S. Hrg. 111–672 

WALL STREET AND THE FINANCIAL CRISIS: 

THE ROLE OF BANK REGULATORS 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

VOLUME 2 OF 5 

APRIL 16, 2010 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

( 


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WALL STREET AND THE FINANCIAL CRISIS: THE ROLE OF BANK REGULATORS 

VOLUME 2 OF 5 


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WASHINGTON : 

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57–320 PDF 2010

S. Hrg. 111–672 

WALL STREET AND THE FINANCIAL CRISIS: 

THE ROLE OF BANK REGULATORS 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

VOLUME 2 OF 5 

APRIL 16, 2010 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

( 


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(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

ROLAND W. BURRIS, Illinois 

PAUL G. KIRK, JR., Massachusetts 

SUSAN M. COLLINS, Maine 

TOM COBURN, Oklahoma 

JOHN MCCAIN, Arizona 

GEORGE V. VOINOVICH, Ohio 

JOHN ENSIGN, Nevada 

LINDSEY GRAHAM, South Carolina 

ROBERT F. BENNETT, Utah 

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

PATRICIA R. HOGAN, Publications Clerk and GPO Detailee 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan, Chairman 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

PAUL G. KIRK, JR., Massachusetts 

TOM COBURN, Oklahoma 

SUSAN M. COLLINS, Maine 

JOHN MCCAIN, Arizona 

JOHN ENSIGN, Nevada 

ELISE J. BEAN, Staff Director and Chief Counsel 

ALLISON F. MURPHY, Counsel 

JENNIFER D. AUCHTERLONIE, DOJ Detailee 

NINA E. HOROWITZ, GAO Detailee 

CHRISTOPHER J. BARKLEY, Minority Staff Director 

ANTHONY G. COTTO, Counsel to the Minority 

MARY D. ROBERTSON, Chief Clerk 


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(III) 

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1 

Senator Coburn ................................................................................................. 8 

Prepared statements: 

Senator Levin .................................................................................................... 93 

WITNESSES 

FRIDAY, APRIL 16, 2010 

Hon. Eric M. Thorson, Inspector General, U.S. Department of the Treasury .... 10 

Hon. Jon T. Rymer, Inspector General, Federal Deposit Insurance Corporation ........................................................................................................................ 12

John M. Reich, Former Director, Office of Thrift Supervision, and Former 

Vice Chairman, Federal Deposit Insurance Corporation .................................. 36 

Darrel Dochow, Former West Regional Director, Office of Thrift Supervision .. 37 

Lawrence D. Carter, Former Examiner-in-Charge (2004-2006), and Current 

National Examiner, Office of Thrift Supervision ............................................... 39 

John Corston, Acting Deputy Director, Division of Supervision and Consumer 

Protection, Complex Financial Institution Branch, Federal Deposit Insurance Corporation .................................................................................................. 66 

J. George Doerr, Deputy Regional Director, San Francisco Region, Federal 

Deposit Insurance Corporation ........................................................................... 67 

Hon. Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation ........... 80 

John E. Bowman, Acting Director, Office of Thrift Supervision .......................... 82 

ALPHABETICAL LIST OF WITNESSES

Bair Hon. Sheila C.: 

Testimony .......................................................................................................... 80 

Prepared statement .......................................................................................... 156 

Bowman, John E.: 

Testimony .......................................................................................................... 82 

Prepared statement .......................................................................................... 181 

Carter, Lawrence D.: 

Testimony .......................................................................................................... 39 

Prepared statement .......................................................................................... 149 

Corston, John: 

Testimony .......................................................................................................... 66 

Prepared statement .......................................................................................... 153 

Dochow, Darrel: 

Testimony .......................................................................................................... 37 

Prepared statement .......................................................................................... 147 

Doerr, J. George: 

Testimony .......................................................................................................... 67 

Prepared statement .......................................................................................... 155 

Reich, John M.: 

Testimony .......................................................................................................... 36 

Prepared statement .......................................................................................... 134 

Rymer, Hon. Jon T.: 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 119 

Thorson, Hon. Eric M.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 101 


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EXHIBIT LIST 

1.a. Memorandum from Permanent Subcommittee on Investigations Chairman Carl Levin and Ranking Minority Member Tom Coburn to the 

Members of the Subcommittee. .................................................................... 189 

b. Washington Mutual Practices That Created A Mortgage Time Bomb, 

chart prepared by the Permanent Subcommittee on Investigations. ....... 198 

c. Office of Thrift Supervision Comments on WaMu and Long Beach Underwriting/Lending Deficiencies, chart prepared by the Permanent Subcommittee on Investigations. ........................................................................ 199 

d. Excerpts from Documents Showing OTS Repeatedly Identified Washington Mutual and Long Beach Underwriting/Lending Deficiencies, 

chart prepared by the Permanent Subcommittee on Investigations. ....... 200 

e. Excerpts from Documents Showing OTS Repeatedly Identified Washington Mutual and Long Beach Risk Management Deficiencies, chart 

prepared by the Permanent Subcommittee on Investigations. .................. 202 

f. Excerpts from Documents Showing Slow and Weak OTS Enforcement 

at Washington Mutual, chart prepared by the Permanent Subcommittee 

on Investigations. ........................................................................................... 204 

g. Excerpts from Documents Showing OTS Impeding FDIC’s Oversight, 

chart prepared by the Permanent Subcommittee on Investigations. ........ 206 

h. Excerpts from Documents Showing OTS Internal Views on Inability 

to Stop Poor Quality Lending Practices, chart prepared by the Permanent Subcommittee on Investigations. ........................................................ 208 

i. WaMu Dodging Compliance with Tougher Lending Standards: Nontraditional Mortgage Guidance, chart prepared by the Permanent Subcommittee on Investigations. ........................................................................ 210 

j. Washington Mutual Regulators Timeline, chart prepared by the Permanent Subcommittee on Investigations. ......................................................... 211 

Documents Related to OTS Failure to Address Long Term Safety 

and Soundness: 

2. Office of Thrift Supervision, 2004 Examination Handbook (Proactive regulatory supervision should evaluate future needs and potential risks to 

ensure the success of the thrift system in the long term.)(excerpt). ............... 213 

3. OTS internal email, dated June 2005, re: Revised ALLL Finding Memo 

Response (In summary, the extended time frames (1–2 month extensions) 

for implementation of various portions of the response to not appear to 

be significant due to the fact that they are only 1–2 month extensions 

of management’s own initiatives and we don’t want to penalize management for their own initiatives.). ....................................................................... 218 

4. OTS internal email, dated July 2005, re: Mortgage Survey (I would not 

send this to WAMU without more preparation. . . . But the bottom line 

is that we reviewed the risk and communicated our concerns to management already. To ask for this similar information in the survey would 

almost be like one hand didn’t know what the other was doing. My 

preference would be shorten the survey quite a bit and start with higher 

level information, and then drill down on individual exams.). ..................... 219 

5. OTS internal email, dated September 2005, re: WSJ Article: re: tightening 

mtg stds (As I have mentioned to some, by the time we come out with 

regulatory guidance, moral suasion and market/media attention will have 

already done the trick, at least for the regulated entities!). ........................... 220 

6. OTS internal email, dated September 2005, re: Meeting (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.). ........................................................... 224 

7. OTS internal email, dated June 2006, re: Talk (My own fear is that 

we may not have done enough to communicate to you why we feel that 

the few negative things we have brought up through findings memos 

and meetings, . . . are not so serious they . . . negate the ongoing good 

progress in making improvements in a manner that seems reasonable 

given the size, complexity, and status of the institution.). .............................. 228 


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8. OTS internal email, dated May 2007, re: Fair Lending Findings Memo 

(Apropos the lack of tools—that is a reality. I’m willing OK with your 

changes, but you need to realize that I feel very strongly about this. 

If the agency could be subject to criticism for the lack thereof, my feeling 

is that is appropriate and it is high time we got such tools. . . . I 

do not believe that sweeping this under the rug is necessary.). ..................... 230 

9. Draft OTS Exam Findings Memo of Washington Mutual Bank, dated 

May 31, 2007, re: Compliance Management Program (WaMu’s compliance 

management program has suffered from a lack of steady, consistent leadership. Dick Stevenson . . . is the bank’s ninth compliance leader since 

2000.). ................................................................................................................ 231 

10. OTS Exam Findings Memo of Washington Mutual Bank, dated June 

7, 2007, re: Broker Credit Administration (There are 14 FTEs in BCA 

handling approximately 34,283 brokers.). ....................................................... 233 

11. OTS internal email, dated October 2007, re: May 3 memo (. . . I sent 

out an email on May 3, 2007, that announced a number of changes. 

. . . Now that we are 5 months into this new process, I am not yet 

comfortable that we have made sufficient progress toward accomplishing 

these goals.). ...................................................................................................... 244 

12.a. OTS Exam Findings Memo of Washington Mutual Bank, dated June 

19, 2008, re: Loan Fraud Investigation (. . . ‘‘control gaps were identified . . . that did not sufficiently mitigate loan fraud exposure.’’ . . . 

raised questions as to whether similar conditions are systemic throughout the organization, particularly since many of the issues raised have 

either previously been raised internally or have been noted at the current 

or at prior OTS examinations. . . .). ............................................................ 246 

12.b. Meeting with Board of Directors, July 15, 2008, OTS Comprehensive 

Examinations of Washington Mutual Bank, (Management/Board Performance and Oversight Unsatisfactory . . . performance exacerbated 

by conditions within management’s control.)(excerpt). ............................... 249 

13. OTS correspondence to Washington Mutual Bank, dated September 25, 

2008, re: Appointment of a Receiver. ............................................................... 254 

14. OTS internal email, dated October 2008, re: West Region Update (You 

know, I think that once we (pretty much all the regulators) acquiesced 

that stated income lending was a reasonable thing, and then compounded 

that with the sheer insanity of states income, subprime, 100% CLTV, 

lending, we were on the figurative bridge to nowhere.). ................................. 261 

Documents Related to Slow and Weak OTS Enforcement: 

15. OTS internal email, dated June 2003, re: OTS Memo 7 (It is clear from 

my experience that changes seem to progress slowly at WAMU so I don’t 

know if we can expect faster progress.). ........................................................... 265 

16. OTS High Risk Meeting Notes, West Region, undated, (The Director 

(while pacing) was very concerned over all the management changes and 

putting inexperienced people in charge of critical areas. Region agreed 

with concerns.). ................................................................................................. 267 

17. OTS Exam Findings Memo of Washington Mutual Bank, dated May 

12, 2004, re: SFR Loan Origination Quality (Several of our recent examinations concluded that the Bank’s single family loan underwriting was 

less than satisfactory due to excessive errors in the underwriting process, 

loan document preparation, and in associated activities.). ............................ 269 

18. OTS internal email, dated April 2004, re: Locale (In any event, a paragraph very clearly tells WAMU they need to identify originated subprime 

in both home and consumer loans and demonstrate compliance with the 

interagency policy statement as amended Jan 31 2001.). .............................. 275 

19. OTS internal email, dated April 2005, re: Fitch—LBMC Review (Some 

insight on the subprime product at LBMC for ALLL and high risk lending 

initiative.). ......................................................................................................... 277 

20. OTS internal email, dated May 2005, re: LBMC Fair Lending (I would 

not, however, say that we could feel comfortable with their moving LBMC 

under the thrift without some conditions. . . . Completion of that plan— 

and satisfactory corrective actions—would be an appropriate condition.). ... 278 


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21. FDIC/Washington State Exam Findings Memo of Washington Mutual 

Bank, dated May 20, 2004, re: Single Family Residential Review (The 

loan file review reflected inconsistencies in underwriting and documentation practices, particularly in the brokered channel. Additionally, examiners noted that Washington Mutual’s SFR portfolio has an elevated level 

of risk due to a significant volume of potential negative amortization 

loans, high delinquency and exception rates, and a substantial volume 

of loans with higher risk characteristics, such as low FICO scores.). ........... 280 

22. OTS Exam Findings Memo of Washington Mutual Bank, dated May 

20, 2005, re: Allowance for Loan and Lease Loss Modeling (Management 

is in process of validating and calibrating LPRM version 3.1, but the 

validation continues to show a significant disparity in actual and projected SFR loss rates.). ...................................................................................... 285 

23. OTS Exam Findings Memo of Washington Mutual Bank, dated June 

1, 2005, re: Corporate Risk Oversight (Corporate Risk Oversight (CRO) 

is responsible for independently evaluating credit and compliance risk 

across the company and assessing the effectiveness of risk management 

processes relative to established strategic and risk tolerance objectives. 

. . . Most of the findings are considered ‘‘criticisms’’ due to the overall 

significance of CRO activities and the fact that we have had concerns 

with quality assurance and underwriting processes within home lending 

for several years.). ............................................................................................. 290 

24. OTS Exam Findings Memo of Washington Mutual Bank, dated June 

2, 2005, re: LBMC Underwriting Review (Our review disclosed underwriting deficiencies that require management’s attention.). .......................... 297 

25. OTS internal email, dated June 2005, re: LBMC downgrades (. . . this 

business is simply too high profile for us not to be sure that processes 

are in place to assure there will be no repeat of the performance of 

these earlier vintages . . . both in securitizations and in the originations 

they will hold for investment.). ........................................................................ 303 

26. OTS Exam Findings Memo of Washington Mutual Bank, dated June 

3, 2005, re: Single Family Residential Home Loan Review (We continue 

to have concerns regarding the number of underwriting exceptions and 

with issues that evidence lack of compliance with Bank policy.). ................. 304 

27. OTS Exam Findings Memo of Washington Mutual Bank, dated June 

3, 2005, re: Loan Origination Quality (The redesigned incentive compensation program for LFCs still does not satisfactorily reward excellence in 

loan origination quality. Finding 3 in the 2004 OTS Memo No. 5 was 

closed because an improved design for the incentive compensation program 

was devised. However, the program was not implemented as designed.). .... 311 

28. OTS internal memorandum, dated June 3, 2005, re: Long Beach Mortgage 

Corporation (LBMC) Review (Because of the high profile nature of the 

business of LBMC and its problematic history, we believe that any and 

all concerns regarding the subprime operation need to be fully addressed 

prior to any move.). ........................................................................................... 314 

29. OTS internal email, dated June 2005, re: S-S 2 response (They agree 

to take all action required to correct the problem. The Target Completion 

Dates are not real timely but fine for WAMU.) ............................................... 317 

30. OTS internal email, dated November 2005, re: Meeting (While we may 

(and have) questioned the reasonableness of these standards, they are 

all we have at this time. If our tolerance for some reason is now a 

lot lower than our handbook standards, it would be nice to have this 

clarified.). .......................................................................................................... 318 

31. OTS internal memorandum, dated December 21, 2005, re: (Long Beach 

Mortgage Corporation (LBMC)). ...................................................................... 320 

32. OTS internal email, dated January 2006, re: WAMU Commitment letter 

(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.). ............................................................................... 328 

33. OTS Exam Findings Memo of Washington Mutual Bank, dated May 

23, 2006, re: Home Loan Underwriting (. . . we did note various underwriting errors that continue to require management’s attention.). ................ 329 


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34. WaMu internal email, dated May 2006, re: OTS Memo 12—Home Loans 

Underwriting (. . . John was able to get the OTS to see the light and 

revise the Underwriting rating to a Recommendation.). ................................ 335 

35. OTS Exam Findings Memo of Washington Mutual Bank, dated May 

25, 2006, re: Loan Underwriting Review—Long Beach Mortgage (Overall, 

we concluded that the number and severity of underwriting errors noted 

remain at higher than acceptable levels.). ....................................................... 337 

36. OTS internal email, dated June 2006, re: Findings Memos (We gave 

them the benefit of the doubt based on commitments and some progress 

when we allowed them to bring LBMC into the bank, but if I am understanding the finding from this exam correctly, we have the same type 

of concerns remaining 6 months later.). .......................................................... 342 

37. Draft OTS Exam Findings Memo of Washington Mutual Bank, dated 

May 31, 2007, re: Compliance Management Program. .................................. 344 

38. OTS Exam Findings Memo of Washington Mutual Bank, dated June 

19, 2007, re: Allowance for Loan and Lease Losses on the 1–4 Single 

Family Residential Loan Portfolio. .................................................................. 349 

39. OTS internal email, dated June 2007 re: Compliance rating (They aren’t 

interested in our ‘‘opinions’’ of the program. They want black and white, 

violations or not.). ............................................................................................. 357 

40. OTS internal email, dated November 2007, re: Wamu appraisal review 

(The fact that coo rotella runs the business units, was the champion 

of cost cutting and use of third party appraisal outsourcing, and continues 

to downplay the various business units’ failing (compliance, bsa, flood 

and now maybe appraisal) by diverting blame to others (risk management 

and now counsel) leaves me uncomfortable.). ................................................. 358 

41. OTS correspondence to Washington Mutual Bank, dated February 27, 

2008 (This letter is to advise you that the Office of Thrift Supervision 

(OTS) is adjusting downward the composite rating for Washington Mutual 

Bank . . . from a ‘‘2’’ to a ‘‘3,’’ effective today.). .............................................. 360 

42. OTS internal email, dated February 2008, re: Kerry Killinger (. . . my 

feeling that OTS would be reasonable in providing adequate time over 

the business cycle for WAMU management to make improvements, particularly in earnings, and that it would be my hope that we would not 

place unrealistic expectations or demands to make changes/improvements 

over unrealistic time periods.). ......................................................................... 362 

43. OTS internal email, dated June 2008, re: Call from Killinger (I further 

told Kerry that as a matter of policy, OTS believes that ‘‘3’’ rated institutions, especially repeat ‘‘3’’s, warranted informal supervisory action and 

consideration of formal action. ........................................................................ 364 

44. OTS/WaMu email, dated July 2008, re: MOU vs. Board Resolution (We 

almost always do an MOU for 3-rated institutions, and if someone were 

looking over our shoulders, they would probably be surprised we don’t 

already have one in place.). .............................................................................. 366 

45. OTS internal email, dated July 2008, re: WAMU MOU (It is, unfortunately, another example of a benign supervisory document.). ........................ 368 

46. OTS internal email, dated August 2008, re: Wamu MOU-Board provisions 

(He [Ben] is concerned that the board is not getting sufficient, consistent, 

or understandable information/reports from management. This was confirmed by the board’s self-assessment where they acknowledged that they 

did not have a full understanding of the bank’s risks.). ................................ 370 

47. OTS internal email, dated August 2008, re: WAMU (What is the status 

of the ROE? When will it be mailed? What is the status of the MOU? 

I feel like we are stuck in quicksand here.). .................................................... 371 

48. OTS, WaMu Ratings of 3/343432, September 11, 2008 (The bank’s overall 

unsatisfactory condition is primarily the result of the poor asset quality 

and operating performance in the bank’s major Home Loan Group line 

of business. . . . The deteriorating asset quality in the Home Loans Group 

is accompanied by inadequacies in risk management, internal controls, 

and oversight that made the bank more vulnerable to the current housing 

and economic downturn. The examination criticized past liberal home 

loan underwriting practices and the concentrated delivery of nontraditional mortgage products to higher risk geographic markets.). ..................... 374 


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Documents Related to OTS Impeding FDIC’s Oversight: 

49. OTS internal email, dated January 2006, re: FDIC participation (The 

message was crystal clear today. Absolutely no FDIC participation on 

any OTS 1 and 2 rated exams.). ...................................................................... 389 

50. OTS internal email, dated June 2006, re: wm board meeting (Didn’t 

even cross my mind that we would have an issue with their attendance 

at the board meeting.). ...................................................................................... 390 

51.a. FDIC internal memorandum, dated June 14, 2005, re: Potential Impact 

of a Possible Housing Bubble on Washington Mutual Bank. ..................... 392 

51.b. FDIC internal memorandum, dated July 5, 2005, re: Insured Institutions’ Exposure to a Housing Slowdown. ..................................................... 398 

51.c. FDIC internal email, dated September 2006, re: OTS re: WAMU (The 

OTS must really be afraid of what we might come across, but bottom 

line is we need access to the information.). ................................................... 404 

52.a.-d. Correspondence between FDIC and OTS, dated October 2006-January 2007 regarding FDIC participation in OTS examinations of 

Washington Mutual Bank. .................................................................. 406–410 

53. FDIC internal email, dated October 2006, re: wamu quarterly (Please 

read info about OTS denying us space and access to information. The 

situation has gone from bad to worse.). ........................................................... 411 

54. FDIC internal email, dated January 2007, re: wm exam (I’m just not 

relishing another round of ‘‘No.’’ Well, let them make fools of themselves 

again!). ............................................................................................................... 413 

55. FDIC internal email, dated February 2007, re: wamu (. . . here we go 

again. This is unnecessary hair splitting by OTS Seattle, and does not 

comport with the approval we got from RD Finn on participation.). ............ 414 

56. OTS internal email, dated March 2008, re: Call from Shelia this evening 

(Shelia was complimentary of OTS’s presentation and commented about 

our being on top of the issues. I would like to think she meant it, but 

I’m always a bit skeptical of her compliments.). ............................................. 415 

57. FDIC internal email, dated April 2007, re: Meeting with OTS Regional 

Management (. . . Finn pushed back on his previous approval of our 

participation in the 2007 exam targets, specifically as to our ability to 

work loan files alongside OTS examiner, and we were particularly interested in WAMUs compliance with nontraditional mortgage guidance.). ...... 416 

58. OTS internal email, dated March 2008, re: WAMU (. . . could you . . . 

have someone on your staff put together a position paper on the need 

for Treasury to stay removed from the supervision of wamu, including 

any attempt to influence our supervision of wamu’s capital raising process.). .................................................................................................................... 417 

59. OTS internal email, dated July 2008, re: Updates (I have read the attached letter from the FDIC [to OTS, dated July 21, 2008] regarding 

supervision of Wamu and am once again disappointed that the FDIC 

has confused its role as insurer with the role of the Primary Federal 

Regulator. Its letter is both inappropriate and disingenuous.). ..................... 419 

60. OTS internal email, dated July 2008, re: Response to July 21 letter 

RE: WAMU (attaching July 22, 2008 letter from OTS to FDIC). ................. 424 

61. FDIC internal email, dated July 2008, re: WAMU Briefing Paper (The 

bank’s credit culture emphasized home price appreciation and the ability 

to perpetually refinance, including the ability to sell non performing assets. The bank’s underwriting standards were therefore lax as management originated loans under a securitization model to transfer risk to 

the market.). ...................................................................................................... 427 

62. OTS internal email, dated August 2008, re: WaMu (Sheila Bair just 

reported on a conference call that there was a rating difference on this 

exam. Can you fill us in.). ................................................................................ 429 

63. FDIC/OTS email, dated August 2008, re: WaMu Rating (You asked me 

to hear out wamu. I hope that you would also hear out our examination 

staff if it comes to that). .................................................................................... 431 


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64. FDIC internal email, dated August 2008, re: WAMU (Major ill will at 

WAMU meeting yesterday caused by FDIC suggestion in front of WAMU 

management that they find a strategic partner. Reich reportedly indicated 

that was totally inappropriate and that type of conversation should have 

occurred amongst regulatory agencies before it was openly discussed with 

management.). ................................................................................................... 432 

65. OTS internal email, dated August 2008, re: WAMU Update and FW: 

FDIC Ratings (The headbutting is currently going on in DC between 

myself and Shelia Bair.). .................................................................................. 433 

66. FDIC/OTS email, dated August 2008, re: W (I should not have to remind 

you the FDIC has no role until the PFR (i.e. the OTS) rules on solvency 

and the PFR utilizes PCA.). ............................................................................. 435 

67. FDIC internal email, dated August 2008, re: Updated Earnings Assessment/Capital Analysis (FYI, it looks like the region will be well armed 

for Thursday’s discussion with the OTS. . . . I find it troubling that 

the primarily [sic] regulator is able to conclude on capital without digging 

into these numbers. We have been asking for the forecasted balance sheet 

for months now and this is the first we have them. Our skeptical assessment is essentially forcing them to dig deeper behind the numbers. Which 

they should have done in the first place before deciding on a capital 

rating.). .............................................................................................................. 437 

68. FDIC/OTS email, dated September 2008, re: Rating Disagreement (I cannot believe the continuing audacity of this woman.). ..................................... 439 

69. OTS internal email, dated September 2008, re: Wamu—need your help 

(The purpose of the meeting would be to discuss the various views of 

the institutions’s risk profile, current actions under consideration by the 

FDIC, and possible capital considerations. We would control the meeting 

and ensure that we have no repeat of the inappropriate behavior displayed 

by some of the FDIC in our last session with the bank. This is my 

idea, not the FDIC’s idea.). ............................................................................... 440 

Documents Relating to Nontraditional Mortgage Guidance: 

70. OTS internal email, dated March 2006, (I am nervous about us putting 

disproportionate pressure on institutions to increase start rates and decrease the start rate/fully-indexed rate differential.). .................................... 441 

71. OTS internal email, dated July 2006, re: NTM Open Issues (We should 

consider going on the offensive, rather than defensive to refute the OCC’s 

positions:). .......................................................................................................... 443 

72. OTS internal email, dated August 2006, re: Latest AMP Guidance (Market impact—MTA hybrid IO ARMS are a huge product for Wamu (I’m 

trying to get current stats as we speak). I would imagine there would 

be a fairly big impact on their lending in this product if they were 

required to underwrite to full neg-am over the life of the loan, assuming 

borrower makes minimum payment ALWAYS. We have dealt with this 

product longer than any other regulator and have a strong understanding 

of best practices. I just don’t see us taking a back seat on guidance 

that is so innate to the thrift industry. I wouldn’t feel one bit disappointed 

if we had to go it alone on this one.). .............................................................. 448 

73. Washington Mutual, Alternative Mortgage Guidance Implementation Plan, 

October 2006 (Recap of OTS Meeting—A: OTS is still gathering FAQ 

from their constituency and expects they may issue a position paper (at 

some undetermined future date), however their initial response was that 

they view the guidance as flexible. They specifically pointed out that 

the language in the guidance says ‘‘should’’ vs. ‘‘must’’ in most cases 

and they are looking to WaMu to establish our own position on how 

the guidance impacts our business processes.). ............................................... 453 

74. OTS Option ARM Neg Am Review, Workprogram 212A(1) & Nontraditional Mortgage Guidance Review, undated, (Wamu states that they do 

not engage in underwriting practices that heighten the need for a borrower 

to rely on the sale or refinancing of the property to make amortizing 

payment on the loans; and therefore they are not making collateral based 

loans. However the liberal use of the Low-Doc/Stated Income loans raises 

the question of reliability of the declared income as being the primary 

repayment source.) ............................................................................................ 462 


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75. WaMu internal email, dated March 2007, re: Follow-up information to 

last evening’s call regarding subprime interagency guidance, etc. . . . 

(If we implement the NTM changes to all loans, then we’ll see additional 

drop of 33% of volume.). ................................................................................... 469 

76. OTS internal email, dated March 2007, re: NTM Gap Analysis (I noted 

that several of our institutions make NINA loans. That, in my humble 

opinion is collateral dependent lending and deemed unsafe and unsound 

by all the agencies.). .......................................................................................... 472 

77. OTS internal email, dated April 2007, re: Wamu NTM Gap Analysis 

(. . . it’s only been a few months since the guidance came out so they 

may need more time to make the necessary adjustments.). ............................ 474 

Other Documents: 

78. OTS internal email, dated May 2007, re: Lunch Friday (Kerry Killinger, 

the CEO of Washington Mutual (WaMu) will be in town Friday and 

wants to have a lunch meeting. He’s my largest constituent assetwise.). ...... 477 

79. OTS internal email, dated May 2007, re: NINA Loans (I note that WAMU 

makes a significant amount of No-doc loans. OTS policy states that nodoc loans are unsafe and unsound.). ............................................................... 478 

80. SEC correspondence to OTS, dated June 24, 2008, re: In the Matter 

of Washington Mutual, Inc. (. . . the SEC staff was advised by Washington Mutual’s counsel, Josh Levine, that the OTS instructed Washington 

Mutual not to provide documents to the Commission relating to the OTS’s 

review of Washington Mutual’s appraisal processes or any communications 

between the OTS and Washington Mutual.). .................................................. 481 

81. FDIC internal email, dated April 2008, re: Findings from Review of 

WAMU Basel II models (HELOC and credit cards) (It is clear, however, 

that OTS at all levels is very aware of the political clout of WAMU 

within their agency.). ........................................................................................ 483 

82. Office of Inspector General, Department of the Treasury/Federal Deposit 

Insurance Corporation, Evaluation of Federal Regulatory Oversight of 

Washington Mutual Bank, Report No. EVAL–10–002, April 2010. ............. 484 

83. U.S. Government Accountability Office Testimony, FINANCIAL REGULATION: Review of Regulators’ Oversight of Risk Management Systems 

at a Limited Number of Large, Complex Financial Institutions, March 

18, 2009, GAO–09–499T, (. . . regulators had identified numerous weaknesses in the institutions’ risk management systems before the financial 

crisis began. . . . However, the regulators said that they did not take 

forceful actions to address these weaknesses, such as changing their assessments, until the crisis occurred because the institutions had strong 

financial positions and senior management had presented the regulators 

with plans for change.). .................................................................................... 582 

84. Center for Responsible Lending Report, The Second S&L Scandal—How 

OTS allowed reckless and unfair lending to fleece homeowners and cripple 

the nation’s savings and loan industry, by Michael Hudson and Jim 

Overton, January 2009. .................................................................................... 614 

85. WaMu internal email, dated, February 2005, re: Moving to Closure on 

Alliance Agreement (We agreed that the Freddie 65% minimum share 

(100% of option arms) proposal offers us between 26MM and 37MM on 

benefit depending on volume. . . . 39% of our 2005 home loans gain 

on sale comes from conforming option arms sales.). ...................................... 643 

86. Washington Mutual, Pre-Meeting for Fannie Mae, March 12, 2004. ............ 644 

87. Freddie Mac—WaMu Meeting, July 28, 2005. ................................................ 656 

88. WaMu internal email, dated December 2004, re: Risks/Costs to Moving 

GSE Share to FH. ............................................................................................. 659 

89. WaMu internal email, dated April 2006, re: Business Arrangement w/ 

Freddie Mac (Highlights of 2006 Freddie Mac Business Proposal). ............. 662 

90. Washington Mutual, Fannie Mae Alliance and Freddie Mac Business 

Relationship Proposal. ...................................................................................... 663 

91. GSE Forum, September 29, 2005 (Objectives of the Freddie/Fannie Business Agreement). ................................................................................................ 667 


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92. WaMu—Excess Liquidity Forecast—‘Break the Bank’ (Total excess liquidity was $47BN at the end of June 2008 which is consumed by the end 

of October as a result of significant deposit runoff and loss of wholesale 

funding sources). ............................................................................................... 680 

93. Correspondence from FDIC to the Permanent Subcommittee on Investigations, dated September 17, 2010, regarding Memorandum of Understanding among the FDIC and other bank regulators. ................................. 681 

94. SEALED EXHIBIT: 2004–07 OTS Reports of Exam; 2007–09 FDIC Large 

Insured Depository Institution (LIDI) Reports; and 2008 FDIC Board 

Transcripts. ....................................................................................................... *

* Retained in the files of the Subcommittee. 


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(1) 

WALL STREET AND THE FINANCIAL CRISIS: 

THE ROLE OF BANK REGULATORS 

VOLUME 2 OF 5 

FRIDAY, APRIL 16, 2010 

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:37 a.m., in room 

SD–106, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. 

Present: Senators Levin, Kaufman, and Coburn. 

Staff Present: Elise J. Bean, Staff Director/Chief Counsel; Mary 

D. Robertson, Chief Clerk; Allison F. Murphy, Counsel; Zachary I. 

Schram, Counsel; Adam Henderson, Professional Staff Member; 

Nina E. Horowitz, Detailee (GAO); Jennifer Auchterlonie, Detailee 

(DOJ); Christopher Barkley, Staff Director to the Minority; Anthony G. Cotto, Counsel to the Minority; Ted Schroeder and Nhan 

Nguyen (Senator Kaufman); and Clark Porter (Senator McCaskill). 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good morning, everybody. This is the second in 

a series 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 could not 

have done what they did unless their regulators let them. Today’s 

hearing asks why Federal bank regulators saw the shoddy lending 

practices, high-risk lending, and 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 (OTS). WaMu was the 

largest single financial institution 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 percent of the OTS budget. Because WaMu’s deposits were insured, the Federal Deposit Insurance Corporation (FDIC), served as a back-up regulator whose 

focus was on safeguarding the Deposit Insurance Fund. 


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1See Exhibit No. 1i, which appears in the Appendix on page 210. 

Like other bank regulators, OTS was supposed to serve as our 

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 OTS and 

FDIC oversight of Washington Mutual. Together they disclose an 

ineffective bank regulatory culture, hindered by weak standards, 

lax oversight, and agency infighting. 

Before its fall, Washington Mutual held itself out as a well-run, 

prudent bank 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,1 shows 

how over a 5-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 loans in favor of high-risk, 

subprime, Option ARM, and home equity loans. Low-risk loans 

shrunk, as we can see from that chart, from two-thirds of the 

bank’s originations to one-quarter. High-risk loans grew from onethird to three-quarters of the bank’s home loan business. 

Those high-risk loans were problem plagued. Tuesday’s hearing 

examined voluminous evidence of WaMu internal reviews finding 

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 

percent and 83 percent. Another WaMu investigation 2 years later 

found that one of the office’s fraud rate was 62 percent. At still another loan office, a sales associate acknowledged ‘‘manufacturing’’ 

documents to support quick loan closings. 

Washington Mutual’s shoddy lending practices affected more 

than its own operations. WaMu and Long Beach sold or securitized 

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 

September 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 system like polluters dumping poison 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 loans, and substandard securitization 

practices but did little to stop it. The documents reviewed by the 

Subcommittee show that OTS knew 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 2005. OTS knew about 


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1See Exhibit No. 1c, which appears in the Appendix on page 199. 

WaMu’s shoddy lending practices, having repeatedly identified 

problems with the banks operations and examination reports year 

after year. Every time OTS listed a problem, it also told WaMu to 

take corrective action. But when the problem did not get fixed, OTS 

failed to force change. Instead, OTS wrung its hands as the bank 

sank into deeper and deeper waters. 

This chart, Exhibit 1c,1 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 are a few. Let 

us start with the year 2004. ‘‘Underwriting . . . remains less than 

satisfactory.’’ ‘‘[N]ot . . . successful in effecting change.’’ Then in 

2005, ‘‘Underwriting exceptions evidence lack of compliance with 

bank policy. Our concerns are increased with the risk profile of the 

portfolio. Deterioration in these [Long Beach] older securitizations 

is not unexpected.’’ 

Now, those 2005 findings came from a report on examination 

which stated more broadly, ‘‘We remain concerned with the number 

of underwriting exceptions and with issues that evidence lack of 

compliance with bank policy.’’ 

‘‘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 profile is considered, including concentrations in Option ARM loans to higher-risk borrowers, in low and limited documentation loans, and loans with subprime or higher-risk characteristics.’’ 

Now, unfortunately, the level of deficiencies were left unchecked. 

In fact, those deficiencies continued to run rampant. Here is 2006. 

‘‘[C]ontinuing weakness in . . . loan underwriting at Long Beach.’’ 

‘‘Numerous instances of underwriter exceeding guidelines . . . 

[and] errors.’’ 

Now 2007, ‘‘[T]oo much emphasis on loan production . . . at the 

expense of loan quality.’’ ‘‘[S]ubprime underwriting practices remain less than satisfactory.’’ ‘‘[U]nderwriting exceptions and errors 

remain above acceptable levels.’’ 

And then, finally, in 2008, the year the bank failed, ‘‘[N]ot in 

compliance with the Interagency Guidance on Nontraditional Mortgages.’’ ‘‘High SFR [single family residential loan] losses due in 

part to poor underwriting.’’ ‘‘[A]ctions should have been taken sooner.’’ 

Those are all OTS’ observations about problems at WaMu year 

after year. In 2008, the year the bank collapsed, OTS said, 

‘‘[A]ctions 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 board of directors 

for 5 straight years. Each year, WaMu promised to do better, but 

it did not, and OTS never took action to change that. 

At our Tuesday hearing, even WaMu officials expressed surprise 

at OTS’ reluctance to act. WaMu’s chief risk officer, Jim Vanasek, 

testified that, ‘‘What I cannot explain is why the superiors in the 

agencies did not take a tougher tone with the bank given the degree of negative findings.’’ Now, this is WaMu’s own risk officer. 


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1See Exhibit No. 1b, which appears in the Appendix on page 198. 

‘‘There seemed to be a tolerance there or a political influence on 

senior management of those agencies that prevented them from 

taking a more active stance. By a more active stance,’’ he said, ‘‘I 

mean putting the bank under letters of agreement and forcing 

change.’’ 

Mr. Vanasek’s successor as chief risk officer at WaMu, Ron 

Cathcart, testified on Tuesday: ‘‘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 other regulators.’’ 

Now, regulations work best when regulators stay at arm’s length 

from those that 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 1b,1 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 is, to their staff. That is just a few that I have read. 

Now, the documents show that more than one OTS examiner expressed misgivings about these lending practices but never got the 

support of OTS management to end them. One WaMu examiner 

wrote that stated income loans—those are loans in which borrowers state their income without any verification—were ‘‘a flawed 

product that can’t be fixed and never should have been allowed in 

the first place.’’ 

Another OTS examiner tried to object to so-called no income and 

no assets (NINA) loans. That means loans in which there is no income and no assets numbers required to be provided by the borrower. An OTS policy official agreed, writing in a 2007 email that 

NINA loans are ‘‘collateral dependent’’ lending and deemed unsafe 

and unsound by all the agencies. But the OTS West Region dismissed that analysis, allowing NINA loans, and called the OTS policy official a ‘‘Lone Ranger.’’ 

Still another example involves Washington Mutual’s flagship 

product, 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 negatively 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 found that WaMu’s 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 ‘‘enhance its system to emphaVerDate Nov 24 2008 13:02 Nov 02, 2010 Jkt 057320 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 P:\DOCS\57320.TXT SAFFAIRS PsN: PAT

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1See Exhibit No. 78, which appears in the Appendix on page 477. 

size loan quality’’ and closed the finding based on WaMu’s promise 

to redesign its pay system. In 2005, OTS discovered that WaMu 

had not changed its compensation plan and again asked the bank 

to fix it. 

Well, 2008 came and WaMu discovered rampant fraud at one of 

its top loan producing offices, and its own staff faulted pay incentives that put loan speed before loan quality. In 4 years, WaMu 

had not fixed the problem. 

OTS had multiple enforcement tools to force change at WaMu. It 

could have required, for example, 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, chronicling the bank’s 

failures rather than preventing them. OTS did not 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, a 2007 email by OTS Director John Reich, Exhibit 78,1 supplies part of the answer. He 

wrote to his staff, ‘‘Kerry Killinger, the CEO of Washington Mutual 

(WaMu) will be in town Friday and wants to have a lunch meeting. 

He is my largest constituent. . . .’’ 

OTS viewed WaMu as its constituent, losing sight of the fact that 

OTS’ real constituents were not the banks that it oversaw but the 

American people that it was supposed to protect from unsafe and 

unsound banking practices. 

A 2005 email by the OTS examiner-in-charge at Washington Mutual is also telling. The examiner-in-charge wrote to his bosses, 

‘‘[T]his 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—OK, ‘chastising’—through ROE on examination 

and meetings, since they have not been really adversely impacted 

in terms of losses.’’ 

Think about that. The WaMu bank examiner felt he could not 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 July 2007, after two credit rating agencies 

suddenly downgraded hundreds of subprime mortgage-backed securities, 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 

$1 billion loss in the first quarter of 2008. 

Finally, in late February 2008, OTS downgraded the bank from 

a 2 to a 3 so-called ‘‘capital, asset quality, management, earnings, 

liquidity, and sensitivity’’ (CAMELS) rating. Now the CAMELS ratVerDate Nov 24 2008 13:02 Nov 02, 2010 Jkt 057320 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 P:\DOCS\57320.TXT SAFFAIRS PsN: PAT

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ing 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 market risk. It uses a scale of 1 to 5, with 1 being the best rating and 5 the worst. The ratings are normally 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 inexplicably did not. Instead, OTS 

waited until the next month and accepted a non-public 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 crisis, and OTS’ own policy. 

In the meantime, the FDIC expressed increasing concerns about 

the bank with its internal Large Insured Deposit Institution (LIDI) 

reports showing the bank to be deteriorating. FDIC told the OTS 

that the bank should consider an outside purchaser. In March 

2008, WaMu invited potential buyers to the bank to review its internal data. In April, WaMu announced it had lost another $3.2 billion in the second quarter. JPMorgan 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 West 

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 15, 2008, Lehman Brothers declared bankruptcy, and over the next 8 days 

WaMu depositors withdrew another $17 billion from the bank, triggering a liquidity crisis. 

On September 7, 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 18, 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 25, 2008, due to the bank’s intensifying liquidity 

problems, the regulators finally pulled the plug. They felt the bank 

could not even make it to the end of the week, as their usual practice, instead moved on a Thursday. OTS closed Washington Mutual 

and appointed the FDIC as its receiver. That same day, the FDIC 

sold the bank’s assets and deposits to JPMorgan Chase for about 

$1.9 billion. 

Critics complain that WaMu should not have been shut down, 

that it should have received a taxpayer bailout under the TARP 

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, but on how regulators let the 

bank deteriorate to the point where its failure threatened to bust 

the Deposit Insurance Fund. 


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The fact is that our bank regulators failed us. 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 of sectorwide 

failures that played a major role in the 2008 financial crisis. 

The Washington Mutual case history makes it clear that OTS 

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 ‘‘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 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 complying with the guidance would reduce its loan volume by 33 percent because fewer borrowers would qualify for loans. In an email to colleagues, WaMu’s 

chief risk officer argued ‘‘in favor of holding off on implementation 

until required to act for public relations or regulatory reasons.’’ 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 

say no to WaMu, they show that OTS did have a backbone when 

it came to saying no to a fellow regulator. For many years, OTS 

and FDIC had shared a cooperative relationship in regulating 

Washington Mutual. In 2006, however, OTS practices abruptly 

changed. The West Region director told his staff, ‘‘The message was 

crystal clear today: absolutely no FDIC participation on any OTS 

1 and 2 rated exams.’’ Since WaMu had a 2 rating, OTS rejected 

the FDIC’s request to participate in a WaMu exam. 

OTS went further. It actually impeded FDIC’s examination efforts. It denied the FDIC examiner access to WaMu data, refused 

for several months to assign him space on site at the bank, and rejected his request to review bank loan files. When the FDIC urged 

OTS to lower WaMu’s rating, OTS resisted. OTS fought this turf 

war at the same time the largest financial institution it was supposed to regulate was losing value, capital, and deposits. 

Now, OTS also took a narrow view of its responsibility to the 

U.S. banking system as a whole. The documents show that OTS allowed Washington Mutual to engage in high-risk 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 


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1See Exhibit No. 19, which appears in the Appendix on page 277. 

of commerce would weaken the financial system and even come 

back to harm its own institutions. 

One OTS examiner commented on the agency’s approach in a 

2008 email as follows: ‘‘We were satisfied that the loans were originated for sale. SEC and Fed were asleep at the switch with 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, an OTS examiner sent an email to colleagues with this description of Long 

Beach’s mortgage-backed securities:1 ‘‘[I]ssues [securitizations] 

prior to 2003 have horrible performance. LBMC finished in the top 

12 worst annualized NCLs [net credit losses] in 1997 and 1999 

thru 2003. . . . At 2/05, LBMC was #1 with a 12% delinquency 

rate. Industry was around 8.25%.’’ Yet OTS took no steps to require 

Long Beach or Washington Mutual to clean up their securitizations 

or the bad loans underlying them. OTS just did not see it as part 

of its job, even while the flood of those toxic mortgages was slowly 

poisoning the secondary markets, leading to their collapse in 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 

did not 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 depositor 

base, and its reputation. The result was a bank failure, a financial 

system that it 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, for his insights, and I thank him again and his staff for 

their great support in this investigation. Dr. Coburn. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. Well, Mr. Chairman, thank you for the great 

work the Subcommittee staff in a bipartisan way have done on 

this. I will summarize my thoughts about this so that we can get 

to business, and then I have a comment that I think we ought to 

pay attention to, because what we heard from your testimony is 

that regulators 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 of when a bank captures its regulator rather than 

a regulator doing its job. OTS had done over 31,000 examination 

hours at WaMu, the equivalent of 15 full-time employees per year. 

The institution was not lacking in Federal regulators. Between 


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2003 and 2008, 545 separate findings of problems with WaMu were 

discovered and noted. Forty-one percent of those were still outstanding at the time of WaMu’s failure. 

OTS noted weak risk management and poor underwriting in 

2003. They never even took one informal enforcement action 

against WaMu until 2008, and that was only after experiencing 

losses on the 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 and approximately 452 thrift holding companies with assets 

of $5.5 trillion. OTS budget is derived from the fees it is charging 

its banks. WaMu was, by far, OTS’ largest regulated thrift, $330 

billion, during the time in 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, ineffectiveness. We need better incentives for both good investments and good regulation. 

Now, the questions that need to be raised. 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, we are going to put a financial reform bill on the floor and we won’t have even completed 

these hearings until April 27, which are critical to understanding 

what is going on. We have asked a formal commission, for which 

we are spending a lot of taxpayer money, to give us a report on 

what happened with the bank failures and the run and the economic collapse that we experienced, and its report isn’t even done 

until 8 months from now. I would put forward that we are about 

to make the same mistakes that we are claiming and accusing 

those that are coming before us of. 

So with that, Mr. Chairman, I look forward to hearing what our 

witnesses have to say. I will be in and out because of an ongoing 

Judiciary hearing at the same time and appreciate again the work 

that you have done and the other staff. 

Senator LEVIN. Thank you very much, Senator Coburn. 

Let me call on Senator Kaufman, who we are so delighted to 

have with us here on this Subcommittee. 

Senator KAUFMAN. I think the two of you have pretty well 

summed up the problem and I am really looking forward to the testimony and the questions and answers, so I pass. 

Senator LEVIN. Thank you so much, Senator Kaufman. 

Now we call on our first panel of witnesses for this morning’s 

hearing, Eric Thorson, the Inspector General at the Department of 

the 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 6, all witnesses who testify 

before this Subcommittee are required to be sworn, so we would 

ask you both to stand up and raise your right hand. 

Do you swear that the testimony that you are about to give will 

be the truth, the whole truth, and nothing but the truth, so help 

you, God? 

Mr. THORSON. I do. 

Mr. RYMER. I do. 


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1The prepared statement of Mr. Thorson appears in the Appendix on page 101. 

Senator LEVIN. Thank you very much. We will be using a timing 

system, so that a minute before the red light comes on, you will see 

the lights change 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 5 minutes, and I think, Mr. 

Thorson, we are going to have you go first and then Mr. Rymer. 

TESTIMONY OF HON. ERIC M. THORSON,1 INSPECTOR 

GENERAL, U.S. DEPARTMENT OF THE TREASURY 

Mr. THORSON. Chairman Levin, Senator Coburn, and Members of 

the Subcommittee, 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 2 years, our country has found itself immersed in 

a financial crisis that started when housing prices stopped rising 

and borrowers could no longer refinance their way out of financial 

difficulty. Since then, we have seen record levels of delinquency, 

defaults, foreclosures, and declining real estate values. As a result, 

securities tied to real estate prices have plummeted. Financial institutions have collapsed. In many cases, these financial institutions seemed 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 2,300 branches in 15 States with assets 

of $307 billion. 

A very brief background. My office performs audits and investigations of most Treasury bureaus and offices and that includes 

OTS. We are required to conduct what is known as a material loss 

review (MLR), whenever a failed Treasury regulated bank or thrift 

results in a loss of $25 million or more to the FDIC’s Deposit Insurance Fund. These MLRs determine the causes of an institution’s 

failure and assess the supervision exercised over that failed institution. 

Since the WaMu failure did not result in a loss, it did not trigger 

a MLR by my office. Nonetheless, given the size of WaMu, Mr. 

Rymer and I decided that a MLR-like review was warranted. We 

completed that review on April 9, 2010. I will discuss the principal 

findings regarding the causes of WaMu’s failure and OTS’ supervision of WaMu. Mr. Rymer will then follow with a discussion of 

FDIC’s role. 

WaMu failed because its management pursued a high-risk business strategy without adequately underwriting its loans or controlling its risks. WaMu’s high-risk strategy, combined with the housing and mortgage market collapse in mid-2007, left WaMu with 

loan losses, borrowing capacity limitations, and a falling stock 

price. In September 2008, WaMu was unable to raise capital to 

counter significant depositor withdrawals sparked by rumors of 

WaMu’s problems and other high-profile failures at the time. 

Mr. Chairman, as you pointed out in your opening statement, 

during the 8 days following the collapse of Lehman Brothers in 

2007, they experienced net deposit outflows of $16.7 billion. 


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With the severity and swiftness of the financial crisis, while that 

contributed 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 ARMs. They pursued this new strategy in anticipation 

of higher earnings and to compete with Countrywide Financial Corporation, who it viewed 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 non-traditional 

loan products that WaMu pursued, in 2006, WaMu estimated that 

its internal profit margin on Option ARMs was more than eight 

times that of government-backed loans, FHA or VA, and 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. 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’ supervision, WaMu was the largest institution under OTS’ regulation. At the time, it represented as much as 

15 percent of OTS’ fee revenue, and I should point out that like the 

other bank regulators, OTS is not taxpayer funded. It is funded 

with fees collected from those that it regulates. 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 through the early part 

of 2008, though supervisory efforts, however, did identify the core 

weaknesses that eventually led to WaMu’s demise—high-risk products, poor underwriting, and weak risk controls. Issues related to 

poor underwriting and weak 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 

satisfactory ratings to continue given that, over the years, they 

found the same things over and over. Even in WaMu’s asset quality 

in their 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 began experiencing losses in 2007 and into 2008 

that they began to downgrade their rating. 

When we asked OTS examiners why they did this, why they 

didn’t lower it earlier, they told us that even though 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 us 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 

has not experienced significant losses in the near term.’’ Given this 

guidance, those things should have been done much sooner. 

In fact, OTS did not take a single safety and soundness enforcement action until 2008, and even then, what they took was quite 


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1The prepared statement of Mr. Rymer appears in the Appendix on page 119. 

weak. As troubling as that was, we became even more concerned 

when we discovered that OTS West Region Director overruled 

issues raised by his own staff with regard to one of those enforcement actions, which you mentioned, Mr. Chairman, the March 

2008 Board Resolution. The Board Resolution 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. And as previously reported by my office, this was the same 

OTS official who also gave approval for IndyMac to improperly 

backdate a capital contribution to maintain its well-capitalized position just 2 months before IndyMac 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 Marla Freedman, Bob Taylor, Don 

Benson, Jason Madden, and Maryann Costello, because it is their 

work that allows me to come here and read these statements. 

I thank you for the opportunity to be here and will answer whatever questions you have. 

Senator LEVIN. Thank you. Your appreciation of staff, I know, 

comes from long experience on Capitol Hill some years ago. We remember you well. 

Mr. Rymer. 

TESTIMONY OF HON. JON T. RYMER,1 INSPECTOR GENERAL, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. RYMER. Good morning, Mr. Chairman, Ranking Member 

Coburn, and Senator Kaufman. Thank you for the opportunity to 

appear here today and present the results of the Federal Deposit 

Insurance Corporation Office of Inspector General work relating to 

Washington Mutual Bank. 

WaMu represents the largest bank failure to date. At the time 

of its failure, WaMu operated over 2,300 branches in 15 States and 

had assets of $307 billion. Because of WaMu’s size, the circumstances leading up to the failure, and the non-Deposit Insurance Fund losses, such as shareholder value, we initiated a review 

of WaMu to evaluate 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 in 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 key members of my 

staff who participated in this review. They are Peggy Wolf, Ann 

Lewis, Diana Chatfield, and Andriana Rojas, and they were led by 

Marshall Gentry. This is a very important project for our staff. 

Our resulting report is unique. It provides a comprehensive look 

at a failed institution from both the primary and back-up regulatory perspectives and has resulted in significant insights regarding the effectiveness of each and the interplay between the two. We 

released the report yesterday afternoon on our public Website. 


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As you just heard Mr. Thorson say, Treasury OIG focused on the 

causes of WaMu’s failure and the OTS supervision of the institution. My office focused on the FDIC’s role as insurer and back-up 

supervisor. My statement discusses an over-reliance on an institution’s safety and soundness, or CAMELS, rating and capital levels 

for the purpose of assessing the risk that the institution may pose 

to the Insurance Fund. My statement will also highlight the FDIC’s 

regulatory tools to mitigate risk, noting significant limitations in 

the interagency agreement related to information sharing and 

back-up examination authority. 

The FDIC was the deposit insurer for WaMu and was responsible 

for monitoring and assessing WaMu’s risk to the fund. Prior to its 

failure, WaMu was the eighth-largest institution insured by the 

FDIC. 

The FDIC conducted its required monitoring of WaMu for the period covered for our review, and that is 2003 to 2008, and it identified risks with WaMu that ultimately caused its failure, namely a 

high-risk lending strategy, liberal underwriting, and inadequate internal controls. 

FDIC monitoring indicated more risk at WaMu than was reflected in the OTS CAMELS ratings. FDIC also identified the significance of those risks earlier than OTS. However, the risks noted 

in the FDIC monitoring reports were not reflected in WaMu’s deposit insurance premium payments. This discrepancy occurred because the deposit insurance regulations rely on the CAMELS ratings and regulatory capital levels to gauge risk and assess related 

deposit insurance premiums. 

Because OTS examinations results rated WaMu as fundamentally sound from 2003 to 2007, increases in deposit insurance premiums were not triggered. Additionally, because of statutory limitations and congressionally-mandated credits, WaMu paid $51 million, or only about a quarter of the $216 million in deposit premiums it was assessed during the period of 2003 to 2008. The 

FDIC estimates that WaMu’s failure could have caused, as you said 

earlier, Mr. Chairman, a $41.5 billion loss to the Deposit Insurance 

Fund. 

The FDIC has three primary tools at its disposal to address the 

risk that it identified at WaMu. One is back-up examination authority. Two is challenging the OTS CAMELS ratings. And three 

is regulatory enforcement actions. The FDIC made use of some, but 

not all, of these tools. 

Back-up examination authority allows the FDIC to conduct its 

own examination of non-FDIC supervised institutions when the 

FDIC believes it is necessary to determine the condition of the institution for insurance purposes. The FDIC, OTS, Office of the 

Comptroller of the Currency, and the Federal Reserve entered into 

an interagency agreement in 2002 that provided guidance on invoking back-up examination authority, including the sharing of institution information. 

According to the terms of the interagency agreement, the FDIC 

needed to request permission from OTS to begin back-up examination authority. This would have allowed FDIC examiners to review 

information on-site at WaMu so they could better assess WaMu’s 

risk to the fund. The interagency agreement required FDIC to 


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1See Exhibit No. 14, which appears in the Appendix on page 261. 

prove to OTS that WaMu exhibited one of the following: A heightened level of risk, meaning WaMu was rated a 3, 4, or 5, and was 

undercapitalized, or material deteriorating conditions, or other adverse developments that could result in WaMu’s becoming troubled 

in the near term. 

The logic of this interagency agreement is circular. The FDIC 

must show a specific level of risk at an institution to receive access, 

but the FDIC needs access to the information to determine the risk 

to the fund. OTS resisted providing FDIC examiners greater on-site 

access to WaMu information because they didn’t feel that 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 grant FDIC 

greater access at WaMu, but limited FDIC’s review of WaMu’s residential loan files. The FDIC wanted to review these files to assess 

underwriting and WaMu’s compliance with the Non-Traditional 

Mortgage Guidance. 

In May 2008, FDIC began for the first time using its second regulatory tool, challenging the CAMELS rating, to challenge the OTS 

safety soundness ratings at WaMu. However, OTS was reluctant to 

lower its rating of WaMu from a 3 to a 4, in line with FDIC’s view. 

OTS and FDIC resolved the ratings disagreement 6 days prior to 

WaMu’s failure, when OTS lowered its rating to agree with FDIC’s 

rating. By that time, the rating downgrade had no impact on 

WaMu’s insurance premium assessment or payments. 

Finally, the FDIC chose not to invoke its third tool, its enforcement powers. FDIC has statutory authority to impose its own enforcement actions on an institution to protect the fund, provided 

statutory and regulatory procedures are followed. According to the 

FDIC, it did not use those powers for WaMu because it believed the 

steps to use those powers were too cumbersome. 

Key conclusions, our report highlighted two major concerns related to the deposit insurance regulations and the interagency 

agreement governing back-up authority. We made two recommendations to address these concerns. The FDIC has concurred 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. 

Senator LEVIN. 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 financial reform, so those reports 

of yours are going to be very helpful to us. 

In Exhibit 14,1 Mr. Franklin, one of WaMu’s former examiners, 

said that stated income loans were ‘‘a flawed product that can’t be 

fixed and never should have been allowed in the first place.’’ OTS 

management told them that was not OTS’ policy. Now, those stated 

income loans are where income is stated on an application, but 

there is no verification for it. If you look at Exhibit 14, that letter 

from Mr. Franklin, not only does he say these loans are a terrible 

mistake, but he also says, ‘‘I concur totally on the W-2 borrowers. 


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1See Exhibit No. 79, which appears in the Appendix on page 478. 

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 

unbelievability? You have got a W-2 in the file and the income is 

redacted. That is what was going on here. 

Then you look at Exhibit 79.1 Another OTS official voiced his 

concern over another kind of loan where there is no income and no 

asset figures that are shown—this was 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 verification led to fraud. And in fact, on some loan 

application forms, he also testified that WaMu loan officers were 

coaching the people who were filing the forms. 

Do any banking regulators now ban the practice of no stated 

loans and these NINA loans, in other words, where income is not 

stated, the so-called stated income loans but there is no proof, and 

where NINA loans are allowed? Do you know of any current regulator that disallows those kind of loans? 

Mr. RYMER. Sir, it was not in the Non-Traditional Mortgage 

Guidance, so other than that, I am not aware of any. 

Senator LEVIN. Do you know of any, Mr. Thorson? 

Mr. THORSON. I am not aware of anybody doing that now. 

Senator LEVIN. Is there now significant proof that stated income 

and NINA loans are risky loans? 

Mr. THORSON. The ability to state your own income is—especially 

I had not seen it before about 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, well, the strength of the 

borrower, etc. But the problem is, you can’t assess the strength of 

the borrower and that has got to be at the foundation of underwriting, risk assessment, risk management of any of this. 

Senator LEVIN. Without that information? 

Mr. THORSON. Right. 

Senator LEVIN. Right. Do you agree with that, Mr. Rymer? 

Mr. RYMER. Yes, sir, I do. I really can see no practical reason 

from a banker’s perspective or lender’s perspective to encourage 

that. That is just, to me, an opportunity to essentially encourage 

fraud. 

Senator LEVIN. Now, on the Option ARMs issue, OTS allowed 

Washington Mutual to originate hundreds of billions of dollars in 

these Option Adjustable Rate Mortgages, these Option ARMs. OTS 

was also allowing the bank to engage in a set of high-risk lending 

practices in connection with the Option ARMs. Some of these highrisk lending practices included low teaser rates as low as 1 percent 

in effect for as little as a month to entice borrowers; qualifying borrowers using lower loan payments than they would have to pay if 

the loan were recast; allowing borrowers to make minimum payments, resulting in negatively amortizing loans; approving loans 

presuming that rising housing prices and refinancing would enable 

borrowers to avoid payment shock and loan defaults. 

Now, it was the Option ARM loans in 2008 that was one of the 

major reasons that investors and depositors pulled their money 


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1See Exhibit No. 1c, which appears in the Appendix on page 199. 

from the bank, and did those Option ARMs, particularly when connected with those other factors, raise a real safety and soundness 

problem at WaMu? Mr. Thorson. 

Mr. THORSON. Well, the first thing they do is, of course, they lead 

to a negative amortization or building up of the principal. That is 

one. Second of all, they mask the ability of the borrower to repay. 

If I can elect, as the borrower, 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 regulatory reform, is the fact that you are not doing the borrower any favor here, either. They may be very tempted to take 

this loan with this, I think you termed it a teaser rate. But many 

of these rates jumped up 6 months, a year, a very short period of 

time, and while a lot of people may believe that they could handle 

that or they would figure a way around it or refinance or whatever, 

the truth is, they couldn’t. And the only people who really benefitted 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. 

Senator LEVIN. Mr. Rymer. 

Mr. RYMER. I think what you have here is a combination of not 

only very aggressive loan products, the Option ARMs, the purchase 

of subprime loans that they did, the home equity line of credit 

(HELOC) loans that they did, coupled with lax underwriting standards, and then over that very lax enterprise risk management processes. So I think the products themselves were risky. The administration of those products, the underwriting of those products were 

risky. And then the management and control after those loans were 

originated was really inadequate. 

Senator LEVIN. I think regulators banned negatively amortizing 

credit card loans about 5 years ago. Should we do the same thing 

relative to home loans? 

Mr. RYMER. Sir, I certainly think it should be considered. I think 

there could be cases where, if there is sufficient collateral, sufficient loan-to-value circumstances, that a negatively amoritizing 

loan might be considered, but certainly as we saw here, these loans 

were extraordinarily risky, and coupled with the Option ARM, they 

were extraordinarily risky for the banks. I think you should consider that. 

Senator LEVIN. Any comment, Mr. Thorson? 

Mr. THORSON. I agree completely with that. I think the truth is, 

the strength of the borrower, tremendous strength of a borrower 

may make in some odd situation that I can’t really think of, make 

that worthwhile. But in that case, you would have a borrower so 

strong they wouldn’t need that. Yes, sir, I would agree with Mr. 

Rymer on that. 

Senator LEVIN. All right. Take a look at Exhibit 1c,1 if you 

would. Now, this chart summarizes some of the key criticisms that 

OTS made of WaMu each year from 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. 


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2See Exhibit No. 1d, which appears in the Appendix on page 200. 

In 2004—this is Exhibit 1d 2—‘‘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, ‘‘The level of underwriting exceptions in our 

samples has been an ongoing examination issue for several years 

and one that the management has found difficult to address.’’ The 

‘‘review of 2003 originations disclosed critical error rates as high as 

57.3 percent of certain loan samples. . . .’’ 

In 2005, single-family residential loan underwriting, ‘‘This has 

been an area of concern for several exams.’’ The next quote on Exhibit 1d, ‘‘[Securitizations] prior to 2003 have horrible performance. 

. . . At 2/05 Long Beach was #1 with a 12% delinquency rate.’’ 

Next, ‘‘We continue to have concerns regarding the number of underwriting exceptions and with issues that evidence lack of compliance with Bank policy.’’ 

The next quote, ‘‘[T]he level of deficiencies, if left unchecked, 

could erode the credit quality of the portfolio. Our concerns are increased when the risk profile of the portfolio is considered, including concentrations in Option ARM loans to 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, 

‘‘[U]nderwriting errors [] continue to require management’s attention.’’ Next, ‘‘Overall, we concluded that the number and severity 

of underwriting errors noted remain at higher than acceptable levels.’’ Next, ‘‘The findings of this judgmental sample are of particular concern since loans with risk layering . . . should reflect 

more, rather than less, stringent underwriting.’’ 

In 2007, ‘‘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 LBMC, we concluded that subprime underwriting practices remain less than satisfactory. . . . Given that this is a repeat 

concern, we informed 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? 

Mr. THORSON. What it points out is that they were actually finding things. The people on the ground, the people in the banks were 

finding things. I wrote down two points you made in your opening 

statement. You talked about arm’s length and you talked about action sooner, and that is what this is really all about is they were 

finding these things. They just were hesitant to do anything about 

it. 

Senator LEVIN. Were they serious criticisms? 

Mr. THORSON. Are they serious? 

Senator LEVIN. Yes. 

Mr. THORSON. Absolutely. 


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1See Exhibit No. 32, which appears in the Appendix on page 328. 

Senator LEVIN. Mr. Rymer, would you agree? 

Mr. RYMER. Yes, sir. I agree with what Mr. Thorson said. I think 

that the examiners, from what I have seen here, were pointing out 

the problems, underwriting problems, riskier products, concentrations, distributions, and markets that may display more risk—they 

were all significant problems and they were identified. At the end 

of the day, though, I don’t think forceful enough action was taken. 

Senator LEVIN. But they are serious enough that enforcement action was needed because management was not addressing it. Is 

that a fair conclusion? 

Mr. RYMER. Yes, sir, it is. 

Senator LEVIN. Mr. Thorson, do you agree with that? 

Mr. THORSON. Yes. 

Senator LEVIN. We cannot find a single formal enforcement action that OTS took against WaMu from 2004 to 2008, no board resolutions, no memoranda 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, as you are Treasury IG, you have done, I 

think, a number of similar reviews. What were your findings relative to the speed with which examiners were reacting? 

Mr. THORSON. As you have said, we have completed 17 of these, 

and we have 33 in progress, and this is both Office of Comptroller 

of the Currency and OTS. And one of the things that we have seen 

here is the fact this is not unusual. This is pretty commonplace. It 

is more than OTS. And it is a matter of they find these things, they 

hesitate to take any action, whether it is because they get too close 

after so many years or they are just hesitant or maybe even the 

amount of fees enters into it. I do not know. But whatever it is, 

this is not unique to WaMu and it is not unique to OTS. 

Senator LEVIN. Does the FDIC want to comment on this? Do you 

have similar findings at FDIC? 

Mr. RYMER. Well, sir, we have 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 have 

done a good job. I would not necessarily say that of those 56 that 

we have not seen enforcement actions. We have seen enforcement 

actions in many of them. So I would not say that the FDIC was 

not taking or not acting on enforcement actions. 

Senator LEVIN. In that regard, you have a somewhat different 

conclusion or experience than does Mr. Thorson. That is fair 

enough. 

Now, if you look at Exhibit 32,1 here you will see Lawrence 

Carter, who is the examiner-in-charge at WaMu, writing to his 

boss, Darrel Dochow, who will be testifying later, writing in 2006, 

‘‘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.’’ 

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 it have to rely on 


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1See Exhibit No. 6, which appears in the Appendix on page 224. 

its relationship? What about enforcement power? What about the 

tools that it has to enforce? 

Mr. THORSON. You are 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 is unacceptable. So the very foundation of how 

they were approaching whether or not these actions were ever corrected or these recommendations were ever corrected is improper. 

Senator LEVIN. 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. 

Mr. THORSON. Correct. 

Senator LEVIN. Now, if you look at Exhibit 6,1 OTS apparently 

felt it could not force WaMu to change its ways as long as it was 

profitable. We have already commented on that, and you have commented on that. Exhibit 6, the OTS examiner-in-charge, Lawrence 

Carter, wrote on page 2, ‘‘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.’’ And I think you have already testified 

to this, but I think it has got to be really driven home. 

Is it proper for an examiner to say that we really cannot 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? 

Mr. THORSON. No. In fact, I think I quoted a small excerpt from 

their own guidance that mentioned the fact that profitability and 

performance of loans is not a qualification to withhold any enforcement action. 

Senator LEVIN. All right. And, Mr. Rymer, do you have a comment on that? 

Mr. RYMER. Yes, sir, just to follow up, I mean, Mr. Thorson was 

alluding to the guidance. The OTS guidance says, ‘‘If an association 

has a high exposure to 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 is 

directly from the OTS Handbook. 

Senator LEVIN. Now, in a departure from its usual practices, 

OTS did not independently track its finding in WaMu’s responses. 

Instead, it relied on WaMu’s ERICS tracking system. Didn’t that 

make OTS dependent on WaMu, Mr. Thorson? 

Mr. THORSON. I believe it does. 

Senator LEVIN. Did you have trouble, both of you, 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? 

Mr. THORSON. It would in any case because of the fact that it is 

not an independent system, and I think to really be effective it has 

to be independent. I cannot tell you why OTS does not have an 

independent system for tracking these measures of compliance. I do 

not know. 


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Senator LEVIN. OK. Do you have any comment on that, Mr. 

Rymer? 

Mr. RYMER. Just to follow up, sir, there were, I think, as you 

mentioned, 548 criticisms or 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 could not determine what had happened with them, again, because they were in 

the books and records of the bank and not OTS. 

Senator LEVIN. And not independently able to track them? 

Mr. RYMER. Yes, sir, that is correct. 

Senator LEVIN. Thank you. Dr. Coburn. 

Senator COBURN. Thank you all for your testimony. As I sat here 

and listened to both the opening statement of the Chairman and 

to your statements, I come to the conclusion that actually investors 

would have been better off had there been no OTS because, in essence, the investors could not 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 are tons of problems, just there was no action taken on it. 

Was OTS’ behavior 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 they collapsed, on the basis that OTS said everything was fine, 

when, in fact, OTS knew everything was not fine and was not getting it changed. Would you agree with that statement or not? 

Mr. THORSON. Yes, sir. I think I pulled back a point in my statement that said basically assigning a ‘‘satisfactory’’ rating when conditions are not is contrary to the very purpose for which regulators 

use a rating system. I think that is what you are saying. 

Senator COBURN. Any comments on that, Mr. Rymer. 

Mr. RYMER. I would agree with Mr. Thorson. 

Senator COBURN. OK. Mr. Thorson, in your testimony you say 

that WaMu failed because its management pursued a high-risk 

business strategy that loosened underwriting too much. It is your 

belief that the high-risk strategy could have been OK with proper 

controls in place? 

Mr. THORSON. I think almost any system, by definition, proper 

risk controls would say, yes, 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 is pretty 

hard to really understand what kind of a system you would put in 

place to control that. But definition-wise, yes. In the real world, 

probably not. 

Senator COBURN. And also the amount as relative to the risk of 

the risky instruments that you are procuring and selling. 

Mr. THORSON. Right. 

Senator COBURN. On page 6 of your testimony, you said, ‘‘OTS 

relied largely on WaMu management to track progress in correcting examiner-identified weaknesses and accepted assurances 

from WaMu management and its board of directors that problems 

would be solved.’’ Do you mean to imply by this that OTS had no 


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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 happened? 

Mr. THORSON. It is my understanding that they relied on 

WaMu’s system for tracking. 

Senator COBURN. So there was no secondary follow-up by OTS to 

changes that were requested by OTS. They took the assurance that 

WaMu had completed the changes and they trusted WaMu. 

Mr. THORSON. 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 am just not aware of it, I want to make sure you 

know that. So I will certainly double-check that and provide it for 

you. But I am not aware of one. 

Senator COBURN. To your knowledge, was it common practice at 

OTS to issue recommendations to banks and then simply take their 

word? 

Mr. THORSON. Yes. 

Senator COBURN. OK. Was WaMu an exception to that? In other 

words, did they do that with the rest of the thrifts? 

Mr. THORSON. I would prefer to make sure I am accurate on that. 

I would like to give you a follow-up answer on that because I want 

to make sure I am correct. 

[The information follows:] 

INFORMATION PROVIDED FOR THE RECORD 

‘‘OTS tracked the status of WaMu’s progress in correcting findings in WaMu’s own 

Enterprise Risk Issue Control System (ERICS). According to OTS, WaMu was the 

only thrift OTS monitored in this manner. Other thrifts under OTS superision are 

monitored using OTS’ internal Examination Data System/Reports of Examination 

(EDS/ROE).’’ 

Senator COBURN. Mr. Rymer, join in here. 

Mr. RYMER. I believe, sir, that as far as I can tell, 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. 

Senator COBURN. Well, 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 you saw that, because if, in fact, you 

are looking at WaMu, you have got to be looking at OTS as you 

did that. When, in fact, did they institute that system? Or did they 

have that system in place all along and ignored it with WaMu? Because now we have become criminally negligent if, in fact, we are 

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? 

Mr. THORSON. No. In fact, as I go back and look at the longer 

statement, one thing I think I can make pretty clear with that is 

the examiners told us they had a process for reviewing the corrective actions, but they took, as you termed it, the ERICS reports, 

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aminer’s area of responsibility. Then each examiner was responsible for determining whether the ERICS reports—in other words, 

WaMu’s internal reports—properly reflected the status of the findings and then, if satisfied, they just sign off. 

Senator COBURN. Without a follow-up check-up. 

Mr. THORSON. Right. 

Senator COBURN. Mr. Rymer, you note in your testimony some 

of the parallels between IndyMac, which failed in July 2008, and 

Washington Mutual. How should the IndyMac failure have informed the FDIC’s handling of Washington Mutual? 

Mr. RYMER. I think the IndyMac failure and the issues that we 

raised with access to information and back-up examination authority at WaMu were similar to the issues we raised at IndyMac. That 

is why we made that comparison. 

Senator COBURN. Now for both of you, and I will 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 that number of 

third-party brokers? 

Mr. THORSON. Well, the one thing to remember is that each one 

of those brokers was certainly providing more than one loan, so you 

can multiply that by another some unknown factor, depending on 

whatever the average number of loans is that those brokers provided. So now you are way above 34,000. I cannot even guess as 

to 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. 

Senator COBURN. 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 were not getting solved. And that is not to say that 

some were not, but, obviously, the fundamental problems that led 

to their demise were not getting solved. 

Any summary of where you look or where the breakdown was at 

OTS? Was it the western manager? Was it guidelines? Was it the 

failure to follow guidelines that would account for the ineffectiveness of the OTS? 

Mr. THORSON. We talked about asset quality, and we talked 

about underwriting and also management, all three of those. It is 

not any one thing. I mean, it was really something pervasive, and 

it really comes down to following a greater desire to do whatever 

you could do to increase profits. When you really get down to it, 

that is what this was all about. We are going to increase the risk 

in order to increase our profitability, and it does not matter 

what—— 

Senator COBURN. Yes, but I am talking about OTS. I am 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 the 

trust in institutions that are supposed to be regulated by an agency 

of the Federal Government can be trusted. 

Mr. THORSON. Right. 


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Senator COBURN. In both of your assessments, as you looked at 

this and you look at OTS—and this is 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 ‘‘customer’’—which I reject—to continue to do 

things that were to the detriment of the institution they were supposed to be safeguarding? 

Mr. THORSON. 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 is interaction between the regulators and the 

banks, and this gets back to, again, whether you have an arm’slength relationship, whether the proper regulations, policies for 

OTS, or any regulator, for that matter, are in place, and whether 

or not from the bottom up are those policies enforced, and when 

people are becoming lax, does somebody in the supervisory role 

come down and say these are the policies, these are what you are 

going to do, that is why we regulate. And in this case, clearly that 

was not done. 

Senator COBURN. But the data that we showed showed that the 

people on the ground, the ones that are actually doing the auditing, 

actually were following guidelines, were they not? 

Mr. THORSON. Yes, at least in the instances you pointed out. 

Senator COBURN. So that would exclude the people on the 

ground, so the problem is above them. So where is it? Where was 

it in this instance? Maybe you are hesitant to point a finger, but 

the fact is you all have looked at this. You have done a study. 

Where was the problem? If it was not with the people on the 

ground reporting and identifying the problems, where was the 

problem? I am trying to get you all to say it. We are going to eventually say it, but you all have looked at this. 

Mr. THORSON. Right, and I am certainly not hesitant to say 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 is a good example of what you are talking about. Whether that continued above 

them or below them, I cannot tell you, but that is certainly one example. And as I pointed out, we found that same example, that 

same individual, involved in IndyMac. 

Senator COBURN. Mr. Rymer. 

Mr. RYMER. Dr. Coburn, I think you have made the point very 

well that the examiners in the field in my view were identifying 

problems. This was a very large institution, and the ultimate determination about what the CAMELS rating was going to be would 

be made at least at the regional level, if not at the national level. 

Senator COBURN. All right. Thank you, Mr. Chairman. 

Mr. THORSON. And if you do not mind, I would like to just add 

that one piece. I was being generic when I said it starts at the bottom with—that is an overall in any regulatory group. That was not 

aimed at the people here at OTS. 

Senator COBURN. No, I understand that, and the record is pretty 

clear. I am sure there is some of that that goes on even within 


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bank examiners, etc. But overall I think the management of the 

regulatory framework failed miserably in this case. 

Mr. THORSON. And I think in the Chairman’s documents you 

point out a whole list of finding after finding after finding. Those 

would not have come forward if you did not have good people on 

the ground. 

Senator COBURN. That is right. 

Senator LEVIN. If I could add a comment, if Senator Kaufman 

will forgive me for just throwing in my own comment here in response to the question that Dr. Coburn raised, the culture is set 

at the top, and this culture here was that these banks are constituents. They are not constituents of the regulator. They are supposed 

to be regulated by the regulator. They are supposed to be the cop. 

And when you deal with folks as though these are your constituents, it sets exactly the wrong tone. And when you revise documents which have teeth in them, as they did at the top, and pull 

those teeth out of the documents, that sets a tone which is transmitted to people below in the field. Would you agree with that? 

Mr. THORSON. Absolutely, yes. 

Senator LEVIN. Thank you. Mr. Rymer, do you agree with that? 

Mr. RYMER. Yes, sir, I would. 

Senator LEVIN. Thank you. Senator Kaufman. 

Senator KAUFMAN. I would 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 has put his finger on something, 

and I would like to go into it a little deeper because 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 

that people higher up the level at OTS were not following up what 

the examiners were saying. 

Now, I think when we are starting to talk about what the problem is here, that is a big problem. And so I think that Senator 

Coburn is right on point, and I would like you just to search your 

mind one more time. Why did this happen? We have got the examiners on the ground saying their problems one year after another, 

and yet every time it goes up the chain, there is a lot of allegations 

about what went wrong, but I would really like the two of you to 

say what you think are the one or two reasons why the risk managers yesterday said that as we go up the chain, we have more and 

more of a problem at OTS repeatedly over all these years. 

Mr. RYMER. Senator Kaufman, let me start by saying I think the 

problem in 2005, 2006, and into 2007, the problem was the bank 

was profitable. I think there was a great reluctance to, even though 

problems were there in underwriting, the product mix, the distribution process, the origination process, all in my view extraordinarily 

risky, not things perhaps that should not be done, but certainly if 

they are done, they need to be done in some moderation, certainly 

with some control environment. And I did not see in this bank’s 

case an adequate control of its environment. 

Senator KAUFMAN. Mr. Rymer, if you were running OTS, and 

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iners, and they were making money. Let us say we are a year from 

now. What would you do? Would you say, well, they are making 

money, it is going to be very difficult politically to move forward 

on this? 

Mr. RYMER. My view is that often times in examinations, if asset 

quality is sufficient in the CAMELS rating, the A being the asset 

quality, the M being management, and if a bank is profitable and 

is not yet showing significant delinquency in the charge-offs, the 

asset quality piece is sometimes hard to downgrade if it is profitable. 

But the management piece, even despite the fact that the bank 

is showing current profitability, the management piece should be, 

in my view, downgraded if management has not demonstrated that 

it has built the adequate systems and control processes and governance processes to help manage problems when they eventually do 

occur in assets. So in this case, I can see really no reason at all, 

once the problems were identified and the concentrations were 

identified in the types of assets, the distribution processes, all 

those things, once those were identified, I find it difficult to understand why the management rating at a minimum was not lowered 

much earlier on. 

Senator KAUFMAN. Mr. Thorson. 

Mr. THORSON. The other part here, too, I think—and you put it 

an interesting way. What would you do if you were head of it? 

One of the things that would touch on what Senator Levin said, 

too, is I would tell them forget about the earnings, that is not our— 

it is part of what we measure as far as the solidity, but it also, unfortunately, lends to the fact I am looking at these guys as a constituent because I think in my testimony I mentioned they pay us, 

OTS, $30 million a year. So we want to kind of be careful about 

that. That should be made very clear from top to bottom that is not 

a factor. It just is not. 

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 do not necessarily have to do this if we 

do not want to take this action. Regulation needs to be enforced— 

emphasized that enforcement of those regulations is also mandatory. That is why it is called a regulation. And maybe that is something that, as you look at regulatory reform, you look at as to what 

should be guidance and what should be an actual regulatory reform. 

Senator KAUFMAN. Is it important who you pick to head up these 

agencies with their state of mind? Isn’t that an important part of 

whether they are going to be successful? I mean, someone that has 

the internal makings to say I know you are making money, but 

what you are doing is really bad and you have to stop doing it. 

How much of a role does that play in how we get around solving 

this problem in the future? Mr. Rymer. 

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 today profitability, but 

to explain to management and enforce with regulatory action that 

risky profitability is going to have a cost. It either has a cost in 

control processes an institution would have to invest in now, or it 


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is going to have a cost ultimately to the bank’s profitability and 

perhaps eventually to the Deposit Insurance Fund. So that is the 

tough decision I think that has to be made, that has to be enforced 

constantly. 

Senator KAUFMAN. And, Mr. Thorson, I have been around this 

place for a long time, not as a Senator but as a staff person, and 

we can only write the laws so much. But it is truly scary when you 

read this report—where it seems to me clear that the problem here 

was that we had good Federal examiners out there saying there is 

a problem here, and the management not doing it. And I just do 

not see it in the report, and I think it is key as we move forward— 

we have good people out there doing the jobs and being the examiners, the career employees that we have. But if you put the wrong 

people in charge, we can write the laws any way we want to, but 

if they are not going to go after a company because they are making money. 

I want to shift to something a little different, but it is all on the 

same point, and that is, I read your causes of WaMu’s failure, and 

I see WaMu failed because its management pursued a high-risk 

business strategy without adequately underwriting its loans or controlling its risks. 

That sounds great. I do not think that is what went on here. I 

really do not. And I think unfortunately you were not here for the 

hearing the other day, but I think if you sat there and watched 

what went on and listened to the Chairman’s questioning and went 

through the exhibits, you would say that is not why they failed. 

Right, Mr. Chairman? They did not fail because management pursued a high-risk business strategy without adequately underwriting its loans or controlling its risks. 

Would both of you comment on what you believe happened here? 

Mr. THORSON. It certainly is a contributing factor. 

Senator KAUFMAN. No, but the thing is that is the sentence right 

here. It does not say, ‘‘A contributing factor was . . .’’ It says—and 

I am not parsing words, I am not trying to parse words. 

Mr. THORSON. No. I understand. 

Senator KAUFMAN. And I am not even critical. I am just trying 

to say it seemed to me there were all kinds of things going on here 

that were—I will get into characterizing it a little later. They were 

doing things that were reported up here—this was not high-risk 

business strategy. They were doing bad things. And the examiners 

were saying they were doing bad things. 

Do you understand my frustration with reading ‘‘pursuit of the 

high-risk business strategy.’’ Isn’t that kind of a cold-blooded way 

of letting everybody off the hook? This was a bad business decision. 

Nothing went on here. 

Mr. THORSON. I appreciate your very much straightforward language on that, and certainly I can tell you from myself on down, 

it is not to let anyone off the hook. 

I appreciate what you are saying, and I guess what I am saying 

is I completely agree with you and your frustration, because, I 

mean, this is what we deal with every day, is we go and measure 

against the regulations and the rules and how did they do this and 

how did they do that. 


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But the bottom line is just what you are talking about, and especially the comment you made to Mr. Rymer, which was, did they 

have the guts to say knock it off, stop it? And that is really what 

it comes down to. When you are hiring regulators, that is what you 

want. And I think what obviously all this paper really says is, No, 

it did not happen. 

Senator KAUFMAN. Mr. Rymer, same thing. 

Mr. RYMER. Yes, sir. 

Senator KAUFMAN. But, in retrospect, maybe there is another 

sentence that would have gone in there? It was a failure by management to police what they were doing. There were all kinds of 

things that went on that were highly questionable. And the people 

at the top of the Office of Thrift Supervision really did not do what 

you would have done faced with a similar situation with a record 

like this. This was not just a 6-month record. This was years of 

people knowing what it is doing. And for whatever reason, they did 

not move forward. Is that a fair—and I am looking for an honest 

correction if I am saying something that is not—— 

Mr. THORSON. No. It is. And, in fact, in the report I believe it 

mentions the fact—a very small amount because we do not get into 

that, but we do talk about fraud indicators and that those are 

being investigated, and we leave it at that. 

Senator KAUFMAN. Right. 

Mr. THORSON. But I think that is part of what you are talking 

about, too. 

Senator KAUFMAN. That is kind of what I am talking about. I 

mean, the first time I heard that, I thought somebody was kidding 

me. I go into a bank, and they say, ‘‘How much do you make?’’ And 

I say, ‘‘$500,000 a year.’’ They say, ‘‘OK. You can get a $2 million 

mortgage.’’ Moving right along, what is the next question? 

I would just like to review a little bit of what you said earlier 

because I want to put it in context. But both of you said stated income loans. What do the two of you think about stated income 

loans? 

Mr. RYMER. I do not think they should be allowed. I think that 

if a bank is going to advance funds, secured or unsecured, they certainly need to verify who they are lending to and verify the repayment sources. 

Senator KAUFMAN. Mr. Thorson 

Mr. THORSON. At the very core of this is the ability to repay, and 

that is a big part of the ability to repay, is how much income does 

this individual have. And if I just tell you, I do not think that— 

I was very surprised when I first saw these, too. Nobody has ever 

given me that opportunity, so I just figured there is no way. But 

it evidently has occurred a lot. 

Senator KAUFMAN. OK. I am going to do something a little 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. 

No, not allowed to look, Mr. Rymer. Take a wild guess. 

Mr. RYMER. As I remember, that number was somewhere in the 

70-percent range. 

Senator KAUFMAN. And, Mr. Thorson, what do you think? 

Mr. THORSON. Sixty percent? 


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Senator KAUFMAN. Would you be surprised if I told you that approximately 90 percent of all WaMu’s home equity loans were stated income loans. Now, folks, when you are writing a report—and, 

again, I have spent a lot of time on this, plus I have the advantage 

of hearing the witnesses the other day and the rest of it, so I have 

a different view. And you are doing your report, and you are doing 

a good job, and I am not being critical. But if you have a company 

where 90 percent of their home equity loans are stated loans, a 

practice which you both define as just exactly—I mean, you did it 

much more articulately, but just you should not be doing that in 

a bank. You have got to think maybe that was one of the causes 

that things went the way they did. 

Let me ask you, the Option ARMs, these are high-risk loans, Option ARMs, right? I will not do the same thing. Seventy-three percent of all Option ARMs were stated income loans. 

Mr. RYMER. I wish you had asked me that one, Senator. I knew 

that one. 

Senator KAUFMAN. You had that one. [Laughter.] 

Mr. THORSON. So did I. 

Senator KAUFMAN. I am going to shut up for a minute, just for 

a minute, and in 50 percent of subprime loans—I mean, here you 

are dealing with someone who comes into your office and is classified as a subprime loan, and you say to them, ‘‘What is your income?’’ And you write it down, and that is it. Would you say that 

is one of the causes of this meltdown? 

Mr. THORSON. No, I mean, clearly—in any professional banking 

operation—that is not acceptable. You have to be able to verify, 

and I think all of us have experienced loans throughout our lives 

where the verification process of almost everything, every piece of 

paper that we submitted was rigorous. And where we parted ways 

with that philosophy I am not sure, but I do remember now the 90- 

percent number, and it is staggering. That is the only way to say 

it. 

Senator KAUFMAN. Mr. Rymer, I mean, isn’t that a systemic 

problem? 

Mr. RYMER. Taken together, all those products were very risky, 

and certainly when you look at the fact that was the bank’s business, certainly it created a very risky organization. 

Senator KAUFMAN. When you have something like this where 90 

percent of the home equity loans, 73 percent of the Option ARMs, 

and 50 percent of the subprime are stated income loans, that has 

to be policy right at the very top of the organization, right? I mean, 

that is not just happening because somebody down in Long Beach 

decided that is what they were going to do. This is the very top of 

the organization. And when you have cases like the Chairman stated where they redacted the W-2, they got a stated income loan to 

begin with. Now they get the W-2. Now they redact the W-2. 

What do you do as a regulator when you detect fraud? First off, 

do you think at least there is the potential for fraud when you find 

90 percent, 73 percent, and 50 percent? Is that on its face—— 

Mr. THORSON. I think you could easily—what was the term? A 

target-rich environment. 

Senator KAUFMAN. Yes, target-rich. That is good. I like that. 

That is a target-rich environment. What do you do as a regulator 


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when you find a target-rich environment in one of the institutions 

that you are regulating? 

Mr. RYMER. In this case, because of the stated income program— 

the numbers were huge. The bank was the victim of the fraud because of their lax controls. 

Senator KAUFMAN. Right. 

Mr. RYMER. Now, the fix to that is to increase the controls. All 

the recommendations that were made of the 500 or so findings 

were to improve those controls. 

Senator KAUFMAN. Right. 

Mr. RYMER. But the bank was the victim of that fraud. But fraud 

in that case is an indicator of just how lax the controls were. 

Senator KAUFMAN. Well, when you say the bank, people get the 

indication like it was the people running the bank who somehow 

are suffering. I think the CEO made—because of the fact they were 

able to expand their mortgages, have more mortgages, do more 

mortgage-backed securities, everybody in the bank was making a 

lot more money. 

Mr. RYMER. Well, let me explain. I mean, the bank was the initial victim, but certainly as those mortgages passed through the 

system, there were lots more people harmed from that fraud than 

just the bank. 

Senator KAUFMAN. Correct. 

Mr. THORSON. And we commented in the report that in 2007, 

WaMu itself identified fraud losses of $51 million for subprime 

loans and $27 million for prime loans. That is a big number, and 

at some point, as you say, top management—I mean, you are talking about $78 million right there. Somebody is going to want to 

take a look at how that happened and what are we doing to stop 

it. 

Senator KAUFMAN. But even beyond that, I mean, don’t you have 

kind of an obligation at some point, when you get numbers—I 

mean, that was in good times. God only knows when we went back 

and looked at what happened to mortgage-backed securities that 

ultimately went toxic, as the Chairman says. I mean, at some point 

you just say, yes, the bank is getting hurt and this and that, but 

there are some people involved and those who were committing 

fraud. 

Mr. THORSON. Yes. 

Senator KAUFMAN. Now, at some point when you come across a 

fraud, you refer it to the Justice Department, is that how it works? 

Mr. THORSON. The regulators refer it to us and to the Justice Department. The bank can refer it certainly. There are a number of 

ways to go here. My guess is a number of those paths were followed. So yes. And there are active cases. 

Senator KAUFMAN. So bank regulators could make not only civil, 

but also criminal referrals? 

Mr. THORSON. Yes. 

Senator KAUFMAN. If there was fraud involved? Mr. Rymer, is 

this normal? 

Mr. RYMER. Yes, sir, it is. It is normal. 

Senator KAUFMAN. When is it inappropriate not to make criminal 

referrals to Justice? Is there any place? I mean, if you find fraud, 

it is pretty—— 


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Mr. RYMER. Well, I think the bank employees as they found it 

would have an obligation to complete a Suspicious Activity Report 

and that would work its way up through to the Justice Department. 

Senator KAUFMAN. But if they didn’t, would the regulators do— 

clearly in this example, everybody—if, in fact, there was fraud—everybody was doing well. We had a report yesterday where it 

showed that the compensation for people that did the Option ARMs 

and subprime, they were compensated better if, in fact, they could 

turn up more mortgages in that market. 

So it is in nobody’s interest in the bank—you don’t even hear 

about it. I mean, this isn’t even up here on the things where people 

are talking about what the bank is doing. And the regulations in 

the report that they are doing way too many stated income loans, 

as far as I know, anyway, it wasn’t raised the other day and I am 

not seeing it anywhere else. So nobody in the bank was worried 

about the risk regulators. Mr. Vanasek and Mr. Cathcart were concerned. So how does it work, then? Does the regulator, is this up 

to OTS to make the referral? 

Mr. THORSON. In some cases, the regulator, if they find an indicator of fraud, they can make a referral and will, and I have no 

doubt that they do. And, in fact, obviously, people inside the bank 

could also do that, not necessarily—I mean, there are all kinds of 

avenues to do that, anonymously and otherwise but, as a regulator 

or as a bank employee or, frankly, almost anybody associated with 

this, if I had ever found a W-2 that had been redacted, I figure we 

hit a gold mine. 

Senator KAUFMAN. Especially engaged in a business practice 

which both of you admit is—— 

Mr. THORSON. What possible reason would you have to redact a 

W-2 except for the fact that the number doesn’t match what you 

have reported? 

Senator KAUFMAN. Mr. Rymer. 

Mr. RYMER. Yes, sir, it is a significant problem. The U.S. Attorney’s Office in Seattle has a task force for WaMu—actually for 

WaMu fraud. 

Senator KAUFMAN. Right. 

Mr. RYMER. So, I mean, they are aware of it and are working the 

issue. Our office has folks contributing there. I have special investigators working that task force as well as the FBI and so forth. 

Senator KAUFMAN. Right. And so when you have a situation 

where not just a redacted loan, but 90 percent of all WaMu’s home 

equity loans are stated income, I would just say, a target-rich environment. 

I mean, it seems so systemic—90 percent—that clearly the top 

management of the company was well aware of what was happening here with stated income loans. They may not have known 

about the redacting down in the field, but essentially they were 

saying, OK, stated income loans. That is fine. It doesn’t matter, the 

size of the mortgage. The size of the mortgage can be as big—they 

testified yesterday, I think, didn’t they, Mr. Chairman, that there 

was no limit on the size of the mortgages that you could get under 

stated income. 

Senator LEVIN. That is right. 


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Senator KAUFMAN. And so, basically, whatever mortgage we have 

got, that is what we are doing. We are going to have stated income. 

It is going to be the policy here. 

And then what we do is we say to people, look, you want to make 

a lot of money? These are the products that we are willing to sell 

in order to do that, and we are going to compensate you a heck of 

a lot better if you do that. And then we say, in an environment 

where Wall Street says the faster you can put these mortgagebacked securities, just get these mortgage-backed securities, just 

get us the mortgages, and then we can put them together and we 

can sell them and they are out of your hair, do some repurchase 

agreements on some of them, and you are down the road and we 

are all going to come out a lot better. 

I am just finishing with that, either of your thoughts on that. 

Mr. RYMER. My general view is that there is a lot of truth to 

what you said. 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 fraud. Or if they were harmed, 

it wasn’t the originator who was going to be harmed, it was someone down the line. 

Senator KAUFMAN. Mr. Thorson. 

Mr. THORSON. I completely agree, and also, as I mentioned earlier, too, these types of loans really didn’t help the borrowers at all. 

Look at the state of foreclosures we have in this country now and 

the pain and suffering that goes with that. And whether people 

thought that they could figure a way around this when it finally 

was time to pay, I guess maybe they did. But the only reason that 

this succeeded was because of the financial gains that were made 

by the people making these loans. 

Senator KAUFMAN. You know what most scares me about this? 

It is, I think, that not just here, but in credit default swaps, so 

much went on on Wall Street, we have rewarded people who essentially said, I know what is going wrong here, but I can’t stop doing 

it because I am making so much money. And, when it all goes bad, 

it is OK to leave it to the taxpayer, but I will have my money and 

I will have my second home and I will have my pool. I will have 

everything I need, and the bank goes under. Like you said, Mr. 

Rymer, the bank is the one that goes under. People lose their jobs 

in the banks. The shareholders lose their equity. People lose their 

homes. But you know what? I have mine. 

We are doing some things in this regard, but I don’t think we 

have done enough to let people know you can’t do that in this country and get away with it, because if you can, they will just keep 

doing it. 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 am out of here 

and I made the price that I made. 

So it is 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, and all you have to do 

is read all the big stories, too big to fail, 13 bankers, and so on. 

So anyway, I want to really thank you, not just for this but for 

your service, and I wish that one of you had been the head of OTS 

during this period. Thank you. 


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1See Exhibit No. 44, which appears in the Appendix on page 366. 

Senator LEVIN. I want you to take a look at Exhibit 44,1 if you 

would. We are going to hear later on from who was then the Director of OTS, Mr. Reich. But this is an email from Mr. Reich to Mr. 

Killinger. This is dated in July 2008. I want to give you a little bit 

of background to this memo. 

This is where he is telling Kelly—he calls him by his first 

name—Kerry—‘‘sorry to communicate by email. I’ve left a couple 

messages on your office phone but I’m guessing you may be off for 

a long weekend,’’ and he is ‘‘wrestling with the issue of a MOU 

versus a Board Resolution,’’ a Memorandum of Understanding 

versus a Board Resolution as the result of a conversation in his office and he has decided that MOU is the right approach. And, he 

says, ‘‘We almost always do a MOU for 3-rated institutions,’’ and 

now they are 3-rated, because in February 2008, they downgraded 

them from a 2 to a 3. 

And then he says, ‘‘We almost always do a MOU for 3-rated institutions, and if someone were looking over our shoulders, they 

would probably be surprised that we don’t already have one in 

place.’’ I guess the head of OTS didn’t think there was anybody 

looking over his shoulder, but we ought to be shocked that there 

is not a Memorandum of Understanding in place since that was 

their common policy. 

Now, I want to go into a little bit of the background, because it 

is worse than that. We will come back to this memo. Go back to 

February 2008. I talked about this in my opening statement. OTS 

downgraded WaMu from a 2 to a 3. Now, once you go from a 2 to 

a 3, which signifies a troubled bank, OTS policy requires you to 

issue a public Memorandum of Understanding at the same time 

aimed at correcting those deficiencies. OTS did not do that. We will 

ask Mr. Reich about that when he is testifying. But instead, OTS 

waited until the next month and accepted a non-public Board Resolution. That is the background. 

So first, instead of doing a Memorandum of Understanding, 

which is public, it is a non-public Board Resolution. September 7, 

2008, as we know, OTS finally, after being prodded by FDIC, went 

to a 4. But now let us talk about going to the 3. 

I want to go to the memorandum, Exhibit 44.1 I find this to be 

an extraordinary document. First of all, an apology, to Kerry, communicating by email. This is the regulator who is head of an organization that has been presumably pointing out defects in this 

bank’s operations, including fraudulent operations, for 4 years. It 

starts off with an apology. ‘‘Tried a couple messages on your office 

phone, didn’t reach you, so I am going to send you an email.’’ ‘‘He 

has been wrestling,’’ he says, ‘‘with the issue of the MOU versus 

a Board Resolution.’’ I don’t know how much more wrestling you 

have got to do. But he has been wrestling that issue. 

He has decided MOU is the right approach in this situation. And 

then he says, ‘‘we almost always do that MOU for 3-rated institutions, and if someone were looking over our shoulders, 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. 


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1See Exhibit No. 45, which appears in the Appendix on page 368. 

And then he says, ‘‘[A]s much as I would like to be able to say 

a Board Resolution is the appropriate regulatory response, I don’t 

really believe it is.’’ I don’t know why he would like to be able to 

say a Board Resolution is appropriate instead of a MOU when his 

own policies provided for a MOU and they have been dawdling for 

all these months. But that is what he tells Kerry. 

And then he says, near the bottom, ‘‘I do believe we need to do 

a MOU. We don’t consider it a disclosable event, and we also think 

the investment community won’t be surprised if they learn of it 

and would probably only be surprised to learn one didn’t already 

exist.’’ They sure would be. And then he is apologizing again. ‘‘I am 

sorry to communicate this decision by email. Best regards.’’ Kerry 

signs it, John. 

I find this to be kind of a cozy relationship, to put it mildly, that 

is reflected in this memorandum, in a very deferential, apologetic 

email, long overdue by years, months on the downgrading of the 

bank. Apologetic, deferential. 

And then a few months earlier, apparently this proposed MOU 

had been shared up the chain, and here we get an interesting reaction, back in July, I guess, when they were first putting this MOU 

together. This came from Mr. Dochow, who we will hear from also 

later on, going up the chain to Mr. Ward. This is Exhibit 44, by 

the way—I am sorry, 45. Let me point to Exhibit 45.1

Down at the bottom of page one, you will see that it is from Mr. 

Ward to Mr. Dochow saying, on the WaMu MOU, ‘‘Why did we run 

it by FDIC but not me?’’ That is the first question he asked. And 

then Mr. Dochow answers, ‘‘You make a good point, I apologize, 

and attached is the MOU for your review. I will make any changes 

you want and it has not yet gone to the company. . . . The MOU 

came up yesterday in a call I had with John Reich and Scott 

Polakoff, and then by John Reich with COB Steve Frank. It went 

to the FDIC because I committed to Stan Ivie,’’ who I guess is at 

the FDIC, ‘‘to consider their comments in an effort to minimize 

their letter writing and posturing.’’ 

This is the beginning of a very strange relationship, which I will 

get to in a minute, but the point of this is at the top of that Exhibit 

45, where Scott Polakoff, who is apparently high up in the OTS, 

says, ‘‘Thanks for sharing this document,’’ and then notice what he 

says. ‘‘It is, unfortunately, another example of a benign supervisory 

document.’’ It is still benign, apparently, according to the higherup at OTS. 

Is that not, that whole MOU issue, does that not strike you as 

just simply incredible, that first of all you don’t have a MOU to 

begin with although policy provides that it be issued once you have 

a downgrading from a 2 to a 3? It is delayed. They accept instead 

of a MOU a Board Resolution, which is not public. Months and 

months go by. Finally, they decide, OK, apologetically twice in an 

email to the people they are supposed to be regulating, sorry we 

couldn’t reach you. We have tried twice. Why the hell isn’t the 

bank getting back in 10 minutes to the regulator? 


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So does this strike you as being a reflection of a very cozy relationship with much too much deference and much too much apology, Mr. Thorson? 

Mr. THORSON. Yes, sir, and the other part here, too, is the decision as to whether to do an informal or non-public action versus a 

formal or a public action. Again, he sort of apologizes in the previous document that this could become known. This gets right to 

the heart of what you were talking about, the culture. I mean, that 

is really what you are talking about. We don’t want to do anything 

to hurt, and there is not an acceptance of the fact that a strong regulatory control helps them—— 

Senator LEVIN. And helps the public. 

Mr. THORSON. Absolutely. 

Senator LEVIN. And is their job. 

Mr. THORSON. Right. 

Senator LEVIN. And protects the economy. 

Mr. THORSON. Correct. 

Senator LEVIN. So far too cozy for you, as well? 

Mr. THORSON. It is what? 

Senator LEVIN. This is far too cozy? 

Mr. THORSON. Absolutely, as far as I am concerned, yes. 

Senator LEVIN. Mr. Rymer, do you have any reaction to this? 

Mr. RYMER. It does indicate a level of familiarity that makes me 

uncomfortable. 

Senator LEVIN. Now let us talk about the relationship between 

the 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, but I want to first ask you about it. 

OTS and FDIC, they addressed the risk at WaMu from somewhat different perspectives. You have got OTS looking at the safety 

and soundness of WaMu. You have got a CAMELS rating that they 

use. The FDIC is assessing the risk to the Insurance Fund with the 

LIDI rating, it is called. The ratings differ somewhat, and I won’t 

go into the detail on them, but the point I want to get to is whether 

or not what you saw, you had OTS and FDIC working together 

here or whether or not there was some inappropriate blocking of 

access by OTS to FDIC’s access to the bank data. 

We have gone through some of the documents, I believe, already, 

and I think you are familiar with them, are you, Mr. Rymer? 

Mr. RYMER. [Nodding head.] 

Senator LEVIN. And can I ask both of you, in your judgment, 

whether or not OTS should have allowed the FDIC to help here. 

Mr. RYMER. Yes, sir. It is clear to me that they should have. I 

think the FDIC, by requesting back-up examination authority in 

2005, 2006, 2007, and 2008, indicated that they had concerns and 

those concerns were principally driven by its own LIDI analysis. 

Not to go into too much detail, but the LIDI analysis is looking a 

little bit broader, at broader indicators than just the internal operations of the bank. It is looking at competitive factors and macroeconomic factors in an attempt to identify the risk that a failure 

would cause a loss to the DIF. 

So there is no question in my mind that the FDIC’s request for 

back-up authority, simply given the sheer size of WaMu, was, to 

me, enough reason for FDIC to ask for back-up authority. 


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Senator LEVIN. And Mr. Thorson, are you familiar with these 

documents? 

Mr. THORSON. I agree with Mr. Rymer. I think, as he pointed out 

in his last sentence there, the sheer size of the bank would say that 

there should be a maximum of cooperation, not to mention the fact 

that it is dictated by statute, as well. 

Senator LEVIN. Are you familiar with the documents which show 

that the OTS blocked FDIC access to bank data? 

Mr. THORSON. I have looked at the ones that you have come up 

with. 

Senator LEVIN. All right. And they refused to allow the FDIC to 

participate in bank examinations, rejected requests to review bank 

loan files, and you think they should have allowed those things? 

Mr. THORSON. Well, as a matter of policy, I think they should 

have allowed that. No matter what their reasoning was, as a matter of policy, they should have, yes. 

Senator LEVIN. All right. Well, we will get into that later on. 

Mr. THORSON. While you are doing it, if I can make one comment, going backwards for a second—— 

Senator LEVIN. Yes, please. 

Mr. THORSON. Despite the comment that said that we need to 

move forward with it ASAP in July, that MOU wasn’t signed until 

September. 

Senator LEVIN. Right. That is ASAP. The ‘‘S’’ is misplaced. It 

probably is delayed as much as possible. That would be a 

DAMAP—delay as much as possible—instead of ASAP. 

Thank you both. We appreciate your work. We appreciate your 

testimony. It has been a long hearing so far. It is going to get much 

longer. But thank you for kicking it off. 

Let me now call our second panel of witnesses: John Reich, 

former Director of the Office of Thrift Supervision; Darrel Dochow, 

former West Regional Director of the Office of Thrift Supervision; 

and Lawrence Carter, the Examiner-in-Charge for Washington Mutual at the Office of Thrift Supervision from 2004 to 2006, currently the National Examiner at OTS. We appreciate you all being 

with us. We look forward to hearing your testimony. I do not know 

if you were here at the beginning of the first panel, but pursuant 

to the rules of this Subcommittee, all witnesses who testify before 

our Subcommittee are required to be sworn, so I would ask that 

each of you now please stand and raise your right hand. 

Do you swear that the testimony that you are about to give will 

be the truth, the whole truth, and nothing but the truth, so help 

you, God? 

Mr. REICH. I do. 

Mr. DOCHOW. I do. 

Mr. CARTER. I do. 

Senator LEVIN. We are going to use a timing system to let you 

know when 5 minutes have elapsed. A minute before that time 

comes, the light will change from green to yellow, so you can try 

to conclude your remarks. We appreciate your trying to keep those, 

if you could, to 5 minutes, and, Mr. Reich, we are going to have 

you go first and then Mr. Dochow second, and then Mr. Carter. I 

know I have pronounced Mr. Carter’s name correctly, but I do not 

know about Mr. Reich and Mr. Dochow. 


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1The prepared statement of Mr. Reich appears in the Appendix on page 134. 

Mr. REICH. It is ‘‘Rich.’’ 

Senator LEVIN. Mr. Dochow. 

Mr. DOCHOW. It is ‘‘Do-ko.’’ Thank you. 

Senator LEVIN. Good. Thank you. Thank you very much. Mr. 

Reich, why don’t you begin? 

TESTIMONY OF JOHN M. REICH,1 FORMER DIRECTOR, OFFICE 

OF THRIFT SUPERVISION, AND FORMER VICE CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. REICH. Good morning, Chairman Levin. I would like to say 

I was delighted to be here, but that would be a bit of an overstatement. In my retirement, I would much rather be at home reading 

the Washington Post, drinking coffee, and ruminating over the 

Caps loss to Montreal last night. 

I did retire in February 2009, a little over a year ago, after a 49- 

year career. I was in the banking business for 25 years. I was CEO 

of a bank in Sarasota, Florida for 12 years. I worked on Capitol 

Hill. After we sold our banking organization, I moved to Washington, DC, went to work for Senator Connie Mack, a long-time 

friend and former banking colleague of mine. I was his chief of staff 

for the last 3 years of his term in the U.S. Senate. 

I was appointed to the Board of Directors of the FDIC, served on 

the FDIC Board for 8 years, from 2001 through the end of February 2009. I served as the Vice Chairman of the FDIC for the first 

5 years of my 8 years on the board, was, in fact, Acting Chairman 

of the FDIC for a several-week period during 2002 during which 

time a bank failed in Hinsdale, Illinois. 

When I was asked to move by the White House to the FDIC in 

2005, I had some concerns about it. The staff had been allowed to 

deplete, there had 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 would 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 supervise. It was simply a habit that 

I picked up here that carried over when I became a regulator. It 

certainly did not imply to me that—whether it was a $300 billion 

institution or a $30 million institution, I referred to it as a ‘‘constituent.’’ And it was not in any sort of a cozy reflection. 

I think it is important to point out that although Washington 

Mutual has been referred to as the largest failure in American history, in fact, the largest failure in American history was Citi. It 

was not allowed to fail. It was bailed out with billions of dollars 

of taxpayer money. Washington Mutual was not deemed to be systemic and was not bailed out. 


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1The prepared statement of Mr. Dochow appears in the Appendix on page 147. 

Senator LEVIN. For accuracy, I think we said the largest thrift. 

I do not think Citi failed, but it—— 

Mr. REICH. It did not fail. It would have had if it not been bailed 

out. 

Senator LEVIN. I think the reference here was the largest thrift 

failure. 

Mr. REICH. OK. Thank you. 

Senator LEVIN. I will correct myself again. I said it was the largest bank failure, and that apparently is true, thrift or otherwise. 

Mr. REICH. That is true. Thank you, sir. 

Three points that I would like to make. Though asset quality was 

a growing and continuing concern at Washington Mutual, this was 

a liquidity failure, not a capital failure. It was brought on because 

of two bank runs: a $10 billion run after the failure of IndyMac, 

and a $16.4 or $16.7—I heard you say this morning—billion dollar 

run on deposits during the 10-day period preceding September 25, 

with zero cost to the Deposit Insurance Fund and zero cost to the 

taxpayer. 

There have been over 200 bank failures in the United States 

since January 1, 2008, many of which did, in fact, cost 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. 

The second point is that a majority of Washington Mutual’s 

mortgages were in California and Florida, two of the States that 

were particularly hit hard with the most severe price declines in 

real estate. 

The 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 HOLA statute 

under which it operated. They attempted asset diversity, but the 

diversification that took place was all in the area of real estate-related loans. 

If you added all of the assets together of the approximately 800 

institutions that OTS supervises, it would total probably $1 trillion, 

maybe a little bit more today. Because of its concentration in real 

estate loans, it is a problem that I believe Congress needs to address. In my opinion, my personal opinion, the thrift charter is obsolete because the HOLA statute requires that two-thirds of their 

assets be invested in real estate-related loans, which is a concentration. Many of the larger institutions are wrestling with diversification of assets, and it is an issue that I believe needs to be addressed in the regulatory reform. 

I will stop here, Mr. Chairman, and I would be glad to take questions. 

Senator LEVIN. Thank you very much. Mr. Dochow. 

TESTIMONY OF DARREL DOCHOW,1 FORMER WEST REGIONAL 

DIRECTOR, OFFICE OF THRIFT SUPERVISION 

Mr. DOCHOW. Thank you, Mr. Chairman. I will take a short period of time here to read an oral statement, if I may. 


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By way of background, I retired from the Office of Thrift Supervision in March 2009 after a 36-plus-year career as a bank examiner and regulator. I began my career as an assistant national 

bank examiner with the Office of the Comptroller of the Currency 

in 1972. I examined national banks and rose to the position of Assistant Chief National Bank Examiner in Washington, DC, during 

my 13-year OCC service. In 1985, I became a senior regulator with 

the Federal Home Loan Bank of Seattle and subsequently with the 

Office of Regulatory Activities. I became an OTS employee with its 

creation in 1989 and served in various regional examination and 

supervisory capacities, working out of the Seattle, Washington, office and reporting to various regional line managers and ultimately 

to the Regional Director. I was promoted to Regional Director, West 

Region in September 2007 and thereafter reported directly to the 

OTS career bank supervision executives in Washington, DC. 

Over the course of my 36-plus years of public service, I saw some 

of the Nation’s more notable financial and economic crises and 

worked very closely with sister regulatory agencies such as the 

Federal Reserve, the FDIC, the OCC, and State regulatory authorities. I also saw agency policy changes in response to such crises. 

These experiences, grounded by my years as a bank examiner, 

helped define my approach to supervision. 

I have always believed that interagency cooperation is both appropriate and beneficial. As an examiner, I found that when fellow 

examiners from any of the agencies understood the same set of 

facts, there was usually agreement on the bank’s condition and appropriate regulatory corrective action. In addition, analysis is often 

improved by collaboration and constructive critique. I also found 

that it is critical to be factual and analytical so that conclusions are 

supported and regulatory actions are appropriate. I generally considered the seemingly unlimited FDIC staffing as a welcome aid to 

the OTS West Region’s limited resources. After I became Regional 

Director, my predecessor and I both followed the direction given us 

by OTS career executives in Washington, DC, and the written 

interagency protocols governing FDIC participation in examinations. 

Bank supervision is grounded in law, regulation, and agency policies, but can involve significant judgment and discretion. My approach was to have open discussion of examination and supervisory 

strategy, findings and proposed supervisory actions at all levels at 

OTS, and with the FDIC on higher-risk institutions. We conducted 

regular briefings and case discussions including examiners, regional managers, and agency executives, and obtained direction or 

concurrence on proposed next steps and actions. Supervision was a 

collaborative process between the regions and Washington. 

Examination findings and ratings typically form the basis for 

bank supervisory actions. I worked vigorously with the other regions and Washington, DC, to have the most highly talented and 

experienced examiners assigned to the West Region institutions 

posing significant risk. I consider the OTS examiners to be some 

of the very best. They are well trained, highly experienced, extremely hard-working, independent in thought, and were supported 

by me and some of the finest specialists from the capital markets, 

mortgage banking, accounting, appraisal, legal, and fair lending 


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1The prepared statement of Mr. Carter appears in the Appendix on page 149. 

disciplines. I also welcomed Washington, DC, participation in examinations and supervision. I expected line managers that were responsible for daily supervisory oversight to meet with examiners, 

bank executives, risk managers, auditors, and directors on a regular basis. In this regard, I also attended board meetings with the 

region’s largest and most troubled institutions whenever possible. 

I believe in supporting examiners and their conclusions and in taking supervisory action in accordance with agency policy to address 

weaknesses. 

The then OTS philosophy toward supervisory actions was that 

they should be firm but fair. Generally, the prevailing OTS practice 

was to calibrate the action based on the confidence of obtaining correction and within the parameters of the OTS then in existence enforcement policy. I have seen many instances where a simple request from an examiner or supervisor was effective in obtaining 

timely correction. To help ensure supervisory enforcement actions 

were taken in accordance with OTS’ policy, the West Region has 

long followed a practice of having a committee or executive review 

of possible enforcement action situations. OTS D.C. participated in 

most Enforcement Committee reviews and was always consulted. 

National tracking systems for following enforcement actions, examination findings, and violations were in various states of refinement, development, or completion during this time at the OTS. 

Mr. Chairman, bank supervision is a hard job, and hindsight is 

a good teacher. There are things I wish I could change. I am always deeply saddened when an institution fails because of the impact felt by all 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 will do my best to answer all your questions. 

Senator LEVIN. Thank you very much, Mr. Dochow. Mr. Carter. 

TESTIMONY OF LAWRENCE D. CARTER,1 FORMER EXAMINERIN-CHARGE (2004–2006), AND CURRENT NATIONAL EXAMINER, OFFICE OF THRIFT SUPERVISION 

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 am presently a national examiner for OTS, 

and I would like to tell you 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 I received magna cum laude 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. In 1987, I graduated from California State University, Los Angeles, with a MBA specializing in finance. While in 

graduate school, I worked at Trust Company of the West, known 

as TCW, working with investment account management for pension fund clients. 


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After I received my MBA in mid-1987, I went to work for what 

was then the Federal Home Loan Bank—still is—Federal Home 

Loan Bank of San Francisco, where I originally worked as a supervisory analyst. Shortly thereafter, in 1989, I became an examiner 

for the OTS when the examination functions at the Federal Home 

Loan Bank Board were transferred to OTS as part of the Financial 

Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 

1989. 

I have served in lead examination roles for many years at many 

large and small savings institutions, some of which were troubled. 

I also served in support roles, performing in all the CAMELS areas 

of the exam: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. I have supervised onsite staffs of 70 or more examiners, including the generalist, safety 

and soundness examiners, compliance examiners, information technology (IT), examiners, accountants, capital markets examiners, 

and Washington-based quantitative specialists that were well 

versed in the emerging Basel requirements. 

Throughout my career, I have worked closely and effectively with 

my counterparts from the FDIC, the Office of the Comptroller of 

the Currency, the Federal Reserve, and State regulators. 

It should be noted that, with few exceptions, 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. Examinations of small banks, as you might guess, 

take considerably less examination resources than large institutions like WaMu. 

From 1999 through 2002, I was what you would call the loan 

portfolio manager. On the annual WaMu examinations, the loan 

portfolio manager (LPM) was responsible for overseeing the asset 

quality or the A component of the CAMELS. In this role, I implemented a statistical sampling process for our review of WaMu’s homogeneous loan portfolios, which included the home loan portfolio, 

and I oversaw the more judgmental sampling and loan review activities for other types of loans in multiple geographic locations. 

From 2003 through 2006, I was the dedicated examiner-in-charge 

(EIC) for WaMu. And as EIC, I was responsible for exam scoping 

and planning prior to our examinations or field visits. I was responsible for overseeing the work of all examiners in managing 

communication of findings during the exam process and then preparing the examination report and leading what we call exit meetings with both management and the board of directors after the 

end of an examination. 

Of course, I performed these responsibilities under the guidance 

and oversight of my superiors both within the region and within 

Washington, DC, as well as with the support of numerous senior 

examiners and specialists. 

Late in my tenure as EIC, I worked to develop our continuous 

examination process, which we tailored after the large bank supervision programs of the OCC and the Federal Reserve. 

As EIC at WaMu, I supervised an experienced team of examiners 

and supervisory professionals that thoroughly analyzed the issues 

and challenges concerning this very large financial institution. I 

worked closely with region and Washington office staff to resolve 


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1The prepared statement of Mr. Reich appears in the Appendix on page 134. 

complex policy issues as they arose. Our role during the examination was to identify risks and regulatory issues, discuss those risks 

and issues up through the agency’s senior management, and then 

require appropriate corrective actions by WaMu management to 

address those risks and issues in a manner that promoted the safe 

and sound operation of the institution. 

Two years after I ended my term as EIC at WaMu, the institution failed. I should note that I have no special personal insight 

into the final days of WaMu, but I would be pleased to share with 

the Subcommittee my observations and experience gained from my 

23 years of regulating savings institutions, and answer any of your 

questions. 

Senator LEVIN. Thank you very much, Mr. Carter. 

Mr. Reich, let me start with you. In your opening statement,1 at 

the top of page 9 you wrote that stated income, low-document, and 

no-document loans were anathema to you. You said it was anathema 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 Washington, DC, said that 

NINA loans—that is where there is no income and no asset figures 

given—were imprudent. You had the authority as Director of OTS 

to do something about it, but you did not. So what stopped you? 

Mr. REICH. Most of what you said is absolutely correct. I do not 

recall, though, hearing from my examiner on the ground saying it 

was a flawed product. 

Senator LEVIN. Well, you believed it was a flawed product yourself. 

Mr. REICH. I did, and I questioned it at the outset, and—— 

Senator LEVIN. You were the Director, weren’t you? 

Mr. REICH. I was the Director. 

Senator LEVIN. So why not change it? 

Mr. REICH. 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—— 

Senator LEVIN. Are you referring to stated income loans or Option ARMs when you just said that? 

Mr. REICH. Both stated income and option instruments. 

Senator LEVIN. All right. It was your experience that these were 

flawed products. 

Mr. REICH. I would not necessarily call it a flawed product, but 

it was a product that I was uncomfortable with, and I was influenced by the fact that the product had been in existence for more 

than 20 years with positive experience in West Coast institutions. 

Senator LEVIN. It was anathema to you. 

Mr. REICH. It was. It was foreign to me. 

Senator LEVIN. No, it was anathema, not foreign. 


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1See Exhibit Nos. 1c, 1d, and 1e, which appear in the Appendix on pages 199, 200, and 202. 

2See Exhibit No. 1d, which appears in the Appendix on page 200. 

Mr. REICH. I grew up in an era where the fundamental principles 

of credit administration were character, collateral, capacity, and 

conditions. 

Senator LEVIN. You used the word ‘‘anathema’’ in your statement. 

Mr. REICH. I did. 

Senator LEVIN. You have this procedure here, you have this approach which is anathema to you, one of a number of things which 

were anathema to you, but they are still in existence. Did you, as 

head of the agency, not just say we are going to change this? 

Mr. REICH. I could have said that. 

Senator LEVIN. Why didn’t you say it? 

Mr. REICH. I chose not to because of the experience of institutions over the preceding 20 to 25 years. 

Senator LEVIN. And you regret it? 

Mr. REICH. In hindsight, I regret it. 

Senator LEVIN. Not in hindsight. In foresight you believed it was 

wrong. Coming in you believed it was—— 

Mr. REICH. We are at a point of hindsight today, and I regret it. 

Senator LEVIN. What kind of efforts did you make to change 

these practices? Did you issue a temporary new guidance and let 

people comment on it? 

Mr. REICH. No, I did not. As I said, I was influenced by the fact 

that there were 20 years of experience, of positive experience with 

these instruments. 

Senator LEVIN. So Washington Mutual then is originating hundreds of billions of dollars in these adjustable-rate mortgages. OTS 

allows them to engage in a set of high-risk lending practices in connection with the loans. You have low teaser loans, as low as 1 percent for 1 month, to entice borrowers. They were qualifying borrowers with lower loan payments than they might have to pay if 

the loan were recast. You are allowing borrowers to make minimum payments, which is in the vast majority of the cases resulting in negatively amortizing loans, and on and on. 

Then your people in the field make these kind of findings, and 

these are Exhibits 1c, 1d, and 1e.1 Were you here when I read 

these findings in the field? 

Mr. REICH. I was not. 

Senator LEVIN. All right. Well, let me read them to you. I am 

going to again read the somewhat longer context that these are 

from, Exhibits 1d and 1e. 

In Exhibit 1d,2 ‘‘2004 Underwriting of these SFR loans remains 

less than satisfactory.’’ 

‘‘The level of SFR underwriting exceptions in our samples has 

been an ongoing examination issue’’—that means OTS was unhappy with them—‘‘for several years and one that management has 

found difficult to address. . . .’’ 

Next, still 2004, this is what your folks found: ‘‘[Residential Quality Assurance]’s review of 2003 originations disclosed critical error 

rates as high as 57 percent of certain loan samples. . . .’’ 


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1See Exhibit No. 1e, which appears in the Appendix on page 202. 

In 2005, ‘‘SFR [Single Family Residential] Loan Underwriting 

. . . has been an area of concern for several exams.’’ That means 

several years. 

‘‘[Securitizations] prior to 2003 have horrible performance.’’ 

Continuing reading down under 2005, ‘‘. . . concerns regarding 

the number of underwriting exceptions and with issues that evidence lack of compliance with bank policy.’’ 

Next, still 2005, ‘‘[W]e remain concerned with the number of underwriting exceptions and with issues that evidence lack of compliance with bank policy. . . . [T]he level of deficiencies, if left unchecked, could erode the credit quality of the portfolio. Our concerns are increased when the risk profile of the portfolio is considered’’—and it was risky—‘‘including concentrations in Option ARM 

loans to higher-risk borrowers, in low and limited documentation 

loans, and loans with subprime or higher-risk characteristics.’’ 

In 2006, the next page, ‘‘[U]nderwriting errors continue to require management’s attention.’’ 

‘‘Overall, we concluded that the number and severity of underwriting errors noted remain at higher than acceptable levels.’’ 

In 2007, ‘‘Underwriting policies, procedures, and practices were 

in need of improvement, particularly with respect to stated income 

lending.’’ 

Your people are finding all this stuff. ‘‘Based on our review of 75 

subprime loans originated by [Long Beach], we concluded that 

subprime underwriting practices remain less than satisfactory.’’ 

How is that for an understatement? ‘‘Given that this is a repeat 

concern . . . we informed management that underwriting must be 

promptly corrected’’—‘‘promptly corrected’’—‘‘or heightened supervisory action would be taken.’’ No, it would not. Year after year 

after year, it was not taken. Why should they believe it was going 

to be taken now? 

In 2008, ‘‘High [Single Family Residential] losses due in part to 

downturn in real estate market but exacerbated by: geographic concentrations, risk layering, liberal underwriting policy, poor underwriting.’’ That is 2008, July. 

Then in Exhibit 1e,1 2006, ‘‘Within [Enterprise Risk Management], fraud risk management at the enterprise level is in the 

early stage of development.’’ Heck, they are just beginning to manage the fraud risk in 2006. 

In 2007, ‘‘Risk management practices in the . . . Home Loans 

Group during most of the review period were inadequate. . . . We 

believe that there were sufficient negative credit trends that should 

have elicited more aggressive action by management’’—how about 

more aggressive management by your . . . agency? 

‘‘In particular, as previously noted, the risk misrepresentation’’— 

here you go. Now you are talking fraud. ‘‘. . . the risk misrepresentation in stated income loans has been generally reported for some 

time.’’ For some time it has been going on. 

On and on, year after year. So what do you do about it? What 

does OTS do about it? Not one single formal enforcement action 

against WaMu from 2004 until 2008. 

Mr. REICH. That is not correct, Mr. Chairman. 


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Senator LEVIN. Until the end of 2008, it is correct. 

Mr. REICH. There was a formal enforcement action for BSA and 

flood insurance violations that led to—which was a formal action 

and included—— 

Senator LEVIN. That is an overcharge for flood insurance. That 

is not what we are talking about. 

Mr. REICH. Civil money penalties. 

Senator LEVIN. That is not what we are talking about. 

Mr. REICH. But it also included BSA and anti-money-laundering 

violations. 

Senator LEVIN. That is a money-laundering violation. We are 

talking about what they were doing in terms of the underwriting 

practices, the credit practices here, the mortgages they were 

issuing. No board resolutions required, no Memorandums of Understanding required, no fines. So the bank—I forgot what the number 

was. It came out. I think Senator Coburn used a number as to how 

many warnings, how many findings, how many deficiencies, year 

after year after year. 

Mr. REICH. I think he cited a number in excess of 500 items. 

Senator LEVIN. Yes. Now, is that apparently normal for OTS? 

Mr. REICH. Is what normal? 

Senator LEVIN. What I just described. You go year after year 

after year of these kind of findings, and you do not have any formal 

action taken. All you do is say we have told them they ought to do 

better, we have told them they ought to do better, they say they 

will do better. And they do not. 

Mr. REICH. My response to that, Mr. Chairman is that—— 

Senator LEVIN. You are the cop on the beat or supposed to be. 

Not a ticket, not a fine for this? How many years would it have 

taken if they did not go under before you would have acted? Is this 

acceptable to you? 

Mr. REICH. Washington Mutual was a 2-rated institution until 

early 2008. 

Senator LEVIN. Well, it took you long enough—— 

Mr. REICH. Typically, formal actions are not utilized in institutions that are 1 and 2—— 

Senator LEVIN. Well, that is in your hands. That is your decision 

not to give them a formal warning. 

Mr. REICH. I think that is the fairly common practice in—— 

Senator LEVIN. It may be common, but that is OTS’ determination not to take any kind of formal action at all, and the 2 is your 

decision. 

Mr. REICH. That is true, but—— 

Senator LEVIN. And you were reluctant to increase it to a 3 even 

though the FDIC was pushing you to do it, and when you did finally—finally—decide in early 2008 to push it from a 2 to a 3, you 

did not even then do anything publicly. You then violated your own 

policy, issuing a Memorandum of Understanding instead of—you 

had a board action, which is private, instead of a Memorandum of 

Understanding, which is public. Even after all these years of all 

these violations, you finally decide in early 2008 you are going to 

push them from a 2 to a 3, you then do not make that public, you 

do not do what policy indicated you traditionally do, which is to 

have a Memorandum of Understanding, which is a public docuVerDate Nov 24 2008 13:02 Nov 02, 2010 Jkt 057320 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 P:\DOCS\57320.TXT SAFFAIRS PsN: PAT

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ment. You delay that for months. Then you apologize in an email, 

‘‘I am so sorry,’’ you say, you are so sorry that you have to write 

him with an email. You have tried him twice on the phone. 

Now, I got to tell you, it is not only feeble enforcement, it is pitiful enforcement. You want to defend it? Go ahead. 

Mr. REICH. I would simply point out that the FDIC had a resident examiner on premise at Washington Mutual throughout the 

entire period of time that you are talking about, and that there was 

no ratings disagreement of Washington Mutual being a 2-rated institution until 2008. 

Senator LEVIN. And then there was a disagreement—— 

Mr. REICH. And then there was. 

Senator LEVIN. You disagreed with them. So for another 6 

months after they went pushing you to a 3, but this—did they 

make these kind of findings year after year after year, the FDIC? 

That was your agency. Don’t try to say the FDIC was sitting 

there. Your agency had primary responsibility, not FDIC. As a matter of fact, you even pushed them away, your people, because they 

did not have primary responsibility. You pushed them away. You 

did not want them to have a seat at the table. You would not even 

give them a desk, by the way. But your people made these findings, 

not FDIC. You are the primary regulator, and you did not want 

FDIC to be meddling around in your backyard. 

Now, let us go back to your agency. Year after year you make 

these findings. Is that in your judgment adequate regulation? 

Mr. REICH. Well, those are all items that are taken from examination reports, and they are sort of taken out of context. 

Senator LEVIN. No, they are not. I read the context. I gave you 

the context on these. 

Mr. REICH. I believe the 2006 examination report states in the 

cover letter that risk management practices and internal control 

environment continue to improve in 2005. 

Senator LEVIN. Well, I read you 2006. 

Mr. REICH. Right. 

Senator LEVIN. OK. So it said it had not. They remain. 

Mr. REICH. The 2007 general comments for the year 2006 and 

through the first quarter of 2007 indicated that there were continuing credit challenges, that operating results improved, that 

there had been a cease-and-desist order with BSA, AML, an increase—— 

Senator LEVIN. That was the money-laundering issue. 

Mr. REICH. That is correct. 

Senator LEVIN. Yes. I would not cite that in defense of your feeble enforcement, that there is a money-laundering order. But, at 

any rate, let us talk about what they were doing there with mortgages. 

Mr. REICH. It also said that asset quality was satisfactory and 

trends were negative. 

Senator LEVIN. Are you using that as a defense? 

Mr. REICH. I am not using it as a defense. I am simply pointing 

out that the examination results in sum indicated that the institution still deserved for the years up until 2008 the 2 rating that it 

was given by the OTS, and that was agreed to by the FDIC. 


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Senator LEVIN. And then the FDIC in February 2008, they finally persuade you, and they made an effort, by the way, for some 

time to persuade you to go to a 3, but nonetheless, finally in February 2008 you have a 3 rating. What happened? Why, then, is 

there not the usual traditional Memorandum of Understanding, so 

called, made public? Why is it then? 

Mr. REICH. I don’t know, to tell you the truth. I do not know why 

it took so long to implement the MOU. 

Senator LEVIN. Why don’t you know? This is a huge issue. You 

knew you were coming here. Why don’t you know that? I mean, you 

used that as an excuse for no formal enforcement action, that they 

were a 2 instead of a 3. Then you come in front of us and you say, 

well, you don’t know why it took so long when you finally decided 

to move them to a 3 to have a Memorandum of Understanding 

which is public for failure for another, what, 7 months, from February, and you don’t know why? 

Mr. REICH. Well, I knew that there was—— 

Senator LEVIN. You should know why. 

Mr. REICH [continuing]. A great deal of back and forth between—— 

Senator LEVIN. Not with FDIC. They were pushing you hard to 

go to a 3. So who is the back and forth with? 

Mr. REICH. I think the back and forth is between the OTS, the 

FDIC, and perhaps regional management on the West Coast. I am 

not certain. 

Senator LEVIN. It wasn’t with FDIC. They were pushing you 

hard. Are you at all embarrassed by this? 

Mr. REICH. I am. 

Senator LEVIN. You ought to be. 

Mr. REICH. I am, by nature, Mr. Chairman, a humble person. I 

am a casual person and an informal person, and it is not at all unusual for me to address the people who run the institutions that 

I supervised, was responsible for supervising, by their first name, 

if I know them, particularly if I am 10 years older than they are. 

Senator LEVIN. The apologetic nature of that email doesn’t—— 

Mr. REICH. I am not disturbed. I make no apologies—— 

Senator LEVIN. It doesn’t come through to you at all? 

Mr. REICH. I make no apology for that email whatsoever. 

Senator LEVIN. Do you make any apology for the 6-month delay 

in making public their rating? 

Mr. REICH. No, I don’t know if apology is the right word, but I 

regret that there was a 6-month delay. 

Senator LEVIN. And you don’t know why? 

Mr. REICH. I don’t recall now. It has been 2 years, and I can’t 

remember yesterday, let alone 2 years. But I regret that it took so 

long. 

Senator LEVIN. This was not some ordinary institution, by the 

way. As you know, it is the largest institution that has ever been 

taken over by FDIC, bank or thrift. So this is not something which 

is sort of asking you to kind of look back at some institution which 

was some small institution you can’t remember. This was the biggest bank failure in history. 

Mr. REICH. That is true. 


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Senator LEVIN. So when you tell us you can’t remember why it 

is that at a critical time you can not remember why it is—— 

Mr. REICH. I was not personally involved in the negotiation of 

the components of the MOU and I do not know, I do not recall, 

don’t think I ever knew exactly the reasons for the length of time 

that it took. 

Senator LEVIN. Well, Mr. Dochow, maybe you can tell us. Why 

did it take so long? 

Mr. DOCHOW. Mr. Chairman, my recollection is that the interim 

downgrade to a 3 from a 2 was done on an interim basis. This was 

before the examination results were completed. This was before the 

examination findings had been written. This was a proactive move, 

quite frankly, to move this institution from a 2 to a 3 based on 

what we were seeing. And as a result—— 

Senator LEVIN. The FDIC wanted to do it a lot earlier than you 

did, right? 

Mr. DOCHOW. I don’t have that recollection. 

Senator LEVIN. You don’t? 

Mr. DOCHOW. My recollection is that any differences we had were 

in late 2008, mid-2008, over a rating between a 3 or a 4, not to a 

3. I think there was general concurrence, based on my recollection. 

And that was an interim move. That was a proactive move to do 

it before the examination had concluded, and a Board Resolution 

was required. Now, you can argue that the Board Resolution may 

have been stronger, but remember, this examination was ongoing. 

The examiners are still developing facts and we were working towards an enforcement action. 

Senator LEVIN. Well, then how do you—I will have to go back to 

Mr. Reich, his own memo here in July. This is July. ‘‘I’ve been 

wrestling with the issue of a MOU versus a Board Resolution as 

a result of our conversation in my office. I have decided that a 

MOU is the right approach for OTS to do in this situation. We almost always do a MOU for 3-rated institutions, and if someone 

were looking over our shoulders, they would probably be surprised 

we don’t already have one in place.’’ You betcha. July 3. It wasn’t 

until, when, September, that the MOU was finally made public. So 

there is another—July, August, September—another couple of 

months. 

But, Mr. Reich, this is your memo, this is your email to Kerry. 

You would like to be able to say a Board Resolution is the appropriate—it is so apologetic, and you don’t even see that. And then 

he says, ‘‘[T]he investment community . . . would probably only be 

surprised to learn that one didn’t already exist.’’ 

Now, you can say whatever you want, Mr. Dochow, about this 

was something in progress, this was interim. There was a decision 

that was made in February, was that not true? Wasn’t there a decision made in February to move them from a 2 to a 3? 

Mr. DOCHOW. Yes. 

Senator LEVIN. OK. 

Mr. DOCHOW. Mr. Chairman, my recollection may not be precise 

here. It has been quite some time, and I have had some limitations 

on access to documents. But I believe the OTS policy at that point 

in time did not require the initiation of a MOU. But instead, at 

that point in time, the OTS policy was consideration of a Board 


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Resolution or a MOU, and that the policy requiring a MOU came 

in place after that time period. 

Senator LEVIN. Well, I am just reading the memo from Mr. Reich 

here to Mr. Killinger. ‘‘Kerry, we almost always do a MOU for 3- 

rated institutions, and if someone were looking over our shoulders,’’ 

which I sure as hell wish there were, ‘‘they would probably be surprised we don’t already have one in place.’’ I mean, that is your 

email, so pretty good evidence contemporaneously. 

Senator Kaufman. 

Senator KAUFMAN. Thank you. I would like to go through some 

of this. Mr. Reich, what is a stated income loan? 

Mr. REICH. It is a loan where the borrower states his income. But 

there is actually a little bit more documentation behind stated income, low documentation, and no documentation loans than is obvious. Those are catch-all terms. But it is my understanding that 

there is a little more documentation than the popular conception. 

Senator KAUFMAN. We had a panel the other day and I asked 

each of them and they said stated income loans are loans where 

the only income is the stated income—— 

Mr. REICH. I think that in many cases, there is background 

checking of reasonableness for the amount of income reported, depending upon the person’s occupation. 

Senator KAUFMAN. Is that your testimony, is that there was 

background checking on stated income loans beyond—— 

Mr. REICH. That is what I have been told. 

Senator KAUFMAN. Yes. And that is—— 

Mr. REICH. Now, I am not saying that was the case in every stated income loan—— 

Senator KAUFMAN. Right. 

Mr. REICH [continuing]. But that there were some procedures 

which existed—— 

Senator KAUFMAN. Right. 

Mr. REICH [continuing]. By institutions that made stated income 

types of loans that relied upon other types of reporting agencies to 

sort of verify the reasonableness of income for certain types of occupations. 

Senator KAUFMAN. Right. Mr. Dochow, has that been your experience with stated income loans? 

Mr. DOCHOW. Actually, I think Mr. Reich is very accurate here. 

Stated income loans tend to refer to programs for stated income. 

Senator KAUFMAN. Right. 

Mr. DOCHOW. They were originally designed for self-employed 

high-income individuals. 

Senator KAUFMAN. Right. 

Mr. DOCHOW. They migrated over the years and they were offered inappropriately to some customers. 

Senator KAUFMAN. OK. 

Mr. DOCHOW. But when an institution makes a stated income 

loan in their program, they should be getting, and the expectation 

is they are checking FICO scores—— 

Senator KAUFMAN. Right. 

Mr. DOCHOW [continuing]. They are checking appraisals and—— 

Senator KAUFMAN. Right. 


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Mr. DOCHOW [continuing]. They are doing a reasonableness test 

on that stated income. 

Senator KAUFMAN. Right. 

Mr. DOCHOW. So they have outside data sources for doing that. 

Senator KAUFMAN. Right. 

Mr. DOCHOW. And that is what the examination process referred 

to. So there are additional checks. It is not a customer walking in 

and saying, ‘‘I make $100,000. Give me the loan.’’ That is just not 

the way it is done. 

Senator KAUFMAN. You are not saying that is the way it is done. 

You are saying that is the way it is not supposed to be done? 

Mr. DOCHOW. That is not supposed to be done that way. 

Senator KAUFMAN. Exactly. And why did they even start a stated 

income? Why would you even have stated income loans? I mean, 

if I were to borrow money, I fill out this whole incredible form 

about where is my bank account, how much is in it, and how much 

I make, and have to provide documentation of what I make. It is 

the one thing that I think everybody in America knows, when you 

go into a loan, you have got to verify to the person that is making 

the loan what your income is. 

Mr. DOCHOW. And I do the same thing, Senator—— 

Senator KAUFMAN. Right. 

Mr. DOCHOW [continuing]. And I think that is the appropriate 

way—but I think we also need to keep in mind, the way it has been 

explained to me is that stated income originally was for high-income individuals who had income that was hard to document 

through a W-2. 

Senator KAUFMAN. Right. 

Mr. DOCHOW. Now, what happened was, over the years, it became commoditized—— 

Senator KAUFMAN. Exactly. 

Mr. DOCHOW [continuing]. And the GSEs started accepting the 

programs. 

Senator KAUFMAN. Yes. 

Mr. DOCHOW. And even their automated underwriting, Desktop 

Underwriter or Loan Prospector, started accepting more liberal 

terms. 

Senator KAUFMAN. Exactly. 

Mr. DOCHOW. And so it became the situation where the documentation kept in the file, quite frankly, sometimes was purged. 

Senator KAUFMAN. Yes. 

Mr. DOCHOW. As you heard earlier today. 

Senator KAUFMAN. Yes. 

Mr. DOCHOW. Now, it was purged not because it wasn’t considered. 

Senator KAUFMAN. Right. 

Mr. DOCHOW. It was purged because the stated income loan had 

to operate under a given program. 

Senator KAUFMAN. Right. 

Mr. DOCHOW. In order to qualify for the program, you couldn’t 

have that information in the file. So I think there—— 

Senator KAUFMAN. How would you have a program, you said you 

can’t have the W-2 form in there? 


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Mr. DOCHOW. Because that is my understanding, the way it has 

been explained to me is that is the way the GSEs and the secondary market accepted those programs. 

Senator KAUFMAN. No, I can understand why they accepted the 

program. They will accept anything. They were trying to get as 

many mortgages as they could and get mortgage-backed securities 

and make it all work. I am just saying, why would the OTS accept 

that? 

Mr. DOCHOW. I can tell you that it was standard practice that 

those loans were made, and that to the extent they were sold into 

the secondary market without recourse, or even with recourse—we 

focused on the recourse, quite frankly. 

Senator KAUFMAN. Sure. You didn’t focus on the riskiness of the 

loans? 

Mr. DOCHOW. We focused on the riskiness to the bank in terms 

of what it may have to repurchase. 

Senator KAUFMAN. In other words, if some bank just said, look, 

we are not going to use any of this program, we are just taking 

money in, you wouldn’t look at that as something to consider in 

your oversight regulating an institution? 

Mr. DOCHOW. No. I maybe have misunderstood the question. 

Senator KAUFMAN. Sure. 

Mr. DOCHOW. We obviously are concerned with an institution’s 

ability to prove the ability of the customer to repay the loan, and 

that is why the agencies on an inter-agency basis issued the NonTraditional Mortgage Guidance and the Subprime Guidance, to 

make sure that you documented the customer’s ability to repay. 

Senator KAUFMAN. Right. Mr. Reich, I assume you agree with 

what Mr. Dochow was saying? 

Mr. REICH. I do. 

Senator KAUFMAN. So it started out 20 years ago as a program 

for high-wealth people. I was going to go on, but I have to stop on 

that. It seems to me a high-wealth person is the easiest person to 

show you what they have got. And obviously, they are going to be 

the ones with the biggest mortgages. It made more sense the other 

day. They were saying it started with people who are self-employed. What would you say a high-income person would be? 

Mr. DOCHOW. Well, Senator, what I meant, when I said high-income, I was including self-employed—— 

Senator KAUFMAN. No, I meant, what is a high-income person? 

Mr. DOCHOW. It would vary upon the type of loan they were getting—— 

Senator KAUFMAN. No, I mean, what would you consider? If you 

were putting together a program and you started and you said, 

look, we are starting a program and we are going to have high-income people—— 

Mr. DOCHOW. High six-figure incomes. 

Senator KAUFMAN. High six-figure. I cannot believe that anyone 

with a high six-figure income comes in for a loan and doesn’t give 

you documentation on what they are making, at least a portion of 

what they are making. To have no stated income, that is hard to 

believe. 

So it started out. It was one of those things you used in special 

cases. I think, Mr. Reich, that is what you said. It is a special case. 


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We are going to use it with high-income people. The people the 

other day said we are going to start out using it with folks who are 

self-employed. So that is a good program, and it is working for 20 

years, as Mr. Reich says. 

What happens when you find out that 90 percent of all WaMu’s 

home equity loans are stated income, and you find out that 73 percent of all Option ARMs are stated income, and 50 percent of your 

subprime loans are stated income? I mean, wouldn’t you stop at 

that point and say, what is going on here? Mr. Reich. 

Mr. REICH. I didn’t know those percentages until I heard you say 

them today. 

Senator KAUFMAN. Let me just make sure I get this in context. 

WaMu was one of the big thrifts that you were supervising? 

Mr. REICH. That is correct. 

Senator KAUFMAN. In fact, they were the biggest, right? 

Mr. REICH. That is correct. 

Senator KAUFMAN. And they had, I think at one point, of the 

thrifts you were supervising, 25 percent of all the assets under supervision were WaMu assets? 

Mr. REICH. Approximately. 

Senator KAUFMAN. Do you think it is hard for me to believe that 

you didn’t know that 90 percent of all the home equity loans they 

were doing were stated income? 

Mr. REICH. I don’t know if it is hard for you to believe or not, 

but I did not personally keep track of the composition of each segment of their portfolio. I was focused on asset quality overall and 

not within each component of the portfolio. 

Senator KAUFMAN. Mr. Dochow. 

Mr. DOCHOW. The percentages are alarming. 

Senator KAUFMAN. Yes. 

Mr. DOCHOW. But I also think it is fair to keep in perspective different products. 

Senator KAUFMAN. I am trying to keep this in perspective. I really am. 

Mr. DOCHOW. Let us take the home equity loans. 

Senator KAUFMAN. Sure. 

Mr. DOCHOW. If you and I went into a bank and wanted a home 

equity line of credit, those become automated approval processes—— 

Senator KAUFMAN. Right. 

Mr. DOCHOW [continuing]. Much like a credit card. 

Senator KAUFMAN. Sure. 

Mr. DOCHOW. You fill out your paperwork, you put down what 

your income is—— 

Senator KAUFMAN. Right. 

Mr. DOCHOW [continuing]. And the bank pulls your FICO scores, 

your credit reports, the loan gets approved or disapproved. Those 

programs lend themselves more to that type of underwriting. 

Senator KAUFMAN. Right. 

Mr. DOCHOW. They are smaller in dollars. They are large in volumes. And the credit score, their credit reports, their loan-to-value 

ratios were historically the most predictive of ability to pay and 

those loans’ performance. 


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Senator KAUFMAN. So why not just ask people what their income 

was and have some verification for it? That is the part I am having 

trouble with. I got all the rest of it. 

I mean, we could poll everybody in this room. I don’t think anyone has ever gone in, outside of maybe if they were with WaMu 

or some of the other banks in California which did practice this, 

Mr. Reich, or this business as WaMu—I don’t think anybody in this 

room has ever gone into a loan and they said, what is your income, 

and they said, OK, that is enough. I am going to check your FICO 

score and everything else, but you don’t have to document where 

your income is coming from. You don’t have to give me a W-2 form. 

You don’t have to do anything else. I have credit cards, I have 

never seen that as an experience for me. 

And again, I realize it started in this industry, and I think 

maybe it started for a good reason. And as Mr. Reich said, I think 

everyone would say this is an anathema. A stated loan is anathema. I think that is what most people would say. I think the two 

regulators who were here earlier kind of went, wow. When the 

folks from the two risk managers that testified the other day were 

concerned about this and reported their concern to management. 

So I am trying to figure out—because every time something like 

this has come down over history, the standard answer you hear— 

well, everybody did it. Everybody did it. And when you hear that, 

that is when I get very scared because what are we going to do 

here in the Senate so that we deal with a concept that everybody 

did it is—we are a Nation of laws, not a Nation of everybody did 

it. 

Mr. Reich and Mr. Dochow, would you like to comment on my 

concern? 

Mr. REICH. I think stated income loans have since been ruled unsatisfactory—I am not entirely certain of that, but I believe that 

the regulators have since eliminated stated income loans as a category of loans in the future. 

Senator KAUFMAN. So that is what really concerns me. Do you 

get the point I am trying to make? Here is a policy that everyone 

agrees was a very bad policy. Here is a policy that was so widespread that 90 percent of the home equity loans fall in this policy, 

a policy that you said was anathema, a policy that even Mr. 

Dochow, with all due respect, other concerns, most people say was 

bad. I am not talking about people in this room, I am talking about 

regulators, people in WaMu. Every time I have read it, everything 

I read about stated income, from experts, folks like you, they say, 

this is not a good program. This is not a good idea. 

And you allow a situation to develop where 90 percent of the 

home equity loans, 73 percent of the Option ARMs—I keep saying 

these numbers over again because I hope they are going to 

change—50 percent of the subprime loans are stated income loans. 

And once it comes to light, everyone says we have to stop this. 

Mr. Dochow, with all due respect to your explanation of how this 

is a loan and could make some sense, everybody said, Whoa, this 

has got to stop. 

And so, Mr. Reich, my point is, when you are sitting up here, you 

are trying to figure out, how do we stop this—what is the next stated income loan? Do you see what I am saying? What is the next 


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program where people will say, well, everybody did credit default 

swaps. Everybody did XYZ. Everybody took $500 out of the till 

every Thursday before they went home. Do you see my concern 

here? 

Mr. REICH. I understand your frustration. 

Senator KAUFMAN. Thank you. Mr. Dochow. 

Mr. DOCHOW. I think you make an excellent point, Senator. Let 

me add a little, if you will, flesh to some of your comments—— 

Senator KAUFMAN. Sure. 

Mr. DOCHOW [continuing]. Because I think they are absolutely on 

point. We saw when credit cards first came out, as an industry, 

that the modeling worked great for a few years, then failed miserably. 

Senator KAUFMAN. Yes. 

Mr. DOCHOW. We saw it with Basel II, the capital analysis that 

it said these mortgages needed very little capital. There is very little risk. Everybody was overcapitalized. 

And so what we find is that the financial system, to the extent 

it is free market, it develops products for the short-term. 

Senator KAUFMAN. Yes. 

Mr. DOCHOW. And that is very difficult because you have that 

balancing act between having a free market, capitalistic system 

and a safe and sound system. And to have someone just simply 

rule, this product is good, this product is bad, has some consequences. So it is a very difficult dilemma and—— 

Senator KAUFMAN. Yes, and frankly, I am concerned, because I 

don’t want to see over-regulation, and I know you don’t, either. But 

when you have situations like this, like you say, it was a systemic 

problem, and it was a systemic problem right to the top, we are 

going to just self-regulate the markets, we don’t need any regulation, it was pretty widespread. 

Let me ask you, though, at some point, Mr. Thorson said earlier 

that this is like the fact that these numbers, which I will not read 

again, there were so many of these types of loans, and as the 

Chairman said, even have specific cases where people went in and 

redacted the W-2, at some point, doesn’t this begin to look like 

fraud on somebody’s part? 

Mr. DOCHOW. I will comment, Senator, if I may. 

Senator KAUFMAN. Sure. 

Mr. DOCHOW. Actually, I think it raises a different issue—— 

Senator KAUFMAN. OK. 

Mr. DOCHOW [continuing]. In addition to the potential fraud. It 

raises the issue of income and incentives. And what I mean by that 

is stated income programs generally gave the lending institutions 

a higher margin. 

Senator KAUFMAN. Right. 

Mr. DOCHOW. And even though the customer provided the income, even though the bank may have considered the income 

and—— 

Senator KAUFMAN. Right. 

Mr. DOCHOW [continuing]. Looked at those W-2s, when they were 

redacted from the file, the bank was then entitled to the higher income. 

Senator KAUFMAN. Right. 


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Mr. DOCHOW. Now, the customer may have come in and applied 

for the stated income program and requested it and the bank had 

income information, but the bank—I think the issue it raised in my 

mind when I heard that earlier was—what is the incentive here? 

Senator KAUFMAN. Right. 

Mr. DOCHOW. Is the customer being given a higher-costing product than they should have been given? 

Senator KAUFMAN. Yes. And here is my concern. I was at a hearing yesterday on Afghanistan and the national police and the problem that we spent $8 billion and we have nothing to show for it, 

and there is a way to deal with this at such a high level that we 

get away from what actually happened. Oh, yes, it was because of 

Basel. It was because of the national leadership in this country 

saying we should have a free market and we didn’t need any regulation. 

And we have now learned that is not a problem, that was a real 

problem. Alan Greenspan, as one of the parents of this, said this 

is a problem. It causes me dismay that we failed. We found out 

that the stated income loan doesn’t work. But this is at a very coldblooded level. 

In the end, it took some people down in the trenches—and we 

know that the Wall Street people were coming and encouraged people to give mortgages. We can get these mortgage-backed securities 

and we know we can move them down the line and they lead, like 

the Chairman said, toxic waste flowing down the river away from 

us. 

And in that kind of environment, everybody—and we have a 

compensation program, as you said, which is just saying to people, 

you got a lot more compensation the more risky the events got. So 

this is all happening. 

But in the end, somebody has to say, I am going to break the 

law. I am going to commit fraud. I am going to do something. When 

you have 90 percent stated income loans—by the way, it is from 

the top of the firm right on down. Everybody has got to know what 

is going on. These are not dumb people. 

And that is kind of what my concern is. OK, I understand it. It 

was a bad environment. They weren’t getting good guidance from 

their national leadership. I understand that they were doing techniques that had been used, as Mr. Reich says, for 20 years and 

were OK. I know my compensation is way up. Everybody’s compensation is up, the more of these things we do. And I know Wall 

Street was singing their siren song about mortgage-backed securities and we can all make a lot of money. 

As Mr. Thorson said, this is a target-rich environment. It took 

some people in the building to basically say, I am going to take the 

money. I am going to put in stated loans. I mean, there are cases 

where everybody involved, every loan, they go to someplace and 

just tell me what you want, fill out the forms, we are off and running, right? I mean, this is an environment. 

As a regulator, I mean, if you were regulating this now and you 

knew about this thing, isn’t this time to send some notices to the 

Justice Department about referrals? 

Mr. REICH. If we see evidences of fraud, we should refer it to the 

Justice Department. 


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Senator KAUFMAN. All right. Mr. Dochow. 

Mr. DOCHOW. In fact, Senator, one of the things I have been 

known to do is to require institutions themselves to make the 

criminal referrals, also. 

Senator KAUFMAN. Right. That would be the best. But the problem is, when you have it, like you said, systemically, where people 

are—Mr. Reich, you didn’t know about this 90 percent, 73, and 50 

percent, and hindsight is 20/20, but not taking hindsight, just saying today, if you knew when you were there that 90 percent—these 

numbers, wouldn’t you at least look into the fact that there might 

be fraud being created? 

Mr. REICH. I might have, had I known those numbers at that 

point in time. 

Senator KAUFMAN. Yes. Mr. Dochow. 

Mr. DOCHOW. The answer is yes. 

Senator KAUFMAN. Mr. Carter, you have been sitting here very 

patiently through the whole thing. What do you think? 

Mr. CARTER. We knew there was a greater propensity for fraud 

in stated income loans. From an examination standpoint, we would 

look at the fraud risk management practices of the institution from 

the top down. 

Senator KAUFMAN. And if you saw this going on, you were aware 

of these numbers, you would have at least asked them to make a 

referral to the Justice Department? If not, you would have referred 

it yourself? 

Mr. CARTER. Any time we saw any evidence of anything criminal, 

we would require the institution to file a Suspicious Activity Report. 

Senator KAUFMAN. And is it fair to say that since, at least Mr. 

Reich and Mr. Dochow—by the way, were you aware of these numbers, 90 percent, 73 percent, and 50 percent? 

Mr. CARTER. I don’t recall those numbers offhand. 

Senator KAUFMAN. So we are saying no one was aware of the 

numbers. But what we are saying is if you did know the numbers, 

you would at least in the first instance begin to look into—I read, 

Mr. Carter, you would have looked into it? I mean, the target-rich 

environment is not a bad phrase to use when you have 90 percent 

of your loans being stated income, is that fair to say? 

Mr. CARTER. We elevated our review of fraud risk management 

practices as the market began to heat up—— 

Senator KAUFMAN. Yes, but I mean, back in the beginning, and 

this is what scares me. We start using things like fraud, examination, whatever you just said, and it all sounds so nice and coldblooded, but when you look down at this thing, as you say, and you 

look at this and you say, there is somebody committing fraud down 

here, and it isn’t just some clerk down at the bottom doing this. 

They are doing something that Mr. Reich has qualified as an 

anathema, that everyone considers as poor banking policy, and 

they are doing it within 90 percent of their prime loans and 53 percent of their—somebody down there is doing something. 

And so it doesn’t matter whether you are making money or not, 

to go back to the Chairman’s point. This institution is making 

money or isn’t making money. You still look at this thing and say, 

what is going on here? And if you knew that, I think all three of 


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you agree, you would look into it, and I suggest that if you looked 

into it based on what others have said, you would have found that 

this just wasn’t happening. This was not a coincidence. That is the 

only point I want to make. Am I making a fair statement, Mr. 

Reich? 

Mr. REICH. In my opinion, our examiners on the ground were 

testing asset quality throughout all of their portfolios and they did 

that consistently, year after year after year. 

Senator KAUFMAN. Right. 

Mr. REICH. And the institution continued to be 2-rated, which 

is—— 

Senator KAUFMAN. But, I mean, because you didn’t have it and 

you didn’t know—you now know that all these stated loan things 

were out there. Don’t you have to, now that you know, say that at 

least you would begin to look into the possibility that it might be 

fraud? 

Mr. REICH. I would agree with that, Senator Kaufman, but I 

think, also, we need to remember what the economic environment, 

the competitive environment and—— 

Senator KAUFMAN. Sure. I have got it. 

Mr. REICH [continuing]. The emphasis on the American dream, 

getting people in their homes—— 

Senator KAUFMAN. Right. 

Mr. REICH [continuing]. And finding financing vehicles that 

would enable them to do that. 

Senator KAUFMAN. OK. Thank you. The only point I want to 

make is we went through that in Basel II, where all these things 

are going on, but in the end, when it comes—that is what scares 

me, Mr. Reich. I am getting OK, and then you scare the hell out 

of me again because you basically say, well, you have got to understand the environment. So it is the environment. Everybody was 

doing it. You have got to understand that. 

And my basic thing is, if that is what we are, then Senator Levin 

and I are on a fool’s errand to try to straighten this out. If every 

time something gets to be popular and every time people are making a lot of money—I mean, if people are making a lot of money, 

my normal response would be, I ought to look at that. That is not 

reassuring to me. 

Mr. REICH. Senator, I think lessons have been learned from what 

we have been through. 

Senator KAUFMAN. Thank you. Mr. Dochow. 

Mr. DOCHOW. One observation I would offer is I have always believed that companies such as banks who are insured by the FDIC 

and the taxpayer is ultimately on the hook ought to have a special 

standard, a special creed of some type, and that their performance, 

in part, ought to be measured by that standard to the customer, 

to the public interest. 

I can tell you, in my career, I have been dismayed at comments 

from CEOs and even small community banks who say their only 

responsibility was to shareholders. 

Senator KAUFMAN. Right. 

Mr. DOCHOW. I think that gets to the linchpin. 

Senator KAUFMAN. I think that is basically—I am sorry to have 

gone so far over, Mr. Chairman. 


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1See Exhibit No. 39, which appears in the Appendix on page 357. 

2See Exhibit No. 34, which appears in the Appendix on page 335. 

Senator LEVIN. No, not at all. I am glad you are doing what you 

are doing—it is exactly on target. It is not, though, just what you 

have discussed. It is also the cultural environment inside the regulatory agency. I want to read you a couple more emails about that 

cultural environment. 

If you take a look at Exhibit 391, right in the middle there, it 

says—this is to you, Mr. Dochow. ‘‘We are going to have the same 

battle on the complaint memo, although I still stand by the findings. Since we weren’t able to do a separate evaluation of the process, they will fight it. It doesn’t matter that we are right, what 

matters is how it is framed. And all we can do’’—listen to this— 

‘‘is point to the pile of complaints and say there is a problem.’’ 

That is not all you can do. You can do a lot more than that if 

you have the will to do it. 

Take a look at Exhibit 34.2 This one is really pretty dramatic 

stuff. Exhibit 34, this is a time when OTS was looking at an underwriting recommendation, and they were going to be a little bit 

tougher in their recommendation, and they were talked out of it by 

the bank. Take a look at page 2. ‘‘OTS confirmed today that they 

will re-issue this memo without the ‘Criticism.’ It will be a ‘Recommendation.’ ’’ So it starts off as a criticism, but then OTS is 

talked into making it less than a criticism. It is just going to be 

a recommendation. 

And then if you look at the first page of Exhibit 34, you will see 

a memo, ‘‘Good news’’—this is inside of the bank. ‘‘Good news— 

John’’—and that is Robinson at WaMu—‘‘was able to get the OTS 

to see the light’’—you guys were really seeing the light a lot—‘‘and 

revise the Underwriting rating to a Recommendation. Our response 

is already complete.’’ 

And then at the top of this memo from the head of Home Loans, 

‘‘I’ll bet you’re a happy guy!!! Well done.’’ 

Well, they were too happy too often with OTS backing off from 

taking strong action. 

And then take a look, if you would, at—and, by the way, while 

Senator Kaufman is here, I think that stated income loans are still 

not prohibited at all. We just heard that from the last panel, so I 

think, Mr. Reich, when you said that you thought—— 

Mr. REICH. I thought it had been dealt with in the past year. 

Senator LEVIN. No, it is not at all dealt with. It is still a very 

open issue, and it is the reason why Congress has a responsibility 

to put down some bright lines here. We cannot rely on the regulators. That is obvious from today’s hearing, it seems to me. We 

should be able to rely a lot more on the regulators, but we cannot. 

We have to do some tough stuff—— 

Senator KAUFMAN. All the same, Mr. Chairman, good fences 

make good neighbors, and I think good regulators work best when 

they have bright-line rules on what is OK and what is not OK. 

Senator LEVIN. They can point to them when they come to telling 

the folks they are supposed to regulate, Hey, this is the law, we 

are going to enforce it. 


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1See Exhibit No. 19, which appears in the Appendix on page 277 

2See Exhibit No. 17, which appears in the Appendix on page 269. 

3See Exhibit No. 27, which appears in the Appendix on page 311. 

There is plenty of discretion to do that, which is not used too 

often, as we are seeing. But, nonetheless, it will, I think, help pretty clearly if we have some bright lines. 

Then we have to take a look at Exhibit 19.1 OTS examiners knew 

that Washington Mutual and Long Beach were notorious for selling 

bad loans. This gets to the point that Senator Kaufman was talking 

about. Just let them go. 

Now, Exhibit 19, in 2005 you had an OTS examiner sending an 

email to colleagues with this description of the Long Beach mortgage-backed securities: ‘‘[Securitizations] prior to 2003 have horrible performance. LBMC [Long Beach] finished in the top 12 worst 

annualized NCLs [net credit losses] in 1997 and 1999 thru 2003. 

. . . At 2/05, LBMC [Long Beach] was #1 with a 12% delinquency 

rate.’’ Its delinquency rate was No. 1, and you folks knew about 

this. 

Now, OTS apparently does not think too much about the impact 

of the thrifts that you are supposed to regulate selling billions of 

dollars in poor-quality, high-risk, toxic loans in the financial markets. Apparently, that is not—you do not view that inside your jurisdiction. But it could be very directly inside your responsibility 

because if those loans come back, that does have an impact on the 

institutions that you are supposed to regulate. Would you agree 

with that, Mr. Dochow? 

Mr. DOCHOW. Yes. 

Senator LEVIN. OTS, on Exhibit 17,2 in May 2004 issued a findings memo on excessive errors in the underwriting process, concluded that some of the reasons were sales culture focused heavily 

on market share via loan production and extremely high lending 

volumes. OTS recommended to WaMu that it should compensate 

loan processors based on the quality of the loans that they made. 

And on page 5, WaMu laid out a set of corrective actions that it 

planned to take. But as is happening regularly, as we have seen, 

WaMu did not carry out the plan that it designed. And so next 

year, Exhibit 27,3 OTS asked WaMu to address ‘‘continuing high 

levels of errors in loan origination process.’’ That is OTS’ words. 

OTS had to revisit the problem of paying loan staff for quantity 

over quality. Again, it asked WaMu to reward loan processors 

based on the quality of the loans that they made. 

So how about Mr. Carter? Do you know whether OTS was more 

successful the second time around in pressuring WaMu to reward 

its loan processors for loan quality instead of quantity? Do you 

know? 

Mr. CARTER. I do not recall specifically what progress they made, 

but they made steady progress throughout the examinations. 

Senator LEVIN. They made steady progress on what? 

Mr. CARTER. In addressing many of our issues. 

Senator LEVIN. Well, what was the issue? We have just gone 

through about 20 of them. What was the issue that you think they 

made the greatest progress on? 


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1See Exhibit No. 7, which appears in the Appendix on page 228. 

2See Exhibit No. 32, which appears in the Appendix on page 328. 

3See Exhibit No. 1i, which appears in the Appendix on page 210. 

Mr. CARTER. The corrective action plans that they would give us 

normally would involve changing management, changing systems, 

and bringing in new processes. 

Senator LEVIN. But the output, the outcome. 

Mr. CARTER. The overall outcome of improving single family underwriting was something they struggled with from exam to exam. 

Senator LEVIN. And ‘‘struggled with’’ being a bureaucratic euphemism for they did not do much. 

Mr. CARTER. I do not think I would go as far as to say they did 

not do much. 

Senator LEVIN. Well, how far would you go? You say they struggled with it. In other words, they did not accomplish very much. 

Mr. CARTER. They were not fully effective in addressing all the 

underwriting issues. 

Senator LEVIN. How about saying, instead of ‘‘not fully effective,’’ 

use more direct language like ‘‘they were ineffective?’’ I got that not 

fully effective throughout your ratings here. They were not fully effective. How about saying ‘‘ineffective?’’ 

Mr. CARTER. Ultimately, in reducing the exception rates down to 

levels that we thought would be satisfactory, they were ineffective. 

Senator LEVIN. They were ineffective. OK. 

Mr. Carter, take a look at Exhibit 7,1 more a cultural problem. 

Long Beach, you say in Exhibit 7, ‘‘was working at a deliberate, 

reasonable pace.’’ That is on page 1. And then in Exhibit 7, I believe this is where you said the natural evolution, if I can find 

those words, would be sufficient. Well, we will come back to that. 

I do not have the right number exhibit in front of me. 

Exhibit 7 is right. Take a look in the middle of that. ‘‘Long 

Beach—natural evolution internally will address a number of 

issues.’’ Well, it did not. So you wrote on Exhibit 32,2 Mr. Carter, 

in reference to WaMu’s request to move Long Beach Mortgage 

under the bank, ‘‘[W]e are not comfortable with current underwriting practices, and you don’t want them to grow’’—your words— 

‘‘significantly without having the practices cleaned up first.’’ 

Six months later, now Exhibit 36,3 in response to findings that 

Long Beach Mortgage had not improved their practices. OTS wrote 

it could not ‘‘simply say [to them that] ‘you made a commitment 

and haven’t kept it.’ ’’ Why couldn’t you tell Long Beach, simply, 

‘‘You made a commitment and haven’t kept it?’’ Why do you say 

that you cannot do that in Exhibit 36? Why can’t you tell Long 

Beach, ‘‘Hey, you guys made a commitment. You haven’t kept it?’’ 

Mr. CARTER. Where are you on that page? 

Senator LEVIN. Exhibit 36. 

Mr. CARTER. Can you point me there? 

Senator LEVIN. It is about eight lines from the top. ‘‘Our findings 

are similar in some ways, but I don’t think we can just simply say, 

‘You made a commitment and haven’t kept it.’ I think 90 days to 

get a completely acceptable exception rate may also be unrealistic. 

. . .’’ Now, mind you, this is a promise they made 6 months before. 

Why can’t you simply say to the people you regulated, ‘‘You made 

a commitment and haven’t kept it?’’ 


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Mr. CARTER. Some of the difficulty—we were very focused on taking and looking at samples of loans. Then we were focused on exception rates and how many of the loans had errors in them. How 

we defined ‘‘exception’’ rate was not always black and white. 

Senator LEVIN. Well, you said they haven’t kept the promise. 

Why don’t you just tell them they haven’t kept it? 

Mr. CARTER. I think that we did tell them. 

Senator LEVIN. No, you said you cannot just simply tell them, 

‘‘You made a commitment and haven’t kept it.’’ Why can’t you say 

those words? Like ‘‘unacceptable,’’ why can’t you use the word ‘‘unacceptable’’ in your documents? We were finally able to get you to 

say that here today, but your documents—that is not the way you 

talk. Why can’t you tell someone you regulate, ‘‘Folks, you made a 

commitment 6 months ago, and it was conditioned’’—‘‘our determination that you could become part of WaMu was dependent on 

you making that commitment. You haven’t kept it?’’ Why can’t you 

look people in the eye and say, ‘‘You made a commitment. You 

haven’t kept it?’’ 

Mr. CARTER. I think that overall when you look at single family 

underwriting, we told them that. 

Senator LEVIN. You said here you cannot tell—— 

Mr. CARTER. This is not single family underwriting overall. This 

is looking at a specific action plan where they had made promises 

in the past—— 

Senator LEVIN. They had not kept them. 

Mr. CARTER [continuing]. And we had to judge how much 

progress they made on that action plan. They didn’t do nothing. I 

think that is a double negative, but they had made progress on the 

action plan. We had to make a judgment call. Did they make sufficient progress that we would say it would be adequate? Did they 

make so insufficient of progress that we would say they were totally inadequate? 

Senator LEVIN. It does not have to be ‘‘totally.’’ Just ‘‘inadequate.’’ 

Mr. CARTER. And I think that what I said here is that we could 

not conclude that their progress was wholly inadequate, because 

they did make some progress. 

Senator LEVIN. I am not saying ‘‘wholly inadequate.’’ Can you 

use the words, ‘‘Folks, your progress is inadequate?’’ Are you able 

to tell them that? 

Mr. CARTER. For their progress on this specific action plan, I did 

not conclude we could tell them that. 

Senator LEVIN. That it was inadequate? 

Mr. CARTER. That is right. 

Senator LEVIN. You could tell them it was not wholly adequate. 

Mr. CARTER. Yes. 

Senator LEVIN. But not inadequate. 

Mr. CARTER. I do not think I could say it was wholly inadequate. 

Senator LEVIN. I did not use the word ‘‘wholly.’’ You could tell 

them it was not wholly adequate, but you could not tell them it 

was inadequate. That is what you are telling us. 

Mr. CARTER. Yes. 

Senator LEVIN. That is the kind of bureaucratic speech which I 

think sends the message to people you regulate that, hey, folks, you 


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1See Exhibit No. 49, which appears in the Appendix on page 389. 

are making progress, instead of telling them it is inadequate, 

speaking clearly and directly to people that you have a responsibility to regulate. And I think it goes—frankly, it is one of the 

issues that I have seen throughout these documents, is that kind 

of not clear statements to people you regulate. And I will not go 

over a lot of them because obviously it is running late, but there 

are a lot of them exactly like that. 

Now the issues with FDIC and the turf battle that you folks had. 

Exhibit 49 1, Mr. Dochow, is an email from Mr. Finn to you. ‘‘The 

message was crystal clear today. Absolutely no FDIC participation 

on any OTS 1 and 2 rated exams.’’ 

Now, you could have allowed them, could you not, to participate? 

It is not a prohibition. It is your discretion as to whether or not 

they could participate on an OTS 1 and 2 rated exam. Is that correct that it is not against regulations? 

Mr. DOCHOW. I am not sure I am the right one to be answering 

that. My understanding is that—— 

Senator LEVIN. Well, who is the right one here? Mr. Reich, are 

you the right one? 

Mr. REICH. I will be glad to answer the question. 

Senator LEVIN. Is it against your regulations that they participate, or is it just discretionary? 

Mr. REICH. We have an agreement between the agencies as to 

when it is appropriate for back-up examinations, and that agreement applies mainly to 3, 4, and 5 rates institutions and not 1 and 

2 rated institutions. 

Senator LEVIN. Now, there was a 2002 interagency agreement, 

was there not, with FDIC? 

Mr. REICH. That is correct. 

Senator LEVIN. And there was a protocol. 

Mr. REICH. That is right. 

Senator LEVIN. And it permits OTS discretion, does it not, in allowing FDIC—— 

Mr. REICH. It does. 

Senator LEVIN. You had the discretion to allow them to do it? 

Mr. REICH. Well, may I expand? 

Senator LEVIN. Oh, sure. Crystal clear, no participation on any 

OTS 1 and 2 rates exams. This is 2006. 

Mr. REICH. There are reasons for the policy as it exists, and one 

of the reasons is that, first of all, the primary regulator is the primary Federal regulator, and when another regulator enters the 

premises, when the FDIC enters the premises, confusion develops 

about who is the primary regulator, who really is calling the shots, 

who do we report to, which agency. 

Second, there is the statutory authority that Congress has given 

the primary Federal regulator. There is the desire to avoid confusion with the institution. And, thirdly, when the FDIC enters an 

institution, if it is known—sometimes they enter as examiners of 

the primary Federal regulator or are not identified as being FDIC 

examiners; but if it is known that they are, alarm bells can go off 

both within the bank and within the community where the bank 

is located. 


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1See Exhibit No. 45, which appears in the Appendix on page 368. 

2See Exhibit No. 66, which appears in the Appendix on page 435. 

Senator LEVIN. And you have discretion to allow them to enter? 

Mr. REICH. We do. 

Senator LEVIN. And you did not exercise it. There instead was a 

series of emails here showing some real turf battles going on. 

Mr. REICH. This was at the very outset of my entrance at OTS, 

and I was—I mean, I have no recollection of—— 

Senator LEVIN. Well, maybe Mr. Dochow does. On July 25, if you 

will look at Exhibit 45,1 this is your feeling about FDIC, and you 

wanted to share this MOU we have talked about with them and 

why it went to FDIC: ‘‘[B]ecause I committed to [them] to consider 

their comments in an effort to minimize their letter writing and 

posturing.’’ You viewed FDIC as someone that was doing posturing. 

Is that accurate? 

Mr. DOCHOW. I have always believed in sharing full information 

with the FDIC. I have always been guided by agency policy and the 

interagency protocol. The issue with the MOU was to make sure 

we had the full FDIC comments. This is July 2008. 

Senator LEVIN. I know. 

Mr. DOCHOW. This is a time period where the agencies were 

struggling to determine if the 3 rating or the 4 rating was the appropriate rating. And historically, the FDIC had written a number 

of memos back in the—I understand in the early 2000s doing onesided documentation of issues. And it created—— 

Senator LEVIN. One-sided documentation? 

Mr. DOCHOW. One-sided documentation of issues. And so I had 

worked very hard to develop a strong relationship with Stan Ivie, 

who was the Regional Director at the FDIC. 

Senator LEVIN. Could you explain what is one-sided documentation? 

Mr. DOCHOW. Ignoring the primary regulator’s views and simply 

stating speculation or conjecture or their analysis. 

Senator LEVIN. And so you wrote in 2008 to Sheila Bair at FDIC 

Exhibit 66?2

Mr. DOCHOW. Exhibit 66? 

Senator LEVIN. ‘‘Dear Sheila, You really know how to stir up a 

colleague’s vacation.’’ 

‘‘I do not under any circumstances want to discuss this on Friday’s conference call. . . . I want to have a one on one meeting 

with Ben Bernanke prior to any discussion. . . . I may or may not 

choose to have a similar meeting with Secretary Paulson. I should 

not have to remind you the FDIC has no role until the PFR [the 

primary regulator] (i.e., the OTS), rules on solvency and the PFR 

utilizes PCA.’’ 

So no role for FDIC. Now, this is a bank. If this bank goes under, 

their Insurance Fund is wiped out. They have about one-third of 

the money in the Insurance Fund that they would have to lay out 

if this bank goes under. But you are telling her, the head of FDIC, 

‘‘I should not have to remind you that FDIC has no role’’—which 

is not accurate. They have a back-up role surely to protect their Insurance Fund. 


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1See Exhibit No. 59, which appears in the Appendix on page 419. 

Then Scott Polakoff writes to you that he has ‘‘read the attached 

letter from the FDIC regarding supervision of WaMu and am once 

again disappointed that the FDIC has confused its role as insurer 

with the role of the Primary Federal Regulator,’’ that its letter is 

‘‘inappropriate and disingenuous.’’ 1

And now going to July 2008, you have your letter saying that 

they are ‘‘posturing.’’ That is why you sent the MOU to them. 

So you think they are exceeding their jurisdiction, and you think 

they are posturing. Is that fair? That is what your emails show. At 

that time you thought they were exceeding their jurisdiction, they 

had no role—— 

Mr. DOCHOW. That is not my email, Mr. Chairman. 

Senator LEVIN. Which one? 

Mr. DOCHOW. Exhibit 66. Those aren’t my emails. 

Senator LEVIN. Well, Exhibit 45, let us go to the posturing one. 

You thought they were posturing. 

Mr. DOCHOW. No. What I thought was by us being cooperative 

and fully sharing the memorandum of understanding, if we could 

get the reviews, it would avoid posturing. 

Senator LEVIN. Yes, but that means you were afraid they would 

be posturing. You had a fear that they were going to be posturing. 

Mr. DOCHOW. I do not express it that way. 

Senator LEVIN. ‘‘It went to the FDIC because I committed to 

[them] to consider their comments in an effort to minimize their 

letter writing and posturing.’’ You had a fear of their posturing. 

Mr. DOCHOW. I had a concern that they would be posturing. 

Senator LEVIN. You had a concern, not a fear. 

Mr. DOCHOW. Not a fear. 

Senator LEVIN. But a concern. 

Mr. DOCHOW. Yes. 

Senator LEVIN. And what was your concern? 

Mr. DOCHOW. My concern was that they would start documenting 

the files with a series of information that we would then have to 

respond to and that would drag out the process. Therefore, we 

would not be effective in getting the supervision enforcement in 

place in a timely manner. 

Senator LEVIN. And, Mr. Reich, you are the one who wrote that 

memo to Sheila Bair in August reminding her the FDIC has no role 

until OTS rules on solvency. Is that accurate, they have no role? 

Don’t they have a back-up role? 

Mr. REICH. They do have a back-up role. 

Senator LEVIN. So why say no role? Kind of over the top, isn’t 

it? 

Mr. REICH. Well, it was in the context of what was going on during this period of time. I did not mean to imply that they have—— 

Senator LEVIN. You are not implying—— 

Mr. REICH [continuing]. No role whatsoever. 

Senator LEVIN. You are not implying. You are stating it explicitly. 

Mr. REICH. Obviously, they have a back-up role, and they have 

an on-site examiner at WaMu. 

Senator LEVIN. Well, you are reminding her—— 


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1See Exhibit No. 68, which appears in the Appendix on page 439. 

Mr. REICH. So they do have a role. 

Senator LEVIN. Well, not at that time. You wrote her in August. 

You must have been upset. You reminded her that the FDIC has 

no role. Those are your words, not mine. 

Mr. REICH. These were tense times. 

Senator LEVIN. OK. I am sure they were. So what was the tension between your agency and FDIC here? Your folks would not 

even give them a chair in the office, a desk. 

Mr. REICH. I do not think that is accurate. 

Senator LEVIN. All right. We will hear from them later. What 

was the tension? 

Mr. REICH. Well, Rome was burning. The economy was going to 

Hell in a hand basket. 

Senator LEVIN. Yes, but what was the tension between the two 

of you? You treated them, instead of being collaborators to try to 

address a common problem, you treat them as though somehow or 

other they are to be shoved away. What caused this? 

Mr. REICH. I think basically and fundamentally it was who was 

the primary Federal regulator. 

Senator LEVIN. It was turf, in a word. 

Mr. REICH. I think OTS had the responsibility as the primary 

Federal regulator. 

Senator LEVIN. Turf. 

Mr. REICH. We had the statutory responsibility. 

Senator LEVIN. Instead of going at this as partners—— 

Mr. REICH. I have more than most—an understanding of the role 

of the FDIC and their need to participate. I have been there. 

Senator LEVIN. Let us take a look at another one of your emails, 

Exhibit 68.1

Mr. REICH. I assume we are talking about audacity. 

Senator LEVIN. Yes, we are talking about audacity. Chairman 

Bair writes OTS that she informed WaMu of a ratings disagreement. You expressed, ‘‘I cannot believe the continuing audacity of 

this woman.’’ What is audacious about FDIC telling WaMu about 

a potential downgrade, just telling WaMu? Why is that so audacious that you cannot believe the audacity of this woman? 

Mr. REICH. Again, it relates to the fact that OTS was the primary Federal regulator—— 

Senator LEVIN. I understand. 

Mr. REICH [continuing]. And I thought that OTS ought to be the 

agency that relayed the downgrade in rating to the new CEO who 

just took over. 

Senator LEVIN. Turf. 

Mr. REICH. Characterize it as how you may. I have the highest 

regard for Sheila Bair, but these were tense times, and people’s 

blood pressure increases under situations like this, and sometimes 

we say things that we wish would not appear in print. 

Senator LEVIN. What really strikes me throughout here is that 

we have a situation where we have two regulators; both clearly 

have a stake. You are the primary regulator, but it is clear that 

FDIC has a significant interest. If this bank goes under again, 

their Insurance Fund is wiped out. 


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1See Exhibit No. 66, which appears in the Appendix on page 435. 

So instead of supporting each other, instead of supporting with 

open arms, saying, ‘‘Hey, let’s proceed together on this, let’s do this 

together,’’ instead of kind of ‘‘I’ve got your back, you’ve got my 

back, let’s go after a common goal,’’ it is back biting that I read in 

these emails. 

Mr. REICH. Chairman Levin, if I may, I volunteered—— 

Senator LEVIN. Well, no, let me finish. 

Mr. REICH. OK. 

Senator LEVIN. Instead of kind of collaborating with the FDIC, 

we have seen how OTS collaborated with the people they are supposed to regulate, just collaborating all the way, working with 

them instead of taking action when it was due against them, act 

against them directly. So you see all that collaboration between you 

and the people you are supposed to regulate. But when it comes to 

collaborating with another agency to go after a problem which 

threatens this economy, we see this kind of email traffic. And I 

have got to tell you, I think the American taxpayers and the American people expect a lot more from their regulators than what we 

have seen in this situation. 

Mr. REICH. Well, first of all, I think taking and publicizing an 

email that is taken totally out of context is—— 

Senator LEVIN. That is the whole email. I read the whole email. 

Mr. REICH. It is a very short email message—— 

Senator LEVIN. Well, how can it be out of context? 

Mr. REICH. But it does not in any way describe the context of the 

environment that took place. 

Senator LEVIN. Well, I read the whole email.1

Mr. REICH. I want to say that—— 

Senator LEVIN. ‘‘You really know how to stir up a colleague’s vacation. I do not under any circumstances want to discuss this on 

Friday’s conference call, in which I may or may not be able to participate depending on cell phone service availability on the cruise 

ship location,’’ where you are at. ‘‘Instead, I want to have a oneon-one meeting with Ben Bernanke prior to any such discussion. 

. . . Also, I may or may not choose to have a similar meeting with 

Secretary Paulson.’’ 

‘‘I should not have to remind you the FDIC has no role until the 

[primary regulator] ( . . . OTS) rules on solvency . . . ’’ 

Now, I will tell you, that is the context. I am not taking anything 

out of context. I read the whole thing twice. 

Mr. REICH. Well, it is not all of the context. I volunteered to have 

the OTS make a presentation in-depth to the Board of Directors of 

the FDIC during this period of time. I don’t remember now the 

date that it took place, but there was such a briefing, and it was 

led by Darrel Dochow, and he did an absolutely outstanding job 

presenting an in-depth picture of the situation at WaMu. It was at 

the same board meeting that a presentation took place by another 

agency on another institution which was far less informative and 

far less in-depth. 

Senator LEVIN. That is the context? 

Mr. REICH. That is part of the context. 


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1The prepared statement of Mr. Corston appears in the Appendix on page 153. 

Senator LEVIN. Well, from what I can see—and we have looked 

at plenty of contexts. We have 500 pages of context. About the only 

time OTS showed backbone was against another agency’s moving, 

in your view, into your turf. Boy, that really got your dander up. 

That got your blood pressure up. I do not see your blood pressure 

getting up against a bank which is engaged in the kind of dangerous practices that the bank engaged in, dangerous to their solvency, dangerous to their investors, dangerous to their depositors, 

dangerous to this economy. I never saw that blood pressure come 

up until you are in some kind of a turf issue with FDIC. That is 

the way I think any fair reading of these documents lead one to. 

Does anybody want to add anything before you are excused? 

[No response.] 

Senator LEVIN. Thank you. Thank you for being here today. We 

will go to our next panel. 

We will take a 10-minute break. 

[Recess.] 

Senator LEVIN. The Subcommittee will come back to order. 

I will now call our third panel of witnesses, John Corston, Acting 

Deputy Director of the Large Institutions and Analysis Branch at 

the Federal Deposit Insurance Corporation, and George Doerr, the 

Deputy Regional Director of the Division of Supervision and Consumer Protection at the FDIC in San Francisco. We thank you both 

for being with us. We know it has been a long morning and early 

afternoon. 

Pursuant to Rule 6, all witnesses who testify before this Subcommittee must be sworn in at this time. We would ask you both 

to stand and raise your right hand. 

Do you solemnly 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? 

Mr. CORSTON. I do. 

Mr. DOERR. I do. 

Senator LEVIN. Were you here when I described the timing system? 

Mr. CORSTON. Yes. 

Mr. DOERR. Yes, we were. 

Senator LEVIN. So, Mr. Corston, we will have you go first, and 

then Mr. Doerr. 

TESTIMONY OF JOHN CORSTON,1 ACTING DEPUTY DIRECTOR, 

DIVISION OF SUPERVISION AND CONSUMER PROTECTION, 

COMPLEX FINANCIAL INSTITUTION BRANCH, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. CORSTON. Thank you, Chairman Levin. I appreciate the opportunity to testify on my role with the FDIC regarding Washington Mutual Bank. On behalf of the Corporation, we have submitted to the Subcommittee a written statement that responds to 

specific issues that were requested by the Subcommittee. In addition, allow me to briefly introduce myself and my roles and responsibilities at the FDIC. 


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1The prepared statement of Mr. Doerr appears in the Appendix on page 155. 

I am John Corston, Acting Deputy Director for the FDIC’s Division of Supervision and Consumer Protection’s Complex Financial 

Institution Branch in Washington, DC. I have had a leading role 

in this branch since 2005, after working in three different regions 

in various capacities related to bank supervision. I started as a 

field examiner with the FDIC in 1987. 

An element of my duties as Acting Deputy Director of Complex 

Financial Institutions is to oversee the Large Insured Depository 

Institution Program (LIDI). Broadly, the LIDI program provides 

forward-looking assessment of insured depository institutions over 

$10 billion, provides highly experienced technical experts to provide 

on-site support for the regions, operates continuous presence at the 

eight largest insured institutions, and assists in developing and 

recommending strategy to the Division Director and the Chairman 

regarding specific institutions. 

With regard to Washington Mutual, I worked with technical experts on my staff and coordinated with the region to evaluate 

CAMELS and LIDI ratings and supervisory strategy, including enforcement actions. While the region is primarily responsible for 

these areas, input from the Complex Financial Institutions Branch 

played a significant role in the decisionmaking process. 

I also worked with my Washington-based counterpart at the Office of Thrift Supervision on LIDIs, including Washington Mutual, 

to resolve issues regarding FDIC’s actions or conclusions that were 

not resolved at the regional level. 

One of the roles of the FDIC’s Complex Financial Institution 

Branch is to identify risks that impact large institutions, including 

high-risk lending strategies such as those that took place at Washington Mutual. To do this, we have technical experts on-site at institutions we have identified through the LIDI review process that 

are considered to possess higher levels of risk. For instance, we 

placed staff on-site at Countrywide, IndyMac, and Washington Mutual to identify high-risk activities and measure their impact on 

the financial condition. 

My branch’s responsibility is to examine financial institutions 

and gain an awareness of the speed in which the institution could 

deteriorate, determine its sensitivity to market events, and analyze 

its exposure to loss so appropriate and timely responses can be developed. 

I thank you for the opportunity to testify today and I am pleased 

to answer any of your questions. 

Senator LEVIN. Thank you very much. Mr. Doerr. 

TESTIMONY OF J. GEORGE DOERR,1 DEPUTY REGIONAL DIRECTOR, SAN FRANCISCO REGION, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. DOERR. Chairman Levin, I will be even more brief. I appreciate the opportunity to testify on my role with the FDIC in the supervision of Washington Mutual Bank (WaMu). 

I am George Doerr, Deputy Regional Director for the FDIC in the 

San Francisco Regional Office, a position which I have held since 

June 2007. I have been with the FDIC almost 40 years. From SepVerDate Nov 24 2008 13:02 Nov 02, 2010 Jkt 057320 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 P:\DOCS\57320.TXT SAFFAIRS PsN: PAT

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1See Exhibit No. 51a, which appears in the Appendix on page 392. 

2See Exhibit No. 82, which appears in the Appendix on page 484. 

tember 2002 until June 2007, I was Assistant Regional Director for 

the FDIC San Francisco Regional Office. The San Francisco Region 

covers 11 States—Washington, Oregon, California, Arizona, Nevada, Utah, Idaho, Wyoming, Montana, Alaska, and Hawaii, in addition to the Territories of Guam and American Samoa and also 

Micronesia. As Assistant Regional Director in those years, among 

my responsibilities was our Regional Large Bank Program, which 

included WaMu. 

The three matters the Subcommittee asked me to be prepared to 

address with respect to WaMu are, one, Non-Traditional Mortgage 

Guidance; two, WaMu’s condition as assessed through the CAMELS ratings; and three, FDIC’s Large Insured Depository Institutions Program and ratings, also referred to as the LIDI program. 

On behalf of the Corporation, we have provided discussion of these 

three matters in the written statement submitted to the Subcommittee. 

Thank you again for the opportunity to testify, and I am pleased 

to respond to any of your questions. 

Senator LEVIN. Thank you both. Mr. Doerr, first, take a look at 

Exhibit 51a, if you would.1

Mr. DOERR. OK. 

Senator LEVIN. It is a memo entitled, ‘‘Potential Impact of Possible Housing Bubble on Washington Mutual.’’ In this memo, the 

FDIC wrote an analysis of WaMu’s single-family residential loan 

portfolio, focusing on Option ARMs, hybrid loans, low documentation loans, which means low number of document loans, payment 

shock, and geographic concentrations. Now, if single-family residential lending was traditionally safe, what were the risks that FDIC 

saw with these aspects of WaMu’s lending that made it less safe 

than historical times? 

Mr. DOERR. Well, we were becoming concerned with what would 

happen were there to be a dramatic downturn in the mortgage industry and with housing in general, or what effect that sort of 

downturn would have on the mortgage industry. 

Senator LEVIN. Loans were risky, were they? They had multiple 

risk factors layered on top of each other. Borrowers in low documentation loans were subject to higher default risk. Is that not 

true? Payment shock increased default risk. Geographic concentrations were vulnerable to high housing rate increases. Were they all 

true? 

Mr. DOERR. That is correct. 

Senator LEVIN. All right. The IG report, and that is Exhibit 82,2

page nine, found that Option ARMs were 47 percent of the loans 

in WaMu’s portfolio. So now in light of the elevated risks in that 

memo, low documentation, payment shock, geographic concentrations, did FDIC or OTS discourage these products? If not, why not? 

Mr. DOERR. Well, we did not specifically discourage those products. I, for one, can see a problem with certain of those products. 

You have been talking during the hearings with stated income 

loans, and I certainly see some holes in those. But as an agency, 


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FDIC did not take the position to prevent institutions from making 

those loans. 

What we did is we provided Non-Traditional Mortgage Guidance 

in October 2006. We set out in the guidance certain safe and sound 

principles under which institutions should approach these non-traditional mortgages. For example, one should qualify borrowers at 

the fully indexed rate, not at the teaser rate. Also, that when evaluating a borrower’s capacity to handle increased amounts accruing 

in a negative amortization loan, you have to evaluate the borrower’s ability to pay the loan through to maturity. Avoidance of 

over-reliance on collateral or the ability to refinance was another 

big mistake made by a number of firms. 

And when it comes to risk layering, which you mentioned, what 

we did was encourage quality controls and risk mitigation for risk 

layering items such as stated income loans, no documentation 

loans, high loan-to-value, high debt-to-income, and those sort of 

items. So that was the interagency statement that was issued. 

Senator LEVIN. Right. Now, that interagency position is not binding, is that correct? 

Mr. DOERR. It is not a law. It is not a rule or regulation. 

Senator LEVIN. Is it binding by regulation? 

Mr. DOERR. It is not. 

Senator LEVIN. Should it be? 

Mr. DOERR. Well, we might consider that. 

Senator LEVIN. What would it take? I mean, given, I think, what 

we understand the risks are here, I am just wondering whether or 

not it shouldn’t be more than just guidance. 

Mr. DOERR. As FDIC, we expected our institutions to be in compliance with that guidance and be in compliance with it right away. 

Senator LEVIN. Without it being stated as being mandatory. You 

view that as an expectation—— 

Mr. DOERR. Yes. 

Senator LEVIN. And has that expectation been lived up to, do you 

know? 

Mr. DOERR. Been lived up to in—— 

Senator LEVIN. Has the guidance been followed? 

Mr. DOERR. It has in some institutions and it has not in others. 

Senator LEVIN. Have you, or will you remind all institutions 

about your expectation? 

Mr. DOERR. That is our expectation. 

Senator LEVIN. But will you remind all the institutions? 

Mr. DOERR. Well, that—— 

Senator LEVIN. How would they know it is your expectation unless you send them frequent reminders of it? 

Mr. DOERR. I think it would be a good idea that perhaps we 

might. That is a policy item for our Washington office, but I would 

agree with you, that would be a good idea. 

Senator LEVIN. All right. Mr. Corston, you can jump in here, too, 

if you would. 

Mr. CORSTON. Absolutely. We certainly have concerns over any 

loan product that, again, has less information incorporated into an 

underwriting process that is layering on more risk. In this case, we 

came out with our guidance to provide examiners some guidance 


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1See Exhibit No. 51b, which appears in the Appendix on page 398. 

and the industry some guidance when the risk became very apparent to our agency and others. 

Senator LEVIN. On Exhibit 51b,1 if you will take a look at that 

exhibit, this is a 2005 memo entitled, ‘‘Insured Institutions’ Exposure to a Housing Slowdown.’’ Mr. Corston, what were the FDIC’s 

concerns about the structure of the loans that were popular at that 

time? What were the risk of those loans in bank portfolios? 

Mr. CORSTON. The concern we had with these loans was the attributes were such that when you have optionality in payments, it 

becomes far more difficult to determine performance, whether you 

are the bank or whether you are an examiner. Many of them became an apparent collateral dependent, and when you are only depending on one source of repayment, again, the risk goes up. We 

became very concerned about the housing market in general and 

the volume of loans that we had that appeared to be dependent on 

the values of the underlying real estate as opposed to the underlying capacity of a borrower to repay themselves. 

Senator LEVIN. On page four of that memo, you wrote about 

Washington Mutual, among others, and you wrote there what they 

held in Option ARMs and that 70 percent of Option ARM customers only make the minimum payment each month. Do you see 

that on page four? 

Mr. CORSTON. Yes, I do. 

Senator LEVIN. This is a memo, by the way, from you to Michael 

Zamorski, right? Do I have that right? 

Mr. CORSTON. That should be the Division Director. 

Senator LEVIN. He is the Regional Director? 

Mr. CORSTON. He would be the Division Director. 

Senator LEVIN. OK. 

Mr. CORSTON. That is correct. 

Senator LEVIN. OK. What consequences can you expect when 

most customers only make minimum payment in terms of the borrower’s reaction to a payment shock? What consequences can you 

expect to negative amortization, to the safety and the soundness of 

institutions that hold these kind of assets? 

Mr. CORSTON. It suggests the inability to repay the loan out of 

their payment capacity, which moves the reliance to the underlying 

collateral. And I think we have seen the results. 

Senator LEVIN. Now, several OTS officials told our Subcommittee 

that single-family residential lending, compared to other types of 

lending, was historically very safe, so that is how they judged 

WaMu’s lending. Is that a fair comparison, given that WaMu’s 

lending practices departed radically from historically safe products 

and practices? Either one of you. Mr. Doerr, why don’t you start? 

Mr. DOERR. No. There is definitely a problem there. What we 

would expect is strong underwriting to take place, to take into account the ability of a borrower to handle a payment shock. If you 

are going to give them a teaser rate to attract them into the institution, that is fine, but you have to qualify them to be able to pay 

the loan as it resets. 

Senator LEVIN. Mr. Corston. 


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1See Exhibit No. 63, which appears in the Appendix on page 431. 

Mr. CORSTON. In the case of Washington Mutual, certainly the 

standard 30-year fixed-rate amortizing mortgage is generally not a 

problem. Any product that you have that has amortization built in 

and a steady interest rate that does not vary with the capacity of 

the borrower to pay, generally, from an underwriting standpoint, is 

not a problem. That is not what 70 percent of these products were. 

Senator LEVIN. Now, as WaMu’s condition continued to worsen 

in the summer of 2008, the FDIC conducted a capital analysis, recommended to OTS that a 4 rating was warranted. Take a look at 

Exhibit 63.1 Do you see that? 

Mr. CORSTON. Yes. 

Senator LEVIN. This is from Sheila Bair to John Reich, and I 

should have asked Mr. Reich about this. ‘‘Sheila, in my view, rating 

WaMu a 4’’—this is now August 2008—‘‘rating WaMu a 4 would be 

a big error in judging the facts in this situation. It would appear 

to be a rating resulting from fear and not a rating based on the 

condition of the institution. WaMu has both the capital and the liquidity to justify a 3 rating.’’ 

And then the email back from Ms. Bair to Mr. Reich, ‘‘We will 

follow the appropriate procedures if the staff cannot agree. You 

asked me to hear out WaMu. I hope that you would also hear out 

our examination staff if it comes to that.’’ 

Then later, the next month, in September, after a lot of backand-forth, OTS followed FDIC’s lead and agreed to a 4 rating. Why 

was OTS resistant to the FDIC’s tougher stance? 

Mr. DOERR. Well, we found that very puzzling. We made a recommendation in May to the OTS concerning capital. We presented 

to them a stress capital analysis. We sent it to them a day ahead 

and then we held a conference call with Mr. Dochow. And when I 

say ‘‘we,’’ that is the Regional Director, Stan Ivie, and me. We held 

a conference call with him to discuss that. His reaction was this 

was not a Generally Accepted Accounting Principles (GAAP), and 

he rejected the argument. It is not a GAAP analysis. It is a stress 

analysis. It says that the institution is going to need capital, more 

capital, to be able to manage itself through a stress scenario as embedded losses begin to become real losses. It is under the principle 

that reserves are there to handle expected losses and capital is 

there to handle unexpected losses. So it is a different item entirely. 

We wanted to get capital addressed in some form of action. OTS 

was going to do a MOU, we became aware, and we contacted Mr. 

Dochow and wanted into the process so that we could get capital 

addressed in that MOU. 

As far as the rating goes, we had our dedicated examiner tell the 

WaMu Board on July 15, that in FDIC’s view, this could be a 4. 

We had not made a final decision at that point—— 

Senator LEVIN. You had not made a final decision. 

Mr. DOERR. We had not made a final decision—— 

Senator LEVIN. It could be or should be? 

Mr. DOERR. Could be. But by the end of the month, we had made 

that decision, and—— 

Senator LEVIN. What month are we talking about? 

Mr. DOERR. July 2008. 


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1See Exhibit No. 51c, which appears in the Appendix on page 404. 

Senator LEVIN. OK. 

Mr. DOERR. On July 31, we briefed Chairman Sheila Bair, and 

the result of which was we told her this is a composite 4 and why. 

Mr. Corston was on that. And she went over to tell Director Reich 

that very day the same thing. It is composite 4. 

Senator LEVIN. Mr. Corston, anything you want to add to that? 

Mr. CORSTON. The only thing I will add is the capital analysis 

showed a capital deficit and that was our concern. And any institution that was showing a deficit in capital to the magnitude that we 

were estimating, and it was approximately $5 billion, we felt in no 

way we could justify a composite 3 rating. 

[Pause.] 

Senator LEVIN. Mr. Doerr, you have been in management roles 

in the FDIC’s West Division since 1989, and as I understand it, 

your division was responsible for WaMu. Through 2005, if I am correct, the FDIC’s working relationship with the OTS was a positive, 

cooperative relationship. Is that correct? 

Mr. DOERR. That is correct. 

Senator LEVIN. Now, if you look at Exhibit 51c,1 this is your examiner, Mr. Funaro. He wrote the following to you. 

Mr. DOERR. I am sorry. I have to find the page. 

Senator LEVIN. Yes. That is OK. 

Mr. DOERR. OK. I have got it here. 

Senator LEVIN. OK. If you look near the bottom there, it says, 

‘‘Darrel Dochow contacted me today and we arranged a meeting for 

September 14 at 9:00 a.m. . . . I was assuming we would coordinate for the fall visit . . . and he would update me on WaMu, since 

I haven’t had access to the WaMu examiner’s library since the end 

of the [second quarter].’’ Why did he not have access to the WaMu 

examiner’s library since then? 

Mr. DOERR. Chairman Levin, he was supposed to. Initially, this 

tied into the fact that Washington Mutual management was moving to a new tower, so there was different space to be provided for 

the examiners, and we fully understood that. That was in July. But 

OTS was to make provisions to provide Mr. Funaro with space in 

the building. This dragged on and on. They promised that they 

would take care of it. There were calls. There were meetings. I was 

involved in one call where Mr. Dochow in August promised that he 

would take care of this, absolutely no problem. 

So every time this came up, we were promised it would be corrected. It dragged on. It dragged on. This is in September and it 

is still not taken care of. In fact, we got another email come October and it was still an outstanding issue. 

Senator LEVIN. What was the reason? 

Mr. DOERR. I can’t explain what the reason was. I personally 

think they didn’t want us there. I mean, we were denied physical 

access and the access to this examiner library. That is a library of 

electronic materials that WaMu puts together for the regulators, 

for both the OTS and the FDIC. He had temporarily lost that as 

part of the move, but you shouldn’t have to go 4 months without 

having to have that. We have a dedicated examiner arrangement 


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1See Exhibit No. 51c, which appears in the Appendix on page 404. 

for the large banks with all of the other regulators and part of it 

is sharing information. So he should have had access to that. 

Senator LEVIN. And it was essential that Mr. Funaro have access 

to that library in order to get information about the Washington 

Mutual? 

Mr. DOERR. Absolutely. 

Senator LEVIN. Now, was an explanation given to either of you 

about that at any time, as to why that was? 

Mr. DOERR. Why that delay happened? 

Senator LEVIN. Yes. 

Mr. DOERR. I never received an explanation, no. 

Senator LEVIN. Did you get involved in that also, Mr. Corston, 

I believe? 

Mr. CORSTON. As far as an explanation? 

Senator LEVIN. Were you involved in this issue? 

Mr. CORSTON. Oh, in this? 

Senator LEVIN. The access issue for FDIC? 

Mr. CORSTON. I was definitely involved in the access issue at certain stages. This is probably not the stage where I got involved, but 

I was very involved in the later stages. 

Senator LEVIN. OK. Now, if you will look down at—well, did you 

have anything to add, then, to that, as to what the reason was for 

that denial of access to the FDIC? 

Mr. CORSTON. No reason was given. 

Senator LEVIN. All right. Now, if you look at the bottom of Exhibit 51c,1 at the message from you, Mr. Doerr, to Mr. Carter, here 

is what it says there. It says, ‘‘John, we received a letter from RD 

Mike Finn regarding our routine request to join their next on-site 

exam target this fall. As you know, Mr. Finn says no, totally contrary to what Vanessa and I discussed with Deputy Dochow on August 17.’’ 

So here is another situation that came up where there is refusal 

on the part of OTS to do something jointly with the FDIC. Again, 

the date of this Exhibit 51c is September 2006. Can you tell us 

what FDIC was seeking to do and why, and what do you know as 

to why OTS was not permitting you to do it? 

Mr. DOERR. We were seeking to join their examination. 

Senator LEVIN. Why? 

Mr. DOERR. We followed our normal protocols under the interagency agreement, and on August 14, we sent the OTS a letter and 

we asked to join under that interagency agreement, and we were 

surprised. We got a letter back from them dated September 1 and 

it said that OTS’ position was that 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 to be on the 

examination. 

Senator LEVIN. Was it important in order for you to have a basis 

that you have access? 

Mr. DOERR. Yes. 

Senator LEVIN. I mean, it is a chicken-and-egg issue, I presume. 


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Mr. DOERR. It is circular. We need access to determine the condition of the institution and they are saying we have no disagreements. The institution is sound, and so you have no basis. 

Mr. CORSTON. Chairman Levin, 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 on-site, 

the dedicated examiners, worked regularly with the primary Federal 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 to acquire it 

through direct on-site access to the information. This was a unique 

situation where we were receiving push-back from the primary 

Federal regulator. 

Senator LEVIN. Did OTS continue to have this posture towards 

FDIC requests to look through files, Mr. Corston? 

Mr. CORSTON. Yes, they did. 

Senator LEVIN. And do you have any examples of that? 

Mr. CORSTON. Mr. Doerr probably would have the best examples—— 

Senator LEVIN. All right. Mr. Doerr. 

Mr. DOERR. Yes, we did. We actually got resolution to this 2006 

matter, both to join the examination and the access for Dedicated 

Examiner Funaro in November. It took several months, but we got 

it. 

We again followed our protocols to join the examination for 2007, 

only to find out in February from Mr. Funaro that OTS refused to 

allow us to look at loan files. 

Senator LEVIN. Now, FDIC requested to look at files after the 

Non-Traditional Mortgage Guidance, correct? 

Mr. DOERR. That is correct. 

Senator LEVIN. And OTS had opposed that guidance and they 

took this position, even to the extent that they opposed having the 

FDIC tag along with the OTS’ own review, and I think you have 

just described that, is that correct? 

Mr. DOERR. That is correct. 

Senator LEVIN. All right. 

Mr. DOERR. We told them that our examiners will sit side by side 

with your examiners. No duplication of effort here. We will work 

some files, you work some files, but we want to work some files. 

Senator LEVIN. And did you believe that OTS had a substantive 

reason for the positions that it took in terms of FDIC access, or 

was it, in your view, just a regulatory turf battle? 

Mr. DOERR. I knew of no substantive position that could be taken 

to tell us not to look at loan files. 

Mr. CORSTON. I also received no substantive—— 

Senator LEVIN. From your perspectives, it was a turf battle. Protecting turf. 

Mr. CORSTON. Yes. 

Mr. DOERR. That is a good description of it. 

Senator LEVIN. Now, there is a binder in front of you there which 

remains a sealed exhibit because apparently there is—bank examination reports are apparently confidential, so that file is sealed. 

Can you take a look at Tab Q207, the FDIC LIDI report? I think, 

Mr. Corston, this is going to be for you. 


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Mr. CORSTON. OK. 

Senator LEVIN. Can you explain what this LIDI off-site rating 

and scale is? 

Mr. CORSTON. 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 

the institutions. This rating does not tie necessarily to CAMELS, 

but it does predict CAMELS when you get to the C, D, and E levels. 

A C stable would indicate an institution that would more than 

likely still be CAMELS 2 rated, but probably have higher levels of 

risk. It could also include 3-rated institutions. The reason Washington Mutual would be included as a C stable is that it had higher 

levels of risk. 

Senator LEVIN. 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? 

Mr. CORSTON. That is correct. 

Senator LEVIN. Which is kind of, is it fair to say, heading towards a 3? Is that a fair summary? Is that some sort of weaknesses 

or concentrations which—— 

Mr. CORSTON. A C negative would clearly indicate that it would 

be heading towards a 3. As a C stable, it would certainly have the 

risk characteristics of an institution that could be heading to a 3 

if it was under some level of stress. 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 

in this report. 

Senator LEVIN. And what is the date of this? 

Mr. DOERR. This was actually done in October. There is something wrong with the date. It says 1899, but it was actually—it was 

done in October of—— 

Senator LEVIN. That is a computer error, apparently. We saw 

that, too. But the information was based on the second quarter? 

Mr. CORSTON. That is correct. 

Senator LEVIN. All right. And so is it accurate to say that FDIC 

had a more negative outlook for WaMu at that time than a simple 

2 CAMELS rating? 

Mr. CORSTON. Correct. 

Senator LEVIN. So what were you looking at that would not be 

inside that OTS 2 rating? Were there some additional things you 

were looking at? 

Mr. CORSTON. Essentially, we would be looking at the level of 

risk and the direction of risk. So when we are looking at this report, it has moderate to high credit risk that is increasing in nature. And I think if you go through the reports, you will see that 

the mitigants for higher levels of credit risk, such as risk practices 

and things like that, were not apparent in this institution. That 

was a concern. And this is one of the reasons that access to clearer 

information for the FDIC in that situation was more critical. 

Senator LEVIN. Just to make sure I understand that, that is 

why—what you just said is the access to their information—— 

Mr. CORSTON. To their information. 

Senator LEVIN [continuing]. Was more critical. 

Mr. CORSTON. More critical. 


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Senator LEVIN. Because of the situation there. Now, if you look 

at the credit issue or rating at the top right-hand corner of that 

document, they are A-1 or A. Is that correct? 

Mr. CORSTON. Correct. 

Senator LEVIN. Now, look forward a few more tabs to the Q2, second quarter, 2008 LIDI. OK? 

Mr. CORSTON. Yes. 

Senator LEVIN. Now, the credit ratings, instead of being A-1 or 

A, now have gone down to B, AA2, BBB plus, and BBB. Is that correct? 

Mr. CORSTON. Correct. 

Senator LEVIN. And this is the information in the second quarter 

of 2008. 

Mr. CORSTON. Correct. 

Senator LEVIN. Now, as of 2008, then, the credit ratings continued to go down all the way to non-investment grade in September. 

Mr. CORSTON. Yes. 

Senator LEVIN. But how important were those rating agency 

downgrades between those two documents? Was that significant? 

Mr. CORSTON. And it is significant in 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 agencies because it could impact the thrift’s access to liquidity. 

Senator LEVIN. So is it fair to say that those credit rating agencies’ ratings were of great significance to you. You put great stock 

and significance in them. 

Mr. CORSTON. Absolutely. 

Senator LEVIN. Now, what is the relationship between asset 

quality and liquidity? 

Mr. CORSTON. 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. 

Senator LEVIN. Now, there are some that have said that WaMu’s 

liquidity problems were unexpected and were the result simply of 

market forces. Isn’t it the case, however, looking at these documents, that since liquidity is based in significant measure on asset 

quality, WaMu’s liquidity problems arose, at least in significant 

part, because of bad quality of their mortgage loans, which were 

the bulk of their assets? 

Mr. CORSTON. Correct. 

Senator LEVIN. Do you have a conclusion as to why Washington 

Mutual failed? 

Mr. CORSTON. Asset quality. Weak asset quality. It brought on 

the liquidity problems. 

Senator LEVIN. And that lack of sufficient capital was something 

that reflected embedded losses in their asset portfolio? 

Mr. CORSTON. As has been discussed earlier, with the optionality 

in their payment structure in their assets, they are 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 the 

company and put capital in. So the type of business they were inVerDate Nov 24 2008 13:02 Nov 02, 2010 Jkt 057320 PO 00000 Frm 00090 Fmt 6633 Sfmt 6633 P:\DOCS\57320.TXT SAFFAIRS PsN: PAT

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1See Exhibit No. 1b, which appears in the Appendix on page 198. 

volved in made it very difficult for them to go out, and raise capital, one, and then, two, when the liquidity became squeezed, the 

assets, again, with the asset quality deterioration, they could not 

fund themselves. 

Senator LEVIN. OK. Take a look finally—and I think this will be 

my last question—at Exhibit 1b. This is a chart that we have 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, Exhibit 1b1 is in your book. You will not be able to read 

that unless you have phenomenal eyes, which probably you do 

given your occupation. At least you used to. 

Mr. DOERR. I can read the chart. Is that where it is? 

Senator LEVIN. All right. Well, it is also in your book of exhibits, 

Exhibit 1b. These are some of the practices that we have talked 

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 is the status of those practices 

today? Are they permitted? Are they frowned upon? 

Mr. CORSTON. They certainly are frowned upon. To the degree 

they are not permitted, I do not know. As far as nontraditional 

loans, to the extent that they are being done at this point, there 

is not nearly as much market acceptance. A lot of these loan types 

had characteristics targeted towards a securitization market that 

does not exist anymore. 

Senator LEVIN. Right. But that could come back again. 

Mr. CORSTON. Yes, it could. 

Senator LEVIN. What in the rules, guidance, regulations is there 

today relative to those five elements? 

Mr. DOERR. There is nothing to prevent them in the rules today. 

Senator LEVIN. Are they discouraged in any guidance? 

Mr. DOERR. Well, unless there is strong risk mitigation—I mean, 

there is a right way and a wrong way to make some of those loans. 

A negative amortization loan, if the borrower has the financial capacity and you can verify that to pay that loan through to maturity. If all you are doing is finding a way to get them a loan and 

not worrying about what comes later, that is wrong. 

So it is a question of not strictly discouraging all negative arm 

loans, but there has to be a right way to handle them. 

Senator LEVIN. How about stated income loans? 

Mr. DOERR. Stated income loans, I guess—— 

Senator LEVIN. Does that depend, too? Is that the answer—— 

Mr. DOERR. Well, if you went back to what Mr. Dochow mentioned of high-net-worth borrowers and it is limited to that, I can 

see some circumstances where a person has $100,000 worth of securities that they own free and clear, you might not worry about 

what their income is. But other than a situation like that, stated 

income is probably not right. 

Mr. CORSTON. I would say, Chairman Levin, under no circumstances would these be considered acceptable to the level that 

Washington Mutual was putting these loans on the books. I mean, 


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if these are one-off situations—I do not know I could speak to that 

necessarily, but, no, this is not an acceptable structure for an institution to do in any type of volume. We have seen the type of risk 

and the results. 

Senator LEVIN. So since there is no regulation on the books for 

these kinds 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 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 are not there now. 

Should we legislate? I am tempted, frankly—and I may do it—to 

just ban negatively amortizing loans. But you point out if you have 

a guy who has plenty of assets and securities, you might want to, 

for some reason I cannot imagine, have a negatively amortizing 

loan. But how are we going to do it? Should we legislate it? 

Mr. CORSTON. Well, policy is not my area of expertise, but I will 

say this: As an examiner in an institution, a tool such as a regulation is fairly easy to support. Guidance becomes—you can support 

it, but it is not as strong. Because it goes more to best practices, 

again, it becomes more something you need to influence. 

So it is something that, certainly from a rules standpoint, obviously needs to be looked at. From an examiner’s standpoint, it is 

a challenge. 

Senator LEVIN. You had an acceptable structure at WaMu, as 

you said. 

Mr. CORSTON. Yes. 

Senator LEVIN. So why wasn’t it changed? What were the reasons it was not changed from what you have heard? Is it that there 

was not clear guidance, that there was not good common sense 

used? What were the reasons? 

Mr. CORSTON. At the time when examiners were in these institutions, we knew—and one of the first memos that you brought up, 

we saw the issues. But it became very hard to influence institutions to change these practices. They certainly were competing 

against each other, and there were institutions outside the insured 

environment that were influencing the underwriting also. And it 

became difficult from an examiner’s point of view as a one-off to influence, say, Washington Mutual when there were other non-insured institutions with which they competed. It made it a challenge. And I would say when we were dealing with these institutions at the time, that is what we were facing. 

Senator LEVIN. After a while—I do not have the exact—I guess 

it was October 2006, there is a joint interagency guidance for nontraditional mortgages that is agreed upon. I do not know why it 

was guidance instead of enforceable regulations. We have talked a 

little bit about that. There was not a clear effective date, but I understand FDIC, Office of the Comptroller of the Currency (OCC), 

and the Federal Reserve treated the guidance as effective immediately. Is that correct? 

Mr. DOERR. That is correct. 

Senator LEVIN. OTS did not. It gave thrifts a year to implement. 

I do not think that guidance dealt with NINA loans. Did it? Do you 

remember? 


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Mr. DOERR. Well, that is probably what you would call layered 

risk. It would probably be in there, one of the elements of layered 

risk. 

Senator LEVIN. How about no-document loans? 

Mr. DOERR. Same. That is a layered risk. 

Senator LEVIN. I guess one of the issues, obviously the big issue 

we will be looking at in the next two hearings is the dumping of 

high-risk loans into the financial system as a whole. We have been 

looking at the upstream. In one bank, a big bank, these mortgages 

ended up being a lot of toxic mortgages were created and put into 

the commercial stream. Next week we will be looking at credit rating agencies, how were those mortgages rated when they were 

securitized and the failures, the flaws, the shortcomings in that 

process, and then the week after we will 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 that 

led to such horrific outcomes for our economy. 

But 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? They can come 

back and bite the institution themselves, obviously, if they turn out 

to be flawed and there is a claim back on the institution. So that 

is one area why I would hope regulators would see that something 

needs to be done in that area. But, in general, I think you know 

exactly what I am driving at. What, if any, guidance should be 

given to institutions by regulators relative to that issue as to putting into the stream of commerce the mortgages which are bad 

mortgages? Let us just call them that. Mr. Corston. 

Mr. CORSTON. I do not deal directly, obviously, with policy, but 

I will say this. 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 are going to portfolio on your balance sheet as opposed to pushing them off your balance sheet. 

Senator LEVIN. And 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 institution? Should your regulators or some 

regulator, depending on who it is, go to an institution and say, look 

this is now the guiding principle, act as though you are keeping 

this in your own portfolio, and if there is not a specific amount of 

skin kept in the game, whatever that percentage might be—— 

Mr. CORSTON. Right. 

Senator LEVIN [continuing]. How would a regulator check that 

out to see whether that kind of guidance is being followed? Act as 

though you are going to own this instead of just dumping it in a 

stream. 

Mr. CORSTON. Through the same exam process we do now. They 

are underwriting the loan so we can see the underwriting standards and we can sample them. 

Senator LEVIN. The same standards that you are now using to 

check—— 

Mr. CORSTON. The same process. 

Senator LEVIN. The same process could be effective in adding 

that one element of guidance. 


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1The prepared statement of Ms. Bair appears in the Appendix on page 156. 

Do you want to add to that, Mr. Doerr? 

Mr. DOERR. That is correct. It is consistent underwriting on both 

sides of the equation—for the portfolio loans, for the securitized 

loans. 

Senator LEVIN. Thank you both. Did you want to add anything? 

[No response.] 

Senator LEVIN. OK. Thank you. I appreciate your coming. 

OK. We are going to have a fourth panel. 

[Pause.] 

Senator LEVIN. Our final panel this afternoon: Sheila Bair, 

Chairman of the Federal Deposit Insurance Corporation; and 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 VI, our witnesses, all of them, are sworn 

in. 

So we would ask you to please stand and raise your right hand. 

Do you solemnly swear that the testimony you are about to give 

to this Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you, God? 

Ms. BAIR. I do. 

Mr. BOWMAN. I do. 

Senator LEVIN. Ms. Bair, why don’t we ask you to go first. 

TESTIMONY OF THE HON. SHEILA C. BAIR,1 CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Chairman Levin, I appreciate the opportunity to testify 

regarding the role of regulators in their supervision of Washington 

Mutual Bank (WaMu). The FDIC shares the Subcommittee’s concerns about issues associated with the primary regulation of large 

and complex insured depository 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 ‘‘back-up’’ authority to examine insured banking organizations, 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 ‘‘represents a heightened risk’’ 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 establish 

that the requisite triggering conditions exist. 

For example, in 2005, WaMu management made the decision to 

change its business strategy from conventional single-family loans 

to nontraditional and subprime loan products. OTS management 

determined that 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 


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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 number of FDIC 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 highrisk mortgage lenders had closed, gone bankrupt, or had chosen to 

be acquired by other institutions. WaMu’s board rejected an acquisition offer from a large commercial bank in favor of a capital infusion that allowed WaMu to retain its independence and management to stay in place, but limited future options for raising capital. 

In both July and September 2008, WaMu suffered substantial deposit runs, and liquidity was dissipating quickly. By September 24, 

cash on hand had declined to $4.4 billion, a dangerously low 

amount for a $300 billion institution that had seen average daily 

deposit withdrawals exceeding $2 billion in the previous week. The 

next day the 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 system by resolving failed 

institutions in an orderly way and ensuring that insured depositors 

have seamless access to their money. However, we too are learning 

important lessons from the crisis, and a central one is that we need 

to be more proactive in using our back-up authority, particularly 

for the larger institutions where our exposure is the greatest. 

We have welcomed the findings and recommendations of the Inspectors General of the FDIC and the 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 economy. 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 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 and 

resolution represent the best course. Further delay by the government would have significantly raised the cost to the FDIC, imposed 

losses on uninsured depositors, and creditors to even greater losses. 

The resolution went smoothly. The FDIC was able to preserve all 

of WaMu’s deposits, both insured and uninsured. The resolution 

left branches open, preserved many jobs, and allowed for a seamVerDate Nov 24 2008 13:02 Nov 02, 2010 Jkt 057320 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 P:\DOCS\57320.TXT SAFFAIRS PsN: PAT

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1The prepared statement of Mr. Bowman appears in the Appendix on page 181. 

less transition for WaMu’s customers the day after the bank was 

closed. In other words, most of WaMu was saved. 

As with all FDIC resolutions, the institution was not bailed out 

but, rather, competitively bid to the private sector. We were able 

to sell it at zero cost to the Deposit Insurance Fund. In contrast, 

had the FDIC been forced to liquidate WaMu, the FDIC estimates 

that it would have suffered approximately $41 billion in losses. 

Thank you for the opportunity to testify, and I am pleased to answer your questions. 

Senator LEVIN. Thank you very much, Ms. Bair. Mr. Bowman. 

TESTIMONY OF JOHN E. BOWMAN,1 ACTING DIRECTOR, 

OFFICE OF THRIFT SUPERVISION 

Mr. BOWMAN. Good afternoon, Chairman Levin. My name is 

John Bowman. I am a career Federal employee who became Acting 

Director of the Office of Thrift Supervision a little over 1 year ago 

during the height of the financial crisis after about 5 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’ supervision of Washington Mutual, 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. 

The demise of WaMu came early in the procession of more than 

200 banks and thrifts that have closed during this crisis. Lifelines, 

such as the Treasury’s TARP program and the FDIC’s increase in 

deposit 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 continued to rise, these practices supported a widely 

praised initiative to increase homeownership in America. Yet, as 

we now know, homeownership reached unsustainable levels and 

became too much of a good thing. 

Like all of 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. 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 rating agencies rated them highly. Those beliefs proved misplaced when the real estate market collapsed, the secondary market froze, 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 banking industry regulator. 

Since WaMu’s failure, the OTS has taken lessons to heart from 

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spector General’s Material Loss Reviews, and we have made strides 

to address the resulting recommendations. We have instituted controls to better track problems identified in their examination reports and to take timely, effective action when necessary. 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 continue to provide 

badly needed credit in their communities. Because consumer and 

community lending remains important for American families, I continue to believe in the thrift charter and the need for thrifts to 

have a separate regulator. With the changes we have instituted, I 

believe we have made the OTS significantly stronger for the future. 

Thank you again, Mr. Chairman. I am happy to answer your 

questions. 

Senator LEVIN. Thank you very much, Mr. Bowman. 

Throughout the last few years of WaMu’s operation, the FDIC as 

the back-up regulator made repeated requests to participate in 

OTS exams and was continually rebuffed. We heard in the second 

panel how the FDIC sought to participate in OTS exams of Washington Mutual, was limited in terms of staff, forbidden to do file 

review. For periods of time, OTS blocked FDIC access to exam material. 

Mr. Bowman, are you familiar with that, and was that the right 

course of action? 

Mr. BOWMAN. I can’t say that I am familiar with it, Mr. Chairman, given my responsibilities prior to becoming the Acting Director, but I have read enough about it and I have been watching 

these proceedings to have a sense of what is alleged to have gone 

on. 

Senator LEVIN. What is your reaction? 

Mr. BOWMAN. My reaction is twofold, actually. One is the two 

people who were probably the two most senior people within our 

organization were both prior employees of the FDIC. John Reich, 

who spoke earlier, was the Vice Chairman of the FDIC for 5 years. 

Scott Polakoff, who was the Senior Deputy Director, had served at 

the FDIC, I think probably in excess of 25 years, including that as 

a Regional Director out in Chicago. My sense was they knew what 

the issues were. Their perspective, I presume, would be as close to 

the FDIC’s as anyone’s within OTS. So I followed their lead. 

Senator LEVIN. I mean, why should it take the FDIC 4 months 

to get a desk or access to the examiner’s library with WaMu documents? Does that make any sense to you? Does it ring right? 

Mr. BOWMAN. Yes, that is sort of a specific allegation, sir, that 

I really don’t have any response to. 

Senator LEVIN. All right. And did you follow the email traffic 

back and forth here? 

Mr. BOWMAN. No. 


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1See Exhibit No. 68, which appears in the Appendix on page 439. 

[Pause.] 

Senator LEVIN. The 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. OTS got wind of it and said, ‘‘I cannot’’—this 

is from Mr. Reich to Mr. Polakoff, rating disagreement—‘‘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? 

Mr. BOWMAN. Are you reading from a particular email, sir? 

Senator LEVIN. I am, Exhibit 68.1

Mr. BOWMAN. All right. 

[Pause.] 

Mr. BOWMAN. So the question again? 

Senator LEVIN. What is audacious about the FDIC seeking access 

to—not in this case access—sitting down with a bank which has 

had the kind of problems that the bank had and to tell that bank 

that they were going to recommend a downgrading in their rating? 

Why is that so audacious? 

Mr. BOWMAN. Well, I think you probably have to ask John Reich 

that, sir. I don’t mean to—— 

Senator LEVIN. I did. 

Mr. BOWMAN [continuing]. Make light of it, but I am not sure exactly what else might have been going on with the Director at that 

time, what his perception was, what his perspective was, and why 

he would have put it into an email like this. 

Senator LEVIN. And in terms of access to files and sitting next 

to OTS when you do your examination, is there anything particularly problematic about that? 

Mr. BOWMAN. I don’t think so—— 

Senator LEVIN. Did that happen? 

Mr. BOWMAN. That FDIC should sit next to an OTS examiner? 

Senator LEVIN. No, that they should be rejected when they try. 

Mr. BOWMAN. Well, I mean, the difficulty I am having with the 

characterization of rejected is that I am looking at the FDIC IG’s 

report, which was issued as part of this, and that seems to indicate 

that, in fact, in the end, and I am quoting now from page 45 of the 

report, the information obtained from invoking back-up examination authority did not prompt FDIC to challenge OTS’ composite 

rating of WaMu until mid-2008. So that to me indicates that the 

FDIC got its information. They did not—— 

Senator LEVIN. It took 4 months—— 

Mr. BOWMAN. Maybe not in a timely fashion—— 

Senator LEVIN. Yes. Mr. Bowman, it took 4 months to get a desk. 

Now, look, there is a problem. There is a turf—— 

Mr. BOWMAN. A desk? 

Senator LEVIN. Yes, a desk. 

Mr. BOWMAN. OK. 

Senator LEVIN. In FDIC’s offices—— 

Mr. BOWMAN. WaMu’s offices. 

Senator LEVIN. No, in OTS’ offices. In WaMu’s offices. 

Mr. BOWMAN. Right. 


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1See Exhibit No. 45, which appears in the Appendix on page 368. 

Senator LEVIN. Let me get it straight. In WaMu’s offices where 

OTS had space, it took 4 months for the FDIC to get a desk. Now, 

there is a problem there. There was a turf war going on here, it 

is obvious. They couldn’t get to the examiners’ library that had 

WaMu documents. We had testimony here today. Did you hear that 

testimony? 

Mr. BOWMAN. I heard some of it, yes, sir. 

Senator LEVIN. Should that be the case? Should that happen? 

Mr. BOWMAN. It depends upon the circumstances. 

Senator LEVIN. All right. Do you know anything about these circumstances? 

Mr. BOWMAN. These particular circumstances? I know there was 

a dispute going on in terms of how the 2002 agreement should be 

implemented. Yes, sir, I know that. 

Senator LEVIN. All right. And you know that Mr. Dochow in July 

2008 sends a message about that 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. Dochow sends 

to Mr. Ward, is the following.1 He apologized, sends the MOU, and 

he says, ‘‘The MOU came up yesterday in a call I had with John 

Reich and Scott Polakoff. . . . It went to the FDIC because I committed to [the FDIC] to consider their comments in an effort to 

minimize their letter writing and posturing.’’ FDIC’s posturing. 

This is the email traffic between your people. Does that bother 

you that is the case, that there is this feeling that exists here that 

there is a rejection of access to files, to doing an examination with 

the FDIC sitting next to it, that a Memorandum of Understanding 

which is shared with the FDIC, that the FDIC is viewed as being 

a posturer and that is 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, and 

how do you cure it? 

Mr. BOWMAN. I am not sure what other people within the agency 

think about the FDIC. I know what I think about the FDIC. 

Senator LEVIN. No, but your people—this is the expression. 

Mr. BOWMAN. Right. I have two responses. 

Senator LEVIN. Does that trouble you, is my point. 

Mr. BOWMAN. 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. 

To the extent that it reflects other issues that may have prompted that language, there has to be a way to work those issues out. 

Senator LEVIN. Now, with the FDIC, when they were not given 

the access to the files, they weren’t given space and they asked for 

reasons, they are not even given reasons. When I asked, 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 agencies negotiated 

this memorandum. There is a standard in there for FDIC access 

and FDIC involvement. Is this Interagency Memorandum—and I 


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ask this of you, Ms. Bair—is this memorandum sufficient now, or 

is it being renegotiated? What is the status of this memorandum? 

Ms. BAIR. No, it is not sufficient and it is being renegotiated. 

Senator LEVIN. And why is that? 

Ms. BAIR. Because, I think as our IG reported, it is circular in 

that 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 in when we feel it is necessary to protect the Deposit Insurance Fund or gauge our risk exposure. 

Senator LEVIN. And Mr. Bowman, what is your reaction to that 

renegotiation? 

Mr. BOWMAN. I have a couple of thoughts. One is going back to 

your earlier question about the access to information. I go to the 

report of the FDIC IG that was issued today. In that document, it 

states categorically that the FDIC had sufficient information to arrive at and concur with the CAMELS rating that the OTS had entered into. That is a significant amount of information in terms of 

who got to sit at which desk or who got to sit in which chair—— 

Senator LEVIN. No. It is not which desk. 

Mr. BOWMAN. Whether they got a desk or not, or whether they 

had to stand in the hall—— 

Senator LEVIN. No, whether they had access—— 

Mr. BOWMAN. I don’t have any information about that. 

Senator LEVIN. Mr. Bowman, the question here is access. 

Mr. BOWMAN. It appears, sir, that they got the access because 

they came up with a CAMELS rating—— 

Senator LEVIN. It took them 4 months—— 

Mr. BOWMAN [continuing]. That concurs with the OTS. 

Senator LEVIN. Mr. Bowman, it took them 4 months to get a desk 

with your folks. They were denied access for 4 months at a critical 

moment of a bank that was in deep trouble. I hope you are not 

going to justify that. I hope you will look into what happened and 

why it happened—— 

Mr. BOWMAN. I will certainly look into it, sir. I can’t justify it because I don’t have any knowledge of it other than what is being 

presented here today. 

Senator LEVIN. All right. 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 so—— 

Mr. BOWMAN. I think at least two of those folks that spoke today, 

sir, no longer work at the agency. 

Senator LEVIN. Yes, but your legislative folks have access to this 

material. 

Mr. BOWMAN. OK. I also should point out, sir, the first I saw the 

information I am 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 I could perhaps be a little bit more helpful yesterday and 

was refused permission to see it—— 

Senator LEVIN. These are your documents. 

Mr. BOWMAN. But there were probably how many different documents turned over? 


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1See Exhibit No. 1d, which appears in the Appendix on page 200. 

Senator LEVIN. According to my staff, these documents were 

shown to you in your interview. We had an interview with you, did 

we not? 

Mr. BOWMAN. The number of documents that were shown to me 

in my interview numbered 10. I see a significant number of tabs 

beyond 10. 

Senator LEVIN. And how many did we ask your staff about, or 

your former staff about today, more than 10? 

Mr. BOWMAN. I don’t know. 

Senator LEVIN. Well, let us take a look at something which 

comes from your documents which I have asked them about. These 

were OTS documents. These are excerpts from documents. I don’t 

know if I want to read these again. I don’t think you were here earlier—— 

Mr. BOWMAN. I can save you the trouble. 

Senator LEVIN. You can? OK. Well, do you want to look at Exhibit 1d in your book.1 This is the pattern. ‘‘Underwriting of singlefamily residential (SFR) loans,’’ 2004, ‘‘remains less than satisfactory.’’ Level of SFR underwriting exceptions in our samples 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]’s review of the 2003 originations disclosed critical error rates as high as 57 percent of certain 

loan samples. . . .’’ SFR loan underwriting, this has been an area 

of concern for several exams. Securitizations prior to 2003 have 

horrible performance. 

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. 

The Inspector General’s report is highly critical. I don’t know if 

you have read that report or not. Did you? 

Mr. BOWMAN. I actually read the report prior to providing the 

management response and accepted it. We, in fact, have already 

adopted the one recommendation that was made in that report in 

terms of further changes by the Office of Thrift Supervision, which 

was the implementation of a system to track management responses. This had been put in place in October 2007. 

Senator LEVIN. So you have read that critical report? 

Mr. BOWMAN. I have read it and the FDIC’s, as well. 

Senator LEVIN. Mr. Bowman, are you willing to work with the 

FDIC to come up with an Interagency Memorandum which will 

make it possible for the FDIC to promptly access information about 

insured institutions whenever it finds the need for information? 

Mr. BOWMAN. Sir, up until whenever it finds the information, I 

was prepared to say, yes, I would be prepared to work with them 

along with the Federal Reserve Board, the OCC, which are the four 

Federal regulators. I should point out, sir, that my only hesitation 

in saying that 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 


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the Federal Reserve, the Office of the Comptroller of the Currency, 

and the Office of Thrift Supervision is that of a back-up 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. If we are responsible for it, 

if we made a mistake, we should be held accountable for it. We can 

work with the FDIC, and I am 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. 

Senator LEVIN. Is there any reason, since they are a back-up regulator that has got major skin in the game, as one would say, given 

the fact that they insure these firms, these banks, is there any reason why you cannot work together cooperatively without mixing up 

your roles in terms of accountability? 

Mr. BOWMAN. As you also know, as the Acting Director of the 

OTS, I am also a Director on the Board of Directors of the FDIC. 

So the answer to your question is there is no reason why we can’t 

work together. 

Senator LEVIN. 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 cooperative relationship with the FDIC? In other words, you can assign responsibility 

to someone and still have them act in cooperation with somebody 

else, right? 

Mr. BOWMAN. Absolutely. 

Senator LEVIN. All right. So that fact was repeated in these 

emails. OTS has principal responsibility. FDIC doesn’t. We went 

through these emails earlier today. OTS wanted to remind the 

FDIC that OTS was the principal regulator, as though FDIC didn’t 

know it. And that is what is 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 a cooperative relationship, and I can still not understand what 

the reluctance was. I don’t understand why FDIC was apparently 

rejected when it sought access to materials and access to joint examinations. 

[Pause.] 

Senator LEVIN. Let me ask both of you about some of the risky 

practices that we have talked about at these hearings, 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. 

Ms. BAIR. Yes. We have—— 

Senator LEVIN. Go into all of them, the 3 or 4 that we have 

talked about. 

Ms. BAIR. We have. We are opposed on a policy level. We are opposed to stated income. We are opposed to teaser rate underwriting. You need to underwrite at the fully indexed rate. We think 

you should document income. You should document the customer’s 

ability to repay, not just the initial introductory rate, but if it is 

an adjustable product, when it resets, as well. 


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One of the things that complicates the ability to set strong underwriting standards across the board is that we can only reach insured depository institutions and a lot of this—actually, the majority of this—was done by non-banking institutions that would not be 

subject to prudential standards or consumer standards of bank regulators. 

The Federal Reserve under HOEPA does have the authority to 

apply consumer lending standards across the board. In 2008, we 

filed a strong comment letter urging the Federal Reserve to ban 

stated income, to require ability to repay, to require underwriting 

at the fully indexed rate for all higher-risk mortgages, not just 

subprime or higher-rate mortgages, but also Option ARMs, interest-only loans, any non-traditional mortgage product. The Federal 

Reserve did finalize rules, but they only apply to the high-rate 

loans. They don’t apply to the negative amortization loans. 

They are out for comment again on this issue. We filed another 

comment letter suggesting that these type of standards should 

apply to at least non-traditional mortgages. I think, frankly, given 

the deterioration in the prime market, they should consider applying them across the board to all mortgages. 

The authority is there now and we have strongly encouraged the 

Federal Reserve to use that and we would be happy to make our 

comment letters available to the Subcommittee. 

Senator LEVIN. And you have the authority, as well? 

Ms. BAIR. The banking regulators have the authority for insured 

depository institutions under safety and soundness rules, yes. 

Senator LEVIN. But you have the authority to act on all of those 

items that you enumerated? 

Ms. BAIR. We do for insured depository institutions. 

Senator LEVIN. Stated income, teaser rates, document—— 

Ms. BAIR. That is right, for insured depository institutions, the 

primary regulators do. 

Senator LEVIN. And you do. And you have made recommendations to your board, have you? 

Ms. BAIR. We have. We joined the Interagency Guidance, which 

was a negotiated document. It did not completely ban stated income, as our examiners indicated, but it did make clear that we 

think that should be the exception, not the rule. I personally would 

be willing to go further and just eliminate stated income. I think 

if you provide flexibility in terms of the types of documentation 

that could be provided, whether it is deposit slips or W-2s or tax 

returns, fine. Any third-party good verification of income can be allowed. But some verification should be made. 

I, frankly, don’t personally think there is any reason for a stated 

income loan and we would be happy to see rulemaking applied 

across the board for all insured depository institutions. But again, 

you are only getting part of the market if you don’t apply that to 

the non-banks as well, and you do get into this regulatory arbitrage 

problem. The more standards you put on banks, you have the nonbanks doing looser underwriting and drawing market share from 

the banks. 

Senator LEVIN. Well, that is exactly the kind of testimony which 

I think is going to be very helpful to us as we proceed with the legislative response. 


ph44585 on D330-44585-7600 with DISTILLER
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Mr. Bowman, what would be your answer to my question? 

Mr. BOWMAN. I actually would agree with everything that Chairman Bair said. Unfortunately, the OTS does not have separate regulatory responsibility or regulation writing responsibility. That 

goes to the Federal Reserve as HOEPA. 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 it has to be applied across the board, 

both to regulated depository institutions as well as what is 

euphemistically referred to as the shadow banking agencies or the 

shadow banking industry. 

I think we also have to be careful in terms of, right now, we are 

getting lots of indications that there is a credit crunch going on in 

our country. Consumers, small businesses, individuals don’t have 

the kind of access to credit that they believe they need. Some of 

that may be an overreaction to the response to what happened in 

2003 through 2007, but the more prescriptive 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. 

Senator LEVIN. Subject to that risk, it is important, though, that 

we be clear and prescriptive? Subject to that risk that you have 

just outlined—— 

Mr. BOWMAN. Yes. 

Senator LEVIN [continuing]. You support what Ms. Bair said? 

Mr. BOWMAN. Yes. 

Senator LEVIN. OK. And did you comment on the negative amortizing loans, Chairman Bair? 

Ms. BAIR. Yes. Well, we think, again, 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 the 

borrower can make the payment at the initial introductory rate, 

but when it resets. 

These Option ARMs are terrible products. As was the case with 

WaMu and most of the institutions that made these loans, the vast 

majority of borrowers continued making the minimum payment 

only, so building up not only negative amortization, but also facing 

an interest rate increase when the loans reset. Our experience with 

failed banks is that Option ARMs almost always go bad when they 

hit the reset period. They were not underwritten at the fully indexed rate and shouldn’t be allowed. Again, we have encouraged 

the Federal Reserve to expand their rules so that they apply to all 

non-traditional mortgages, not just what we call subprime, which 

are the high-rate mortgages. 

Senator LEVIN. That is very helpful. 

Mr. Bowman, do you want to react to that? 

Mr. BOWMAN. Nothing to add to that. I agree with that. 

Senator LEVIN. OK. You have indicated that you have already 

sent some public comments—— 

Ms. BAIR. Yes. 

Senator LEVIN [continuing]. On this that you would share with 

this Subcommittee. We appreciate that. 

Any comments further on this subject, Mr. Bowman, we would 

appreciate from you, as well. 


ph44585 on D330-44585-7600 with DISTILLER
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I think on that positive note, we will end. Rather than trying to 

summarize a long hearing, I don’t think I will. It is obvious that 

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 have had, a big part of it. Other parts will be taken 

up next week when we look at the credit rating agencies, what 

their failures were that contributed to this economic disaster. And 

then the week after, we will be looking at the investment banks 

and what their major contribution was to this economic disaster. 

But today’s hearing will now be adjourned with thanks. 

Ms. BAIR. Thank you. 

Mr. BOWMAN. Thank you, Mr. Chairman. 

[Whereupon, at 2:55 p.m., the Subcommittee was adjourned.] 


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ph44585 on D330-44585-7600 with DISTILLER57320.250
343 


ph44585 on D330-44585-7600 with DISTILLER57320.251
344 


ph44585 on D330-44585-7600 with DISTILLER57320.252
345 


ph44585 on D330-44585-7600 with DISTILLER57320.253
346 


ph44585 on D330-44585-7600 with DISTILLER57320.254
347 


ph44585 on D330-44585-7600 with DISTILLER57320.255
348 


ph44585 on D330-44585-7600 with DISTILLER57320.256
349 


ph44585 on D330-44585-7600 with DISTILLER57320.257
350 


ph44585 on D330-44585-7600 with DISTILLER57320.258
351 


ph44585 on D330-44585-7600 with DISTILLER57320.259
352 


ph44585 on D330-44585-7600 with DISTILLER57320.260
353 


ph44585 on D330-44585-7600 with DISTILLER57320.261
354 


ph44585 on D330-44585-7600 with DISTILLER57320.262
355 


ph44585 on D330-44585-7600 with DISTILLER57320.263
356 


ph44585 on D330-44585-7600 with DISTILLER57320.264
357 


ph44585 on D330-44585-7600 with DISTILLER57320.265
358 


ph44585 on D330-44585-7600 with DISTILLER57320.266
359 


ph44585 on D330-44585-7600 with DISTILLER57320.267
360 


ph44585 on D330-44585-7600 with DISTILLER57320.268
361 


ph44585 on D330-44585-7600 with DISTILLER57320.269
362 


ph44585 on D330-44585-7600 with DISTILLER57320.270
363 


ph44585 on D330-44585-7600 with DISTILLER57320.271
364 


ph44585 on D330-44585-7600 with DISTILLER57320.272
365 


ph44585 on D330-44585-7600 with DISTILLER57320.273
366 


ph44585 on D330-44585-7600 with DISTILLER57320.274
367 


ph44585 on D330-44585-7600 with DISTILLER57320.275
368 


ph44585 on D330-44585-7600 with DISTILLER57320.276
369 


ph44585 on D330-44585-7600 with DISTILLER57320.277
370 


ph44585 on D330-44585-7600 with DISTILLER57320.278
371 


ph44585 on D330-44585-7600 with DISTILLER57320.279
372 


ph44585 on D330-44585-7600 with DISTILLER57320.280
373 


ph44585 on D330-44585-7600 with DISTILLER57320.281
374 


ph44585 on D330-44585-7600 with DISTILLER57320.282
375 


ph44585 on D330-44585-7600 with DISTILLER57320.283
376 


ph44585 on D330-44585-7600 with DISTILLER57320.284
377 


ph44585 on D330-44585-7600 with DISTILLER57320.285
378 


ph44585 on D330-44585-7600 with DISTILLER57320.286
379 


ph44585 on D330-44585-7600 with DISTILLER57320.287
380 


ph44585 on D330-44585-7600 with DISTILLER57320.288
381 


ph44585 on D330-44585-7600 with DISTILLER57320.289
382 


ph44585 on D330-44585-7600 with DISTILLER57320.290
383 


ph44585 on D330-44585-7600 with DISTILLER57320.291
384 


ph44585 on D330-44585-7600 with DISTILLER57320.292
385 


ph44585 on D330-44585-7600 with DISTILLER57320.293
386 


ph44585 on D330-44585-7600 with DISTILLER57320.294
387 


ph44585 on D330-44585-7600 with DISTILLER57320.295
388 


ph44585 on D330-44585-7600 with DISTILLER57320.296
389 


ph44585 on D330-44585-7600 with DISTILLER57320.297
390 


ph44585 on D330-44585-7600 with DISTILLER57320.298
391 


ph44585 on D330-44585-7600 with DISTILLER57320.299
392 


ph44585 on D330-44585-7600 with DISTILLER57320.300
393 


ph44585 on D330-44585-7600 with DISTILLER57320.301
394 


ph44585 on D330-44585-7600 with DISTILLER57320.302
395 


ph44585 on D330-44585-7600 with DISTILLER57320.303
396 


ph44585 on D330-44585-7600 with DISTILLER57320.304
397 


ph44585 on D330-44585-7600 with DISTILLER57320.305
398 


ph44585 on D330-44585-7600 with DISTILLER57320.306
399 


ph44585 on D330-44585-7600 with DISTILLER57320.307
400 


ph44585 on D330-44585-7600 with DISTILLER57320.308
401 


ph44585 on D330-44585-7600 with DISTILLER57320.309
402 


ph44585 on D330-44585-7600 with DISTILLER57320.310
403 


ph44585 on D330-44585-7600 with DISTILLER57320.311
404 


ph44585 on D330-44585-7600 with DISTILLER57320.312
405 


ph44585 on D330-44585-7600 with DISTILLER57320.313
406 


ph44585 on D330-44585-7600 with DISTILLER57320.314
407 


ph44585 on D330-44585-7600 with DISTILLER57320.315
408 


ph44585 on D330-44585-7600 with DISTILLER57320.316
409 


ph44585 on D330-44585-7600 with DISTILLER57320.317
410 


ph44585 on D330-44585-7600 with DISTILLER57320.318
411 


ph44585 on D330-44585-7600 with DISTILLER57320.319
412 


ph44585 on D330-44585-7600 with DISTILLER57320.320
413 


ph44585 on D330-44585-7600 with DISTILLER57320.321
414 


ph44585 on D330-44585-7600 with DISTILLER57320.322
415 


ph44585 on D330-44585-7600 with DISTILLER57320.323
416 


ph44585 on D330-44585-7600 with DISTILLER57320.324
417 


ph44585 on D330-44585-7600 with DISTILLER57320.325
418 


ph44585 on D330-44585-7600 with DISTILLER57320.326
419 


ph44585 on D330-44585-7600 with DISTILLER57320.327
420 


ph44585 on D330-44585-7600 with DISTILLER57320.328
421 


ph44585 on D330-44585-7600 with DISTILLER57320.329
422 


ph44585 on D330-44585-7600 with DISTILLER57320.330
423 


ph44585 on D330-44585-7600 with DISTILLER57320.331
424 


ph44585 on D330-44585-7600 with DISTILLER57320.332
425 


ph44585 on D330-44585-7600 with DISTILLER57320.333
426 


ph44585 on D330-44585-7600 with DISTILLER57320.334
427 


ph44585 on D330-44585-7600 with DISTILLER57320.335
428 


ph44585 on D330-44585-7600 with DISTILLER57320.336
429 


ph44585 on D330-44585-7600 with DISTILLER57320.337
430 


ph44585 on D330-44585-7600 with DISTILLER57320.338
431 


ph44585 on D330-44585-7600 with DISTILLER57320.339
432 


ph44585 on D330-44585-7600 with DISTILLER57320.340
433 


ph44585 on D330-44585-7600 with DISTILLER57320.341
434 


ph44585 on D330-44585-7600 with DISTILLER57320.342
435 


ph44585 on D330-44585-7600 with DISTILLER57320.343
436 


ph44585 on D330-44585-7600 with DISTILLER57320.344
437 


ph44585 on D330-44585-7600 with DISTILLER57320.345
438 


ph44585 on D330-44585-7600 with DISTILLER57320.346
439 


ph44585 on D330-44585-7600 with DISTILLER57320.347
440 


ph44585 on D330-44585-7600 with DISTILLER57320.348
441 


ph44585 on D330-44585-7600 with DISTILLER57320.349
442 


ph44585 on D330-44585-7600 with DISTILLER57320.350
443 


ph44585 on D330-44585-7600 with DISTILLER57320.351
444 


ph44585 on D330-44585-7600 with DISTILLER57320.352
445 


ph44585 on D330-44585-7600 with DISTILLER57320.353
446 


ph44585 on D330-44585-7600 with DISTILLER57320.354
447 


ph44585 on D330-44585-7600 with DISTILLER57320.355
448 


ph44585 on D330-44585-7600 with DISTILLER57320.356
449 


ph44585 on D330-44585-7600 with DISTILLER57320.357
450 


ph44585 on D330-44585-7600 with DISTILLER57320.358
451 


ph44585 on D330-44585-7600 with DISTILLER57320.359
452 


ph44585 on D330-44585-7600 with DISTILLER57320.360
453 


ph44585 on D330-44585-7600 with DISTILLER57320.361
454 


ph44585 on D330-44585-7600 with DISTILLER57320.362
455 


ph44585 on D330-44585-7600 with DISTILLER57320.363
456 


ph44585 on D330-44585-7600 with DISTILLER57320.364
457 


ph44585 on D330-44585-7600 with DISTILLER57320.365
458 


ph44585 on D330-44585-7600 with DISTILLER57320.366
459 


ph44585 on D330-44585-7600 with DISTILLER57320.367
460 


ph44585 on D330-44585-7600 with DISTILLER57320.368
461 


ph44585 on D330-44585-7600 with DISTILLER57320.369
462 


ph44585 on D330-44585-7600 with DISTILLER57320.370
463 


ph44585 on D330-44585-7600 with DISTILLER57320.371
464 


ph44585 on D330-44585-7600 with DISTILLER57320.372
465 


ph44585 on D330-44585-7600 with DISTILLER57320.373
466 


ph44585 on D330-44585-7600 with DISTILLER57320.374
467 


ph44585 on D330-44585-7600 with DISTILLER57320.375
468 


ph44585 on D330-44585-7600 with DISTILLER57320.376
469 


ph44585 on D330-44585-7600 with DISTILLER57320.377
470 


ph44585 on D330-44585-7600 with DISTILLER57320.378
471 


ph44585 on D330-44585-7600 with DISTILLER57320.379
472 


ph44585 on D330-44585-7600 with DISTILLER57320.380
473 


ph44585 on D330-44585-7600 with DISTILLER57320.381
474 


ph44585 on D330-44585-7600 with DISTILLER57320.382
475 


ph44585 on D330-44585-7600 with DISTILLER57320.383
476 


ph44585 on D330-44585-7600 with DISTILLER57320.384
477 


ph44585 on D330-44585-7600 with DISTILLER57320.385
478 


ph44585 on D330-44585-7600 with DISTILLER57320.386
479 


ph44585 on D330-44585-7600 with DISTILLER57320.387
480 


ph44585 on D330-44585-7600 with DISTILLER57320.388
481 


ph44585 on D330-44585-7600 with DISTILLER57320.389
482 


ph44585 on D330-44585-7600 with DISTILLER57320.390
483 


ph44585 on D330-44585-7600 with DISTILLER57320.391
484 


ph44585 on D330-44585-7600 with DISTILLER57320.392
485 


ph44585 on D330-44585-7600 with DISTILLER57320.393
486 


ph44585 on D330-44585-7600 with DISTILLER57320.394
487 


ph44585 on D330-44585-7600 with DISTILLER57320.395
488 


ph44585 on D330-44585-7600 with DISTILLER57320.396
489 


ph44585 on D330-44585-7600 with DISTILLER57320.397
490 


ph44585 on D330-44585-7600 with DISTILLER57320.398
491 


ph44585 on D330-44585-7600 with DISTILLER57320.399
492 


ph44585 on D330-44585-7600 with DISTILLER57320.400
493 


ph44585 on D330-44585-7600 with DISTILLER57320.401
494 


ph44585 on D330-44585-7600 with DISTILLER57320.402
495 


ph44585 on D330-44585-7600 with DISTILLER57320.403
496 


ph44585 on D330-44585-7600 with DISTILLER57320.404
497 


ph44585 on D330-44585-7600 with DISTILLER57320.405
498 


ph44585 on D330-44585-7600 with DISTILLER57320.406
499 


ph44585 on D330-44585-7600 with DISTILLER57320.407
500 


ph44585 on D330-44585-7600 with DISTILLER57320.408
501 


ph44585 on D330-44585-7600 with DISTILLER57320.409
502 


ph44585 on D330-44585-7600 with DISTILLER57320.410
503 


ph44585 on D330-44585-7600 with DISTILLER57320.411
504 


ph44585 on D330-44585-7600 with DISTILLER57320.412
505 


ph44585 on D330-44585-7600 with DISTILLER57320.413
506 


ph44585 on D330-44585-7600 with DISTILLER57320.414
507 


ph44585 on D330-44585-7600 with DISTILLER57320.415
508 


ph44585 on D330-44585-7600 with DISTILLER57320.416
509 


ph44585 on D330-44585-7600 with DISTILLER57320.417
510 


ph44585 on D330-44585-7600 with DISTILLER57320.418
511 


ph44585 on D330-44585-7600 with DISTILLER57320.419
512 


ph44585 on D330-44585-7600 with DISTILLER57320.420
513 


ph44585 on D330-44585-7600 with DISTILLER57320.421
514 


ph44585 on D330-44585-7600 with DISTILLER57320.422
515 


ph44585 on D330-44585-7600 with DISTILLER57320.423
516 


ph44585 on D330-44585-7600 with DISTILLER57320.424
517 


ph44585 on D330-44585-7600 with DISTILLER57320.425
518 


ph44585 on D330-44585-7600 with DISTILLER57320.426
519 


ph44585 on D330-44585-7600 with DISTILLER57320.427
520 


ph44585 on D330-44585-7600 with DISTILLER57320.428
521 


ph44585 on D330-44585-7600 with DISTILLER57320.429
522 


ph44585 on D330-44585-7600 with DISTILLER57320.430
523 


ph44585 on D330-44585-7600 with DISTILLER57320.431
524 


ph44585 on D330-44585-7600 with DISTILLER57320.432
525 


ph44585 on D330-44585-7600 with DISTILLER57320.433
526 


ph44585 on D330-44585-7600 with DISTILLER57320.434
527 


ph44585 on D330-44585-7600 with DISTILLER57320.435
528 


ph44585 on D330-44585-7600 with DISTILLER57320.436
529 


ph44585 on D330-44585-7600 with DISTILLER57320.437
530 


ph44585 on D330-44585-7600 with DISTILLER57320.438
531 


ph44585 on D330-44585-7600 with DISTILLER57320.439
532 


ph44585 on D330-44585-7600 with DISTILLER57320.440
533 


ph44585 on D330-44585-7600 with DISTILLER57320.441
534 


ph44585 on D330-44585-7600 with DISTILLER57320.442
535 


ph44585 on D330-44585-7600 with DISTILLER57320.443
536 


ph44585 on D330-44585-7600 with DISTILLER57320.444
537 


ph44585 on D330-44585-7600 with DISTILLER57320.445
538 


ph44585 on D330-44585-7600 with DISTILLER57320.446
539 


ph44585 on D330-44585-7600 with DISTILLER57320.447
540 


ph44585 on D330-44585-7600 with DISTILLER57320.448
541 


ph44585 on D330-44585-7600 with DISTILLER57320.449
542 


ph44585 on D330-44585-7600 with DISTILLER57320.450
543 


ph44585 on D330-44585-7600 with DISTILLER57320.451
544 


ph44585 on D330-44585-7600 with DISTILLER57320.452
545 


ph44585 on D330-44585-7600 with DISTILLER57320.453
546 


ph44585 on D330-44585-7600 with DISTILLER57320.454
547 


ph44585 on D330-44585-7600 with DISTILLER57320.455
548 


ph44585 on D330-44585-7600 with DISTILLER57320.456
549 


ph44585 on D330-44585-7600 with DISTILLER57320.457
550 


ph44585 on D330-44585-7600 with DISTILLER57320.458
551 


ph44585 on D330-44585-7600 with DISTILLER57320.459
552 


ph44585 on D330-44585-7600 with DISTILLER57320.460
553 


ph44585 on D330-44585-7600 with DISTILLER57320.461
554 


ph44585 on D330-44585-7600 with DISTILLER57320.462
555 


ph44585 on D330-44585-7600 with DISTILLER57320.463
556 


ph44585 on D330-44585-7600 with DISTILLER57320.464
557 


ph44585 on D330-44585-7600 with DISTILLER57320.465
558 


ph44585 on D330-44585-7600 with DISTILLER57320.466
559 


ph44585 on D330-44585-7600 with DISTILLER57320.467
560 


ph44585 on D330-44585-7600 with DISTILLER57320.468
561 


ph44585 on D330-44585-7600 with DISTILLER57320.469
562 


ph44585 on D330-44585-7600 with DISTILLER57320.470
563 


ph44585 on D330-44585-7600 with DISTILLER57320.471
564 


ph44585 on D330-44585-7600 with DISTILLER57320.472
565 


ph44585 on D330-44585-7600 with DISTILLER57320.473
566 


ph44585 on D330-44585-7600 with DISTILLER57320.474
567 


ph44585 on D330-44585-7600 with DISTILLER57320.475
568 


ph44585 on D330-44585-7600 with DISTILLER57320.476
569 


ph44585 on D330-44585-7600 with DISTILLER57320.477
570 


ph44585 on D330-44585-7600 with DISTILLER57320.478
571 


ph44585 on D330-44585-7600 with DISTILLER57320.479
572 


ph44585 on D330-44585-7600 with DISTILLER57320.480
573 


ph44585 on D330-44585-7600 with DISTILLER57320.481
574 


ph44585 on D330-44585-7600 with DISTILLER57320.482
575 


ph44585 on D330-44585-7600 with DISTILLER57320.483
576 


ph44585 on D330-44585-7600 with DISTILLER57320.484
577 


ph44585 on D330-44585-7600 with DISTILLER57320.485
578 


ph44585 on D330-44585-7600 with DISTILLER57320.486
579 


ph44585 on D330-44585-7600 with DISTILLER57320.487
580 


ph44585 on D330-44585-7600 with DISTILLER57320.488
581 


ph44585 on D330-44585-7600 with DISTILLER57320.489
582 


ph44585 on D330-44585-7600 with DISTILLER57320.490
583 


ph44585 on D330-44585-7600 with DISTILLER57320.491
584 


ph44585 on D330-44585-7600 with DISTILLER57320.492
585 


ph44585 on D330-44585-7600 with DISTILLER57320.493
586 


ph44585 on D330-44585-7600 with DISTILLER57320.494
587 


ph44585 on D330-44585-7600 with DISTILLER57320.495
588 


ph44585 on D330-44585-7600 with DISTILLER57320.496
589 


ph44585 on D330-44585-7600 with DISTILLER57320.497
590 


ph44585 on D330-44585-7600 with DISTILLER57320.498
591 


ph44585 on D330-44585-7600 with DISTILLER57320.499
592 


ph44585 on D330-44585-7600 with DISTILLER57320.500
593 


ph44585 on D330-44585-7600 with DISTILLER57320.501
594 


ph44585 on D330-44585-7600 with DISTILLER57320.502
595 


ph44585 on D330-44585-7600 with DISTILLER57320.503
596 


ph44585 on D330-44585-7600 with DISTILLER57320.504
597 


ph44585 on D330-44585-7600 with DISTILLER57320.505
598 


ph44585 on D330-44585-7600 with DISTILLER57320.506
599 


ph44585 on D330-44585-7600 with DISTILLER57320.507
600 


ph44585 on D330-44585-7600 with DISTILLER57320.508
601 


ph44585 on D330-44585-7600 with DISTILLER57320.509
602 


ph44585 on D330-44585-7600 with DISTILLER57320.510
603 


ph44585 on D330-44585-7600 with DISTILLER57320.511
604 


ph44585 on D330-44585-7600 with DISTILLER57320.512
605 


ph44585 on D330-44585-7600 with DISTILLER57320.513
606 


ph44585 on D330-44585-7600 with DISTILLER57320.514
607 


ph44585 on D330-44585-7600 with DISTILLER57320.515
608 


ph44585 on D330-44585-7600 with DISTILLER57320.516
609 


ph44585 on D330-44585-7600 with DISTILLER57320.517
610 


ph44585 on D330-44585-7600 with DISTILLER57320.518
611 


ph44585 on D330-44585-7600 with DISTILLER57320.519
612 


ph44585 on D330-44585-7600 with DISTILLER57320.520
613 


ph44585 on D330-44585-7600 with DISTILLER57320.521
614 


ph44585 on D330-44585-7600 with DISTILLER57320.522
615 


ph44585 on D330-44585-7600 with DISTILLER57320.523
616 


ph44585 on D330-44585-7600 with DISTILLER57320.524
617 


ph44585 on D330-44585-7600 with DISTILLER57320.525
618 


ph44585 on D330-44585-7600 with DISTILLER57320.526
619 


ph44585 on D330-44585-7600 with DISTILLER57320.527
620 


ph44585 on D330-44585-7600 with DISTILLER57320.528
621 


ph44585 on D330-44585-7600 with DISTILLER57320.529
622 


ph44585 on D330-44585-7600 with DISTILLER57320.530
623 


ph44585 on D330-44585-7600 with DISTILLER57320.531
624 


ph44585 on D330-44585-7600 with DISTILLER57320.532
625 


ph44585 on D330-44585-7600 with DISTILLER57320.533
626 


ph44585 on D330-44585-7600 with DISTILLER57320.534
627 


ph44585 on D330-44585-7600 with DISTILLER57320.535
628 


ph44585 on D330-44585-7600 with DISTILLER57320.536
629 


ph44585 on D330-44585-7600 with DISTILLER57320.537
630 


ph44585 on D330-44585-7600 with DISTILLER57320.538
631 


ph44585 on D330-44585-7600 with DISTILLER57320.539
632 


ph44585 on D330-44585-7600 with DISTILLER57320.540
633 


ph44585 on D330-44585-7600 with DISTILLER57320.541
634 


ph44585 on D330-44585-7600 with DISTILLER57320.542
635 


ph44585 on D330-44585-7600 with DISTILLER57320.543
636 


ph44585 on D330-44585-7600 with DISTILLER57320.544
637 


ph44585 on D330-44585-7600 with DISTILLER57320.545
638 


ph44585 on D330-44585-7600 with DISTILLER57320.546
639 


ph44585 on D330-44585-7600 with DISTILLER57320.547
640 


ph44585 on D330-44585-7600 with DISTILLER57320.548
641 


ph44585 on D330-44585-7600 with DISTILLER57320.549
642 


ph44585 on D330-44585-7600 with DISTILLER57320.550
643 


ph44585 on D330-44585-7600 with DISTILLER57320.551
644 


ph44585 on D330-44585-7600 with DISTILLER57320.552
645 


ph44585 on D330-44585-7600 with DISTILLER57320.553
646 


ph44585 on D330-44585-7600 with DISTILLER57320.554
647 


ph44585 on D330-44585-7600 with DISTILLER57320.555
648 


ph44585 on D330-44585-7600 with DISTILLER57320.556
649 


ph44585 on D330-44585-7600 with DISTILLER57320.557
650 


ph44585 on D330-44585-7600 with DISTILLER57320.558
651 


ph44585 on D330-44585-7600 with DISTILLER57320.559
652 


ph44585 on D330-44585-7600 with DISTILLER57320.560
653 


ph44585 on D330-44585-7600 with DISTILLER57320.561
654 


ph44585 on D330-44585-7600 with DISTILLER57320.562
655 


ph44585 on D330-44585-7600 with DISTILLER57320.563
656 


ph44585 on D330-44585-7600 with DISTILLER57320.564
657 


ph44585 on D330-44585-7600 with DISTILLER57320.565
658 


ph44585 on D330-44585-7600 with DISTILLER57320.566
659 


ph44585 on D330-44585-7600 with DISTILLER57320.567
660 


ph44585 on D330-44585-7600 with DISTILLER57320.568
661 


ph44585 on D330-44585-7600 with DISTILLER57320.569
662 


ph44585 on D330-44585-7600 with DISTILLER57320.570
663 


ph44585 on D330-44585-7600 with DISTILLER57320.571
664 


ph44585 on D330-44585-7600 with DISTILLER57320.572
665 


ph44585 on D330-44585-7600 with DISTILLER57320.573
666 


ph44585 on D330-44585-7600 with DISTILLER57320.574
667 


ph44585 on D330-44585-7600 with DISTILLER57320.575
668 


ph44585 on D330-44585-7600 with DISTILLER57320.576
669 


ph44585 on D330-44585-7600 with DISTILLER57320.577
670 


ph44585 on D330-44585-7600 with DISTILLER57320.578
671 


ph44585 on D330-44585-7600 with DISTILLER57320.579
672 


ph44585 on D330-44585-7600 with DISTILLER57320.580
673 


ph44585 on D330-44585-7600 with DISTILLER57320.581
674 


ph44585 on D330-44585-7600 with DISTILLER57320.582
675 


ph44585 on D330-44585-7600 with DISTILLER57320.583
676 


ph44585 on D330-44585-7600 with DISTILLER57320.584
677 


ph44585 on D330-44585-7600 with DISTILLER57320.585
678 


ph44585 on D330-44585-7600 with DISTILLER57320.586
679 


ph44585 on D330-44585-7600 with DISTILLER57320.587
680 


ph44585 on D330-44585-7600 with DISTILLER57320.588
681 


ph44585 on D330-44585-7600 with DISTILLER57320.589
682 


ph44585 on D330-44585-7600 with DISTILLER57320.590
683 


ph44585 on D330-44585-7600 with DISTILLER57320.591
684 


ph44585 on D330-44585-7600 with DISTILLER57320.592
685 

Æ 


ph44585 on D330-44585-7600 with DISTILLER57320.593