedings to have a sense of what's alleged to have gone on? >> what's your reaction? >> my reaction is twofold actually. one is the two people who
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were -- the two most senior people within our organization were both prior employees of the fdic, john rich who spoke earlier was the vice chairman of the fdic for five years. scott, who was the senior deputy director had served at the fdic. i think probably in excess of 25 years including as a regional director out in chicago. my sense was they knew what the issues were. their perspective. i assume it would be as close to the fdic's as anyone's within the ots so i followed their lead. >> why should it take the fdic four months to get a desk or access to the examiners library with wamu documents? does that make any sense to you? >> that's sort of a specific allegation, sir, that i really don't have any response to. >> did you follow the email traffic? back and forth here? >> no.
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>> fdic was going to discuss with wamu the recommendation that it was going to make to downgrade its standing. from a 2 to a 3. and ots got wind of it and said, quote, i cannot -- this is from rich. i cannot believe the continuing audacity of this woman. the audacity being that they were going to sit down and discuss their recommendation to downgrade wamu. why is that so audacious?
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>> are you reading from a particular email? >> i am. exhibit 68. >> all right. >> so the question again, i'm sorry. >> what's audacious about the fdic seeking access -- not in this case access. sitting down with a bank, which has had the kind of problems that that bank had and to tell that panic that they were going to recommend the down grading in the rating. why is that so audacious? >> well, i think you have to ask john rich that. >> i did.
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>> i don't mean to make light of it. i don't know what else was going on with the director at the time. what his perception was and why he would have put it into an email like this. >> and in terms of access to files sitting next to ots when you do your examination, is there anything i believe it problematical about that? did that happen? >> i'm sorry? >> should that happen? >> that fdic should sit next to an ots examiner? >> no, that they should be rejected when they try? >> well, the difficulty i'm having with the characterization of rejected is that i'm looking at the fdic i.g.'s report which was issued as part of this. and that seems to indicate that, in fact, in the end -- and i'm quoting from page 45 of the report -- in the end the information obtained from invoking authority from wamu
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until mid-2008. to me that's where fdic -- >> it took four months -- >> maybe not in a timely fashion. >> mr. bowman, it took four months to get a desk. there's a problem. >> a desk. >> a desk. in your offices. >> okay. >> in fdic offices -- excuse me -- >> in wamu's office. >> in ots's office. wamu's offices where ots had space it took four months for the fdic to get a desk. now, there's a problem. there was a turf war going on here, it's obvious. they couldn't get to the examiners library that had wamu documents. we had testimony here today. did you hear that testimony? >> i've heard some of it, yes, sir. >> should that be the case? should that happen? >> it depends about the circumstances. >> do you know any circumstances? >> these particular circumstances i know there was a dispute in terms of how the 2002 agreement should be implemented, yes, sir, i know that. >> and you know that mr. dude in july -- mr. dockhow sends that
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memorandum of understanding that was finally issued relative to this bank -- the first thing he wanted to know was how come that went to the fdic before it came to me? the answer that he gets back -- that mr. dockhow sends to the following and he apologizes and sends the m.o.u.uz it came up yesterday with the call that i had with mr. rich, mr. polikof. i considered their comments in an effort to minimize their letter-writing and posturing. fdic's posturing. i mean, this is the email traffic between your people. does it bother you that that's the case. that there's this feeling that exists here that there's a rejection of access to files to doing an examination with the fdic sitting next to it.
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that memorandum of understanding which is shared with the fdic. that the fdic is viewed as being a posturer. and that's why it was sent to try to avoid that posturing? is that kind of something that folks in your agency feel about the fdic? and does it trouble you if they feel that way? how do you cure it? >> well, i'm not sure what other people within the agency think about the fdic. i know what i think about the -- >> no, but your people -- this is the expression. does it trouble you is my point. >> i have two responses to the extent that an employee of the ots -- and i say that as the acting director uses that kind of language in an email correspondence is inappropriate. number bun. -- number one. number two, to the extent it reflects other issues that may have prompted that language, there has to be a way to work those issues out.
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>> now, with the fdic -- when they were not given the access to the files. they weren't given space. and they were asked for reasons, they're not even given reasons. when i asked, well, what was the reason given by ots, they said we weren't given any reasons. then you have an interagency memorandum, which has now been entered into. as i understand this, the agency negotiated this memorandum. there's a standard for fdic access. an fdic involvement. is this interagency memorandum -- and i ask this of you, ms. bair, is this memorandum being renegotiated? what's the status of this memorandum?ñc- >> no, it's not sufficient and it is being renegotiated. >> and why is that?
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>> because as our i.g. pointed how the it's circular and it requires us to show risk before we can get access and frequently we need the access to prove the risk. so we really need much broader authority to be able to go on. when we feel it's important to protect the depositors fund and risk of exposure. >> mr. bowman, what's your reaction to that renegotiation? >> actually, i have a couple of thoughts. one is going back to your earlier question about information and the access to information. you know, my sense is -- and again, i go to the report of the fdic i.g. that was issued today. in that document it states categorically that the fdic had sufficient information to arrive at and concur with the c.a.m.e.l.s. rating that the ots had entered into. that's a significant amount of information. in terms of who got to sit at which desk or who got to sit -- >> no desk. it's not which desk. >> well, whether they got a desk
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or not, i don't have >> the question is access. >> well, it appears, sir, that they got the access because they did -- they came up with a c.a.m.e.l.s. rating. >> mr. bowman, it took them four months to get a desk with your folks. they were denied access for four months at a critical moment of a bank that was in deep, deep trouble. i hope you're not going to justify that. i hope you will look into what happened -- >> i will certainly look into it. i can't justify it because i don't have any knowledge of it other than what's being presented here today. >> well, i think your folks did have knowledge of it, long before today, and i think you should have looked into it long before today. >> i think at least two of those folks who spoke today no longer work at the agency. >> but your folks, legislative folks have access to this material. >> okay. i also should point out, sir, the first i saw the information i'm being asked about in terms of this book here was when it was placed on the desk in front of me. we asked access to it so perhaps
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i could be a little bit more helpful and was refused -- >> these are your documents. >> well, but, you know, they were probably -- how many different documents turned over? >> according to my staff these documents were shown to you in your interview. we had an interview with you -- >> the numbers.z of documents tt i was shown in the interview was number 10. i see a significant number of tabs about at the point. >> how many did we ask your former staff more than 10. >> i don't know. >> let's take a look something which comes from your documents which i've asked them about. these were ots documents.2% these are excerpts from documents. i don't know if i want to read these again. i don't think you were here -- [inaudible] >> well, if you want to look at 1-d in your book. this is the pattern. underwriting of sfr loans 04
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remains less than satisfy satisfactory. letter of sfr letter writing exceptions has been an ongoing examination issue. in other words, a problem for several years. and one that management has found difficult to address. residential quality assurance of 2003 originations disclosed critical error rates as high as 57% of certain loan samples. sfr loan application, this has been a letter of concern for several exams. securitization prior to '03 of horrible performance. these year after year after year, these are the findings and yet no formal action taken by ots against this bank. that was a problem. i don't know whether -- i guess you didn't hear me ask questions about it before. but this is not effective regulation. it is feeble regulation. year after year after year.
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the inspector general's report is highly critical. i don't know if you've read that report or not, did you? >> i actually read the report prior to providing the management response in which i said i accepted his report. and we, in fact, have already adopted the one recommendation that was made of that report in terms of further changes by the office of thrift supervision which was a system to tract management responses which, in fact, had been put in place in october of 2007. >> so you have read that critical report? >> i have -- i have read it and the fdic's as well. >> mr. bowman, are you willing to work with the fdic to come up with an interagency memorandum which will make it possible for
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the fdic to promptly access information about insured institutions whenever it finds the need for information? >> sir, up until whenever it finds the information i was prepared to say yes, i would be prepared to work with them with the federal reserve board and the occ, which are the four regular regulators. -- federal regulators. whenever they would like to get the information is that we do have a statutory structure which assigns certain responsibilities to different agencies. the fdic's authority as it relates to the federal reserve, the office of comptroller and the office of thrift supervision is that of a backup regulator. one of the complaints and i think one of the reasonable complaints by congress coming out of this crisis is that there was no one to provide or assign responsibility to. there was no one in charge. to the extent that we mix up or try to shave over who the primary federal regulator is i think we get ourselves into trouble again with that same kind of charge.
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if we're responsible for it, if we made a mistake we should be held accountable for it. we can work with the fdic and i'm committed to making sure that we work something out so that we don't have a situation like we apparently had with fdic and ots as it relates to wamu. >> you know, is there any reason since they are a backup regulator that's got a major skin in the game as one would say given the fact that they insure these firms, these banks -- is there any reason why they cannot work -- you cannot work together cooperatively without mixing up your roles in terms of accountability? >> as you also know as the acting director of the ots i'm also a director on the board of directors at the fdic. so the answers to your question is there's no reason why we can't work together. >> and is there any reason why we cannot assign principal responsibility to you if we wanted to or to any other regulator if we wanted to without having that kind of
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cooperative relationship with the fdic? in other words, you could assign responsibility to someone and still have them act as in cooperation with somebody else; right? >> absolutely. >> so the fact that it waso;6e) repeated in these emails we've got primarily responsibility and fdic doesn't and we went through these emails later on today. we're the principal regulator. we're the principal regulator as though they didn't know it. and that's what's so darn troubling here is in critical times in terms of this bank and its depositors, its impact on the economy, its investors and so forth, we didn't see that. we didn't see that kind of cooperative -- i can still not understand what the reluctance was. i don't understand why it was -- why fdic was apparently rejected when it sought access to
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the stated income loans, the negative amortizing loans, teaser rates, should these practices be banned either by a regulator or by congress? i think ms. bair you talked about one of them, i believe. >> yes. >> go into all of them, three or four that we've talked about. >> we have. we are opposed on a policy level, we have -- we are opposed to stated income. we're opposed to teaser rate underwriting where you need to underwrite it. you should document the customer's ability to repay not just the additional introductory rate and when the product resets as well. in 2008, the federal reserve board does have -- one of the things that complicates the ability to set strong underwriting standards across-the-board is that we can reach institutions and the
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majority of this was done by nonbanking institutions that would not be subject to prudential standards or consumer standards of bank regulators. the fed under h.o.p.a. does have the authority to apply consumer lending standards across-the-board. in 2008, we followed the strong comment letter urging the fed to ban stated income and require ability to pay and require lending at the index rate on all mortgages and not just subprime and option a.r.m.s., any nontraditional mortgage product. the fed did finalize rules but they only apply to the high rate loans. they don't apply to the negative amortization loans. they're out for comment again on this issue. we filed another comment letter to apply to nontraditional mortgages. i think given the deterioration in prime they should consider applying them across-the-board to all mortgages. but the authority is there now. and we've strongly encouraged the fed to use that.
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and we'd be happy to make our comment letters available to the committee. >> and you have the authority as well? >> we have the authority for insured deposit other institutions under the rules, yes. >> but you have the authority to act on all of those items that you enumerated? >> we do -- >> for -- >> for fdic, yes. >> and you made recommendations to your board, have you? >> we have -- well, we joined the interagency guidance. we've instructed -- which was a negotiated document. it did not completely ban a stated income as our examiners indicated but it did make clear that we think it should be the exception not the rule. i think if you provide flexibility in terms of the types of documentation that could be provided, whether it's deposit slips or w2s or tax returns, fine any third-party, good verification of good income but some verification should be made.
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i frankly -- personally think a reason for any stated income loan. and we would be happy to apply rulemaking for all institutions but again, you're only getting part of the market if you don't apply that to the nonbanks as well. you dip into this regulatory arbitrage problem with the standards you put on the banks you have the nonbanks doing looser underwriting. and they draw market share from the banks. >> well, that's exactly the kind of testimony which i think is going to be very, very helpful to us as we proceed with the legislative response. mr. bowman, what would be your answer to my question? >> i actually would agree with everything chairman bair said. unfortunately, the ots does not have separate regulatory responsibility or reg writing responsibility. that goes to the fed as h.o.p.a. and in terms of guidance versus regulation, regulation is the way to go. in that regard. the only difficulty and the only caution i might have taking chairman bair's point, one, is
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it has to be applied across-the-board both to regulated depository institutions as well as the -- what's referred to as the shadow banking agencies or the shadow banking industry. that's number one. number two, i think we also have to be careful in terms of -- you know, right now we're getting lots of indications that there's a credit crunch going on in your country. you know, consumers, small businesses, individuals don't have the kind of access to credit that they believe they need. now, some of that may be an overreaction to the response to what happened to 2003 through 2007. but the more proscriptive we become in terms of the kinds of products that are made available to consumers, i think it could have an impact upon availability of credit. >> subject to that risk, it's important, though, that we be scriptive. >> excuse me.
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>> do you support what ms. bair said? >> yes. >> did you comment on the negative amortizing loans, chairman bair? >> yes. well, we think again that they are a product that -- well, that any loan that has adjustable features must be underwritten at the fully indexed rate so that the issuer of the loan should determine not just whether borrower can make the payment at the initial introductory rate but when it resets. these option a.r.m.s. are terrible products as the case with wamu and other institutions that made it borrowers continued making minimum payments building up not only negative amortizatia amortizations and they always go bad when they hit the reset period. the way they were underwritten none of them that we've seen frankly were written at the full index rate and we have
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encouraged the fed to apply rules. >> that's very helpful. mr. bowman, you have anything to add. >> nothing. i agree with that. >> you chair with this committee we appreciate that. any comments further on this subject, mr. bowman, we would appreciate from you as well. and i think on that positive note we'll end rather than trying to summarize a long hearing. i don't think i will. it's obvious we had a situation where a bank was riddled with unsafe and unsound lending practices. the regulators saw them, understood them but did not act to stop them. and that was part of the problem that we've had, a big part of it. other parts will be taken up next week when we look at the
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