How about this recent SEC Statement to the Court; is it misleading? I think so.

Excerpt from Page 4, line 3-7, “Plaintiff Securities and Exchange Commission’s Supplemental Memorandum in Opposition to Michael W. Perry’s Motion For Partial Summary Judgment Concerning Plaintiff’s Risk-Weighting Claim”, August, 22, 2012:

“Moreover, every time IndyMac changed how it calculated this ratio, it also disclosed these changes…..even minor ones….to its investors in its SEC filings. For example, IndyMac’s third quarter 2002 Form 10-Q, 2003 Form 10-K, and first quarter 2005 Form 10-Q each reported minor modifications to the Bank’s calculation of its double risk-weighted capital ratio.”

Indymac’s First Quarter 2005 10-Q, filed April 27, 2005
Regulatory Capital Requirement Excerpt from Page 53

“During 2001, the OTS issued guidance for subprime lending programs which requires a lender to quantify the additional risks in its subprime lending activities and determine the appropriate amounts of allowances for loan losses and capital it needs to offset those risks. The Company generally classifies all non-GSE loans in a first lien position with a FICO score less than 620 and all non-GSE loans in a second lien position with a FICO score less than 660 as subprime. We report our subprime loan calculation in an addendum to the Thrift Financial Report that we file with the OTS. Subprime loans held for investment and subprime loans held for sale which are either delinquent or more than 90 days old since origination are supported by capital two times that of similar prime loans. These subprime loans totaled $290.8 million at March 31, 2005.”

Indymac’s Fourth Quarter 2004 8-K, filed on January 27, 2005
Regulatory Capital Requirement Excerpt from Pages 64-65

“During 2001, the OTS issued guidance for subprime lending programs, which requires a lender to quantify the additional risks in its subprime lending activities and determine the appropriate amounts of allowances for loan losses and capital it needs to offset those risks. The Company generally classifies all loans in a first lien position with a FICO score less than 620 and all loans in a second lien position with a FICO score less than 660 as subprime. Loans meeting this definition are supported by capital two times that of similar prime loans. We report our subprime loan calculation in an addendum to the Thrift Financial Report that we file with the OTS. As of December 31, 2004, subprime loans totaled $695.8 million as calculated for regulatory reporting purposes, of which $612.5 million were loans held for sale.”

Excerpt from Page 366 of Michael W. Perry’s April 18, 2012 Sworn SEC Testimony:

Perry: “It looks like it’s the 10-Q for the period ended March 31, 2005.”

SEC’s Searles: “I’d like to direct your attention to page 53 using the page numbers at the bottom of the document. Under “Regulatory Capital Requirement” section on that page, does this…is this the second change that you were testifying to earlier?”

Perry: “Where does it refer to a change?”

SEC’s Searles: “Well, it doesn’t refer to a change, but it talks about the calculation. Subprime loans held for sale which are either delinquent or more than 90 days old.”

Perry: “Well, that’s the definition of how we calculated the subprime double-risk weighting at this time. As you said, it is not a change here.”

Excerpts from Pages 408 and 412 of IndyMac CFO’s April 5, 2012 Sworn SEC Testimony:

SEC’s Chung: “Again, do you recall that change in the methodology being disclosed in a SEC periodic filing?”

IndyMac CFO: “I believe we articulated the new method. I don’t know if we indicated that it was a change…..”

SEC’s Chung: “Well, was there any consideration given to not disclosing the changes in the method of calculating the subprime adjusted total risk-based capital ratio?”

IndyMac CFO: “It’s showing on 53, I don’t think this actually discloses that a change was made…..”

Why is this important? Because the SEC is trying to say that historically when Indymac’s subprime risk-weighting methodology was changed by the OTS, IndyMac disclosed the change in its periodic filings. Therefore (I guess without regard to materiality?) it created an obligation to disclose the subprime risk-weighting change that occurred on February 26, 2008. The above shows that what IndyMac did in 2005 was no different from what it did in 2008: we disclosed the operative capital ratio, not the details of how that ratio was calculated as compared to what we did in the past. As a result of the OTS granting its waiver of any double risk-weighting requirement on February 26, 2008; the “new method” was in fact “no method” because the OTS had waived any double risk-weighting requirement. And while I was not involved in (or aware of) any discussions by IndyMac’s disclosure committee surrounding the decision to omit the subprime risk-weighting disclosure (and not discuss the OTS waiver) in the February 29, 2008, 2007 10-K, in hindsight, I support and understand their decision because IndyMac had no obligation to double risk-weight subprime loans at that time.

Posted on August 29, 2012, in Postings. Bookmark the permalink. Leave a comment.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: