Countrywide's switcheroo

Ever wonder why the Calabasas-based mortgage lender, now part of Bank of America, was pretty much left alone by federal regulators? Well, perhaps it’s because Countrywide decided to reconstitute itself as a thrift and fall under the aegis of the Office of Thrift Supervision. Until then, the company was regulated by the much tougher Office of the Comptroller of the Currency. It just so happens that the OTS depends a lot on fees paid by the banks it regulates. Yes, you read that right. The Washington Post had a dandy piece over the weekend that will make your blood boil. Here's the key conclusion:

In the parade of regulators that missed signals or made decisions they came to regret on the road to the current financial crisis, the Office of Thrift Supervision stands out.

The Post notes that individual firms are more important to OTS finances than other bank regulators because the agency oversees fewer companies with fewer assets. Countrywide's decision to come under the OTS umbrella was largely the work of Darryl Dochow, the official in charge of new charters in the Western region, home to Washington Mutual, IndyMac and other large thrifts.

In the late 1980s, Dochow had been the chief career supervisor of the savings-and-loan industry, and federal investigators later concluded he played a key role in the collapse of Charles Keating's Lincoln Savings and Loan by delaying and impeding proper oversight of that thrift's operations. Dochow was shunted aside in the aftermath and sent to the agency's Seattle office. Several of his former colleagues and superiors say he eventually reestablished himself as a credible regulator and again rose in the organization.

[CUT]

Senior executives at Countrywide who participated in the meetings said OTS pitched itself as a more natural, less antagonistic regulator than OCC and that Mozilo preferred that. Government officials outside OTS who were familiar with the negotiations provided a similar description. "The general attitude was they were going to be more lenient," one Countrywide executive said. For example, he said other regulators, specifically OCC and the Federal Reserve, were very demanding that large banks not allow loan officers to participate in the selection of property appraisers. "But the OTS sold themselves on having a more liberal interpretation of it," the executive said.

Scott M. Polakoff, the agency's senior deputy director, denied any hanky-panky. He said OTS was a better fit for Countrywide because of the agency's focus on mortgage lending.

He said he challenged Mozilo: "If you're looking for a weak regulator, and if you're calling us because you think we're a weak regulator, stop now. We will walk away." Polakoff said Mozilo told him, "That is absolutely not the reason we're even talking to you about a charter."