Discussion of IndyMac Bank’s 2007 Safety and Soundness Regulatory Examination
Unbelievably, I am advised by counsel that more than four and one-half years after IndyMac Bank’s seizure by the FDIC on July 11, 2008, IndyMac Bank’s Regulatory Safety and Soundness (“CAMELS”) examination reports and other regulatory information concerning IndyMac Bank remain confidential federal government property. Neither I, nor anyone else, is able to disclose information from these documents, unless the government has already placed it in the public domain. The only information related to IndyMac’s Safety and Soundness examinations of which I am aware is in the public domain comes from the U.S. Treasury’s Office of Inspector General’s (“OIG”) Material Loss Report for IndyMac Bank dated February 26, 2009. As a result of this regulatory rule, my discussion of the 2007 safety and soundness examination below is severely restricted. (I call on the OCC, the successor to the OTS, and the FDIC to promptly release all historical regulatory reports related to IndyMac Bank and all sworn, investigative testimony, including my own, that the FDIC obtained in the pre-litigation phase. Publicly releasing these IndyMac-related documents and testimony is in the public’s interest. They have a right to read and learn from them, and make their own judgments. And there really is no good reason for these documents and testimony to continue to be confidential, other than certain federal banking regulators might not want all the facts and the truth to emerge.)
The OIG’s Material Loss Report for IndyMac Bank discloses on page 17, in Table 1, that IndyMac Bank received a Composite (“Overall”) Rating of “2” and a Component Rating of “2” for each and every Component; for both the 2007 Safety and Soundness examination (commencing on January 8, 2007) and for the 2005/2006 examination (commencing on November 1, 2005). These were the best numerical ratings IndyMac Bank had ever received from its regulator, since becoming a Thrift in mid-2000. In fact, as the OIG report notes in Appendix 5, pages 67/68, the 2007 examination only had three matters that IndyMac Bank’s regulators felt required the board’s attention (“MRBA”):
- “Ensure that the conduit division address (IndyMac’s own) internal audit findings.”
- “Re-evaluate senior management incentive compensation to ensure that it was weighted in accordance with the employees responsibilities.”
- “Ensure the new forecasting process was implemented.”
The Office of Thrift Supervision (“OTS”) reviewed these regulatory ratings and their exam findings with IndyMac’s independent board and management in a meeting on March 9, 2007.
In the Treasury OIG’s 2009 Material Loss Report, Page 3, they stated the following: “OTS examiners reported Matters Requiring Board Attention (MRBA) to the thrift, but did not ensure that the thrift took the necessary corrective actions….OTS relied on the cooperation of IndyMac management to obtain needed improvements. However, IndyMac had a long history of not sufficiently addressing OTS examiner findings.”
This is an outrageous statement by the Treasury OIG; it is utterly and completely false. Each year since becoming a federal thrift in mid-2000, IndyMac Bank management took the OTS’findings/recommendations so seriously that we often begin implementing them even before the examination was completed and their report prepared and presented to the board. (My statement in this paragraph is absolutely truthful and can be verified by many other senior managers and independent directors of IndyMac Bank. It also could be verified by the public release of IndyMac Bank’s safety and soundness examination reports by the OCC and the sworn investigative testimony obtained by the FDIC.)
As any bank would, we placed significant weight on these formal regulatory safety and soundness examinations (their ratings and findings) and they materially affected our decisions and actions. And they did when we received this March 2007 report, the last one before the unprecedented financial crisis occurred. After all, as the Treasury OIG report notes, IndyMac Bank’s 2007 safety and soundness examination had 40 regulators involved and over 4,614 man-hours devoted to it (at a significant cost to IndyMac and its shareholders). In fact, later that March, I personally bought $1 million of additional IndyMac stock, as did IndyMac Bank’s independent director who chaired the board’s enterprise risk management committee. I bought the stock because it had declined during the quarter to roughly book value per share, due to our 4th quarter 2006 earnings miss (which included some modest credit deterioration) and first quarter spread-widening in the private MBS marketplace. I also took comfort in knowing that our banking regulators, who understood these same relatively modest market and credit deterioration issues, continued to feel (as they had in recent years) that the risks we were taking were appropriate and manageable in relation to our management expertise, loan loss reserves, and capital base. (I also took some comfort in a Moody’s credit upgrade that occurred in mid-March 2007; see discussion below.)
See the attachment below for a description of U.S. banking regulators numerical (from “1” or Best to “5” or Worst) safety and soundness ratings. (The attachment below was obtained from The Federal Reserve System’s publicly available website.)
I excerpted from this attachment the regulatory descriptions of “2” ratings; because as noted above, in 2007 IndyMac Bank received a “2” for its Composite and each and every Component rating. (I did however replace the generic terms “Bank” or “Institution” in these descriptions, with “IndyMac Bank” or “its”, in order to more accurately depict the safety and soundness views of our regulator at that time; just months before the depths of financial crisis of 2007/2008 surprised nearly everyone):
2007 Safety and Soundness Examination Ratings and Ratings Descriptions: As Presented by the OTS to IndyMac Bank’s Management and Board of Directors on March 9, 2007:
Bank Composite: “Overall”, Rating of 2 – IndyMac Bank is fundamentally sound and stable and in substantial compliance with laws and regulations.
Bank Component: Capital, Rating of 2 – IndyMac Bank has a satisfactory capital level relative to its risk profile.
Bank Component: Assets, Rating of 2 – IndyMac Bank has satisfactory asset-quality and credit-administration practices. The level and severity of classifications and other weaknesses warrant a limited level of supervisory attention. Risk exposure is commensurate with capital protection and management’s abilities.
Bank Component: Management, Rating of 2 – IndyMac Bank has satisfactory management and board performance and riskmanagement practices relative to its size, complexity, and risk profile. Minor weaknesses may exist, but they are not material to safety and soundness and are being addressed. In general, significant risks and problems are effectively identified, measured, monitored, and controlled.
Bank Component: Earnings, Rating of 2 – IndyMac Bank’s earnings are satisfactory. Earnings are sufficient to support operations and maintain adequate capital and allowance levels. Earnings that are relatively static, or even experiencing a slight decline, may receive a 2 rating provided the institution’s level of earnings is adequate in view of the assessment factors listed above.
Bank Component: Liquidity, Rating of 2 – IndyMac Bank has satisfactory liquidity levels and funds-management practices. IndyMac Bank has access to sufficient sources of funds on acceptable terms to meet present and anticipated liquidity needs. Modest weaknesses may be evident in funds-management practices.
Bank Component: Sensitivity to Market Risk, Rating of 2 – IndyMac Bank’s market-risk sensitivity is adequately controlled and there is only moderate potential that the earnings performance or capital position will be adversely affected. Risk-management practices are satisfactory for the size, sophistication, and market risk accepted by IndyMac Bank. The level of earnings and capital provide adequate support for the degree of market risk taken by IndyMac Bank.
You sure wouldn’t understand these positive regulatory views from the Treasury OIG’s biased and inaccurate Material Loss Report. In fact, Appendix 5 of this report (“OTS IndyMac Examination and Enforcement Actions”) only discloses negative findings/recommendations from IndyMac Bank’s annual safety and soundness examination reports and not any of the positive comments. I believe the OIG excluded positive comments from their report, because they did not fit their biased and inaccurate narrative/conclusions. (How in the world can the Treasury OIG say they conducted their material loss examination and issued their report under Generally Accepted Government Auditing Standards, when it is so biased and violates so many of those standards?). Common sense would tell you that the 2007, “2” numerical ratings (the second-best rating possible) were supported in the 2007 safety and soundness report by other more positive comments. Here are a few of the key comments:
(Please note: I had listed 12 positive comments here in my original draft, but upon the advice of counsel I have reluctantly removed them for the reasons discussed above.)
Think about these March 2007 regulatory ratings and related regulatory descriptions, in relation to what has been said by the FDIC about our management of IndyMac Bank. Also, in mid-March 2007, Moody’s Investor Services, Inc. publicly upgraded IndyMac’s investment-grade credit ratings: raising Bancorp to Baa3 and Bank to Baa2; consistent with Standard & Poor’s Financial Services, LLC and Fitch Ratings, Inc. These were the independent and informed views of the government-regulated, “Big Three” National Statistical Rating Agencies at that time. And we now see from The Federal Reserve Board’s 2007 minutes (recently disclosed and discussed in the press after their five-year confidentiality period had expired), that the Fed itself was uncertain about what action to take and really had no clue about the magnitude of the financial crisis until much later in 2007; well after the FDIC-R said in their meritless lawsuit against me, “That Mr. Perry should have known that this crisis was coming and therefore he was negligent in failing to reduce the Bank’s core lending volume (in 2007) further and faster than the bank was already doing; by $10 billion more, almost immediately between April and October.” I don’t really think that is right or fair, because it would have required me to predict a future event that had never occurred in my lifetime or even my father’s lifetime and take highly radical actions. A prudent banker is not supposed to “bet-the-bank” on a highly unlikely event occurring.
As I have said many times, as 2007 began, virtually no one saw the financial crisis coming (and the few that did, severely underestimated its magnitude); certainly I did not. At each step throughout 2007 and 2008, the decisions I made and the actions I took (with the information available to me at the time), were the prudent and appropriate ones to keep IndyMac Bank safe and sound. They were done in consultation with the management team and our board, supported by our primary regulators at the OTS, and by our shareholders (after the crisis was well-known, I wrote a February 12, 2008 letter to shareholders, filed with the SEC as an 8-K, taking responsibility and offering to resign without any contractually-obligated severance if they held me responsible and therefore decided not to re-elect me to the board. IndyMac’s shareholders instead re-elected me with roughly 97% of the vote).
It’s only the FDIC who is inappropriately utilizing hindsight judgment and trying to blame their own insurance decisions (remember they approved our nonconforming mortgage banking business model for deposit insurance in July, 2000), losses, and temporary insolvency on others. The FDIC itself did not foresee this crisis coming and took no actions pre-crisis to warn bank CEOs like myself or bolster and protect the insurance fund.
Note: I believe the FDIC, and others, have unfairly denigrated The Office of Thrift Supervision as result of IndyMac Bank’s and others failure during this unprecedented financial crisis (Dodd-Frank abolished the OTS. It was subsumed within the OCC). The FDIC would say (and their lawyers have in court) that “it doesn’t matter what the OTS said, they were abolished because they got it wrong….” I can tell you for a fact that the OTS regulators I met and dealt with were hard-working, experienced, knowledgeable, independent, and highly ethical (they wouldn’t even accept a bottle of water from us during a meeting). Unfortunately for the OTS, thrifts like IndyMac Bank received no government assistance; we were deemed “Not Too Big To Fail”. Let’s not forget though that the OTS wasn’t the regulator of any of the Too-Big-To-Fail Banks that were bailed out by the government. They weren’t the regulator of any of the Wall Street firms that failed or were saved by various government interventions (firms who took simple mortgages and mortgages securities and other types of loans and securities and structured so many complicated and risky derivatives, then bet against some of them without clearly and specifically telling buyers they were doing so, and sold them worldwide). They weren’t the regulator of Fannie Mae and Freddie Mac, who were placed in conservatorship just weeks after IndyMac was seized by the FDIC and remain in conservatorship today (and would have become insolvent if not for a U.S. taxpayer bailout of well over $130 billion). They weren’t the overseer of FHA and its mortgage insurance fund which is currently insolvent (to the tune of over $15 billion). And they weren’t the regulator of the National Statistical Rating Agencies (who we now know through hindsight, incorrectly slapped AAA-ratings on hundreds of billions in mortgage and other securities; that would otherwise have not been sold/purchased by so many in the U.S. and around the world). With the benefit of hindsight, nearly everyone in government financial regulation (and monetary policy) and the private-sector finance’s judgments were proven to be mistaken, because the world experienced a highly unlikely (very-low probability) event; a once or twice-in-a-century global financial and economic crisis.