Where were regulators when banks were failing?

That came into play in the failure of three related banks — First National Bank of Arizona, First National Bank of Nevada, and First Heritage Bank, which together had $3.65 billion in assets and were seized by the FDIC in July 2008. Thethree shared common boards and some centralized functions.

As early as 2002, the OCC identified problems at the First National Banks of Arizona and Nevada (which merged in June 2008) and said they were "adversely impacted by the significant concentration in high-risk mortgage products and weak risk management controls." Yet the OCC still gave both banks the same high rating as in 2001 when there were few problems.

All three banks were controlled by the First National Bank Holding Co., whose chairman was Raymond Lamb. The inspector general characterizes Lamb as "very dominant and influential," and says he "emphasized growth and profits over appropriate risk management."

His son, Patrick Lamb, ran the mortgage division at the First National banks, which had the most troubled real estate loans. The FDIC said, "The owner's son ran the mortgage division as a closed, separate operation and wanted no intervention from anyone." In July 2007 regulators seized the banks. Raymond Lamb didn't return phone calls seeking comment, and Patrick Lamb couldn't be reached.

OCC officials won't talk about specific cases, but they blame the economic downturn for most of their misses. "The economy and the financial system has gone through a severe disruption on a scale not seen since the Depression," says John Walsh, chief of staff at the OCC. "Nobody realized in looking at these bad real estate loans that a tsunami was coming, as opposed to just a tide."

Backdating capital

However, to the Treasury's inspector general the most "alarming" findings were that some senior officials at the OTS "either directed or authorized" two banks —IndyMac and BankUnited — to "inappropriately" book capital that wasn't there.

"We were alarmed by the risk such mischaracterizations can cause to good bank management and oversight. ... The banks' position and soundness were not accurately reported," says Rich Delmar, counsel to the Treasury's inspector general.

The OTS' director of the western region, Darrel Dochow, allowed the California bank IndyMac to show that it had more capital on its books than it actually did to avoid falling below its "well-capitalized" status. If banks fall below that status, regulators immediately cut off a bank's access to new brokered deposits.

IndyMac's holding company made a $50 million capital contribution on May 9, 2008, of which $18 million was recorded as capital on March 31, 2008. The FDIC seized IndyMac just four months later, on July 11. The government agency has incurred losses totaling $8.9 billion related to the bank. Dochow was removed from his job, and he has since left the agency. Dochow couldn't be reached for comment.

The inspector general also found that Florida's BankUnited was short of capital for the second quarter of 2008. When the OTS' senior deputy director found out in August about the shortfall, he directed the bank to infuse capital from its holding company. However, he advised that the funds be recognized as of June 30, at least two months before the infusion occurred.

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