Regulatory arbitrage anecdote of the day

By Felix Salmon
June 22, 2009

Connie Bruck has a profile of Angelo Mozilo in the latest New Yorker, which annoyingly isn’t freely available online. There’s lots of interesting material in it, but I was particularly struck with Countrywide’s regulator-shopping:

Mozilo called some of the regulators’ concerns “much ado about nothing.” He decided that Countrywide should try to switch regulators, leaving the Fed and the O.C.C. for the weaker Office of Thrift Supervision (O.T.S.)…

Under the existing system, banks may choose their own regulators, which in turn are funded by the fees that the banks pay; the O.T.S. had lobbied Countrywide to make the switch.

Call me naive, but while I knew that companies would try to get themselves regulated by the toothless OTS, I had no idea that the OTS itself would lobby them to make the switch. Of course in hindsight it makes perfect sense — I’m sure that the likes of Countrywide and AIG accounted for a large chunk of the OTS’s income. But the idea that the OTS and the OCC were competing with each other, in a regulatory race to the bottom — well, let’s just say it explains quite a lot. And it’s one reason why I’m uncomfortable that even after the OTS and the OCC merge to become the National Bank Supervisor, there’s still going to be some measure of competition between the NBS and the FDIC to see who gets to regulate whom.
Update: Binyamin Appelbaum and Ellen Nakashima had more detail, back in November, even going so far as to name Darryl W. Dochow as the individual responsible for bringing Countrywide into the OTS fold.


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This just underscores the flaws in our current economic system and the fact that regulators are more concerned with protecting their self-interests, rather than the interests of consumers.

The need for reform is obvious, but the devil will be in the details.

This American Life actually had a nice piece on this a few weeks ago.

The point was that after the S&L crisis, we lost a lot of thrifts, so the OTS lost a lot of its importance / purpose. As usual with large beaurocracies (or organizations generally), the struggle for self-preservation set in and they spent a lot of time lobbying banks to convert to OTS overview. A big part was how bank-friendly the agency was (remember the infamous “cutting the red tape” photo).

Posted by ab | Report as abusive

Given the choice between the OCC and the OTS, you’ll still get away with anything. It will just cost a bit more in regulatory capture fees with the OCC.

Also, for those who complain about the link between the rating agencies’s revenues and the credit ratings, take a gander at the SOLE source of OCC funding.

The OTS not only Lobbied, but also put the weakest examiner in charge of the transfer and subsequent examinations.. The same examiner who had led the WAMU examinations for several years, allowing them to run wild also. Also Darrell Dochow, of Indymac fame, was also involved in the transfer and failure of Indy, Wamu and Countrywide.(and, lest we forget, Lincoln) Dochow did more to destroy the financial system than he gets credit for. How could OTS allow him to rise to power again after the Lincoln debacle?

Why do you think GE also wanted OTS to be their equivalent consolidated regulator for Europe? Because they were the best? or Weakest?

Posted by zhao | Report as abusive

From -regulation-obama-business-beltway-regs. html

“Last year Colonial BancGroup, an embattled Birmingham, Ala., bank, switched from an OCC charter to an Alabama bank charter after months of scrutiny by federal regulators over its loan books. It had switched from an Alabama charter to an OCC charter just five years earlier.

Colonial tried to portray the switch as a way to save $1 million a year–federal regulation is more expensive than state regulation–and to have the “ability to pursue business strategies that best suit its strengths.”

The $26 billion-asset Colonial is heavily exposed to the Florida real estate market as a major construction and commercial real estate lender. Its maneuvering may have backfired. Last fall when applying for federal money under the Troubled Asset Relief Program, Colonial was told it would only get it if it could first raise private funds.

In April, Colonial struck an as yet incomplete deal with a Florida firm, Taylor Bean & Whitaker, which would inject $300 million into the bank and convert it to an OTS charter from a state banking charter, contingent upon getting final approval for $550 million in Federal TARP money.

Stuck with that chicken-and-egg dilemma, Colonial last week got slapped with a cease and desist order by the Federal Deposit Insurance Corp. and Alabama banking regulators, who are demanding the bank increase capital levels and reduce problem assets.”

Posted by A | Report as abusive