Saturday, April 17, 2010

Was Sheila Bair reckless and irresponsible? I report – you decide

Here is an email exchange between government officials leading up to the confiscation of Washington Mutual – courtesy Deal Breaker.


“I cannot believe the continuing audacity of this woman.” – Email from OTS Executive Director John Reich to OTS senior official Scott Polakoff (referring to FDIC Chair Sheila Bair), 9/10108, Polakoff

—– Original Message —–
From: “”Bair, Sheila C.”" []
Sent: 08/06/200805:46 PM AST
To: Donald Kohn
Subject: Fw: W

This is pretty over the top

—–Original Message—–
From: Reich, John M
To: Bair, Sheila C.
Sent: Wed Aug 06 17:32:482008
Subject: Re: W

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, in which I mayor may not be able to participate, depending on cell phone service availability on the cruise ship location.

Instead, I want to have a one on one meeting with Ben Bernanke prior to any such discussion – as early next week as possible following my return to the office. 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 PFR (i.e. the OTS) rules on solvency and the PFR utilizes PCA.

You personally, and the FDIC as an agency, would likely create added instability if you pursue what I strongly believe would be a precipitous and unprecedented action. And ifit occurs without my consent, I will not sit quietly by and observe – there would be a public reaction. Put yourself in the PFR’s shoes in this situation. We have our responsibilities, including the right of primary supervisory determination of this institution’s condition, and until Congress changes the statutes under which we operate, our responsibilities as the PFR are not to be simply tendered to the FDIC in a down economic cycle.

It seems as though the FDIC is behaving as some sort of super-regulator – which you
and it are not. I also believe there could be a high potential for FDIC actions of the type you are contemplating to calIse irreparable harm to Wamu if, at any point in the near future, Wamu wishes to actualy seek a buyer. The potential harm could stem from the fact that any such potential buyer may have been allready been contacted by the FDIC.
If in fact any meetings or discussions have already taken place by the FDIC with either JPMC, Wells Fargo, or any other entity, in any capacity in which WaMu was even mentioned, I would like to see a copy of the signed confidentiality agreement signed by the bank – required in any resolution scenario before an institution is told the name of the failing bank.

This is an OTS regulated institution, not an FDIC regulated institution. We make any decision on solvency, not the FDIC, and I have staff equally as competent as staff at the FDIC, whom I know well.

The FDIC can do whatever internal contingency planning it wishes, but should in no way go outside the FDIC. This is a 3-rated institution. Are you also trying to find buyers for Citi, Wachovia, Nat City and others?

Finally, ifWamu were to learn ofthe FDIC’s actions, there may well be a question as to whether these actions may constitute a disclosable event. That, in and of itself, is a reason not to proceed with this approach for a publicly traded institution. The government should not be in the business of arranging mergers – particularly before they are necessary, and we are not at that point in WaMu’s situation.

I will attempt to be on the Friday conference call, and I am going to assume this notion is not going to be raised.


—– Original Message —–
From: Bair, Sheila C.
To: Reich, John M Cc: Murton, Arthur J. ; Polakoff, Scott M
Sent: Wed Aug
Subject: W

Dear John,

I’d like to further discuss contingency planning for W during the calion Friday. Art talked with Scott about making some discrete inquiries to determine whether there are institutions which would be willing to acquire it on a whole bank basis if we had to do an emergency closing, and on what terms. I understand you have strong objections to our doing so, so I’d like to talk this through. My interest is in assuring that IF we have to market it on an emergency basis, there is multiple bidder interest.
In any event, both the FDIC and the FRB agree that there needs to be a contingency plan in place, so let’s talk this through on Friday. I’d really like to develop a plan everyone is comfortable with.



Michael R said...

The inspectors general of the OTS and the FDIC did a separate investigation that corroborated many of the subcommittee's findings.

OTS Inspector General Eric M. Thorson said that the agency spotted weaknesses in its relationship with mortgage brokers, middlemen who act as liaisons between borrowers and lenders. In 2007, only 14 Washington Mutual employees oversaw more than 34,000 third-party brokers.

Yet OTS examiners refused to lower Washington Mutual's asset quality ratings even though its practices were unsatisfactory because "WAMU was making money and loans were performing," Thorson said. This assessment runs counter to OTS guidelines, which state that demonstrating profitability is not sufficient if an institution has a high exposure to risk, Thorson said.

The inspectors general found that infighting between the agencies also hampered regulation of Washington Mutual.

The FDIC had identified risks and challenged the OTS's financial soundness ratings of the thrift in 2008, they said. That disagreement was not resolved until seven days before the bank's collapse.

Kind of hard to imagine where the obstacle was here to agreeing on soundness ratings. (/eyeroll)

Michael R said...

I'd have to go with, "No."

Anonymous said...

If you really want to report please also note the reports that clearly state that OTS was incompetent and there was no way in hell that WaMu should have had a rating of 3. People like your blog because you are sensible and show both sides of the coin, in this case you are being totally one sided.

Eidolon said...

Why yes -- yes, she was -- quite. In spite of the events to date in WMI's farcical bankruptcy case (in which WM equity holders have been repeatedly demoralized, not the least of which by their own purported counsel), and these latest sham investigations by our least governing bodies, I enjoy the same findings I did 18 moths ago, to wit WaMu was a solvent bank seized contrary to the findings of its primary regulator. Stay tuned to this riveting yet pathetic story from America's present and future...

Michael R said...

To put a finer point on it:

You wrote in 2008:

"The lack of visibility creates a lack of accountability. Sunlight (visibility of the liquidation) is the greatest disinfectant. In the WaMu case senior debt holders from the outside look as if they had their rights taken from them (and those rights were valuable) by a government official without any method whatsoever of auditing the decisions of said official."

The evidence available is fairly compelling that the official who deprived you of sunlight, visibility, and auditing was John M. Reich.

To wit, had you and the rest of the market had the same visibility into the fraud, lax risk management, quality of loan origination (e.g. 50-85% fraud rates), etc., as the OTS examiners, you most likely would have invested differently. And John M. Reich withheld that material information from you for years.

Sheila Bair was merely attempting to prepare for the inevitable, in an adverse political environment. (Seriously. "I may or may not choose to have a similar meeting with Secretary Paulson." WTF kind of person talks like that?)

Michael R said...

James Vanasek, chief risk and credit officer of WaMu from 1999 to 2005:

"My opinion is the OTS examiner in charge during the period of time I was there did an excellent job of finding and raising issues. Likewise, I found good performance from the FDIC examiner in charge. What I can't explain is why the superior in the agencies didn't take a tougher tone with banks, given the degree of negative findings."

Clearly the problem here was the reckless and irresponsible Sheila Bair.

bonerici said...

it's impossible to make a judgment just from those letters.

But it's clear in the last few years, bair has been blamed for a lot that is not her fault and the purpose of this infighting by john reich is so he could blame someone else for his own mistakes.

remember in 2008 when senator schumer published some letters about how indymac might fail, well, reich then blamed schumer for indymac's collapse.

Nothing that has ever happened on reich watch has ever been his fault, according to him.

I think bair has made some mistakes, but she has also been proactive which I like. Overall she's done a good job.

because of reich's failure of proper oversight at OTS, obama wants the entire agency is shut down. So somehow the faults of reich are not his own personal inability to run the OTS, but problems with the agency.

The only thing the letters really show is just how insufferable reich must have been to deal with.

Anonymous said...

It's important to keep in mind that the sub-prime division only consisted a little over 10% of Wamu's portfolio. The circumstances surrounded Wamu at that time, if one does a bit of digging, showed that the authorities intentionally made a bad situation worse (not putting the company on the no short-selling stock, excluding it from numerous meetings, Wamu's other suitors were intimidated by JPM to stay out of the bidding, JPM itself pretended to be a good-faith bidder to spy on Wamu, etc). Let's face it, every bank was in trouble of falling at that time, but the actions of the parties involved in Wamu's case (namely FDIC and JPM) showed that they took advantage of the crisis to murder a solvent bank. There's no sense of justice here.

What the senate hearings have failed so far is offering justice for Wamu's stakeholders. Instead, they show their one-sided witch-hunt story. Also, if the FDIC and JPM were law-abiding entities, then you would expect them to return the refund of $5.6 billion due to the company.

As an investor, I have totally lost faith in the integrity of our regulators. Instead, I view them as thieves who use power to rob from the little guys, making the rich guys richer and poor guys poorer. This is the opposite of what Robin Hood did.

Enough said

Unsympathetic said...

Eidolon: Bair is right. You are wrong.

Sheila Bair is completely correct here. OTS should be shut down - they're a joke.

Anonymous said...

So I guess the market was wrong too driving WaMu stock to low single digits and its debt to significant discounts, impairing its ability to fund itself. If regulators and the market were so wrong and confiscated your right position in WaMu securities, then you should have raised the capital and bank credit lines to buy the bank, honor its debt servicing, fund the bank and its open trading positions, and backstop the option-ARM-heavy balance sheet causing the capital holes. I'm sure the FDIC would have considered a better bid than JPMs. The people with cash at the end of a panic get the benefit of wide bid-offer, liquidty premia, and dislocated opportunities. Deal with it you weren't the only one who made a wrong decision in 2008, the only people who didn't make at least one bad decision are liars.

lassinruh said...

One needs to read through the exhibits that were filed with the senate "hearings" as well as through the the documents that are available through the bankruptcy proceedings to get a clearer picture. You can not base your opinion on the farce that went on in the senate last week.
Serious questions remain:
Why was WAMU not put on the do not short list by the SEC?
Who caused the "run" on the bank, there is no evidence that retail customers withdrew 16 billion dollars?
Why was JPM in contact with the FDIC about WAMU months before WAMU's "seizure" was discussed?
Once you do the research yourself you will be able to come to a conclusion about the FDIC's and JPM's role in WAMU's demise. WAMU did not fail!
Links provided below.
It's a lot of reading, but it's the only way to form an educated opinion.
Thank you John for writing this blog.

Anonymous said...

Debtors seek the Rule 2004 examination of the following Knowledgeable Parties: (Pg. 443 onward shows internal emails of JPM talking about wiping out Wamu shareholders many months before the seizure)

"The Regulators"
FDIC - The Federal Deposit Insurance Corporation, in its capacity as receiver for WMB and in its corporate
OTS - Office of Thrift Supervision
OCC - Office of the Comptroller of the Currency
Federal Reserve - Board of Governors of the Federal Reserve System
Treasury Department - U.S. Department of the Treasury
SEC - U.S. Securities and Exchange Commission
Paulson - former U.S. Treasury Secretary Henry M. Paulson, Jr

"The Rating Agencies"
Moody's - Moody's Investors Service
S&P - Standard and Poor's Corporation ("S&P")

"The WaMu Suitors"
Banco Santander - Banco Santander, S.A.
Toronto-Dominion - Toronto-Dominion Bank
TD Bank - TD Bank, N.A.
Wells Fargo - Wells Fargo, N.A.

"The Banks"
FHLB-SF - Federal Home Loan Bank-San Francisco
FHLB- Seattle - Federal Home Loan Bank-Seattle
Goldman Sachs - The Goldman Sachs Group, Inc.

"The JPMC Professionals"
PWC - PricewaterhouseCoopers
Equale - Equale & Associates
Holt - Richard F. Holt
Horne - David Horne, LLC

Please read these articles;

KTS9 Interviews Kirsten Grind "How Washington Mutual Could Have Survived..."

Radio Interview by David Ross;

The Biggest Banking Heist in World History: Washington Mutual

Please read this descriptive complaint that was submitted to the SEC from Apex Venture Advisors Mike Stathis Managing Principal on October 7, 2008 in regards to the manipulation that occurred on Wamu's stock;

I'm also enclosing another link that quotes Judge Hughes from a case against the FDIC that was wrapped up on August 24, 2005;

"The record shows that the swap was the only reason for this suit. It also shows that the FDIC knew that it had no factual or legal basis for its claims, and that its cases here and in Washington were shams."

As usual, Judge Hughes is acerbic in his opinion regarding the FDIC's conduct, noting in particular that FDIC officials "lied about it all under oath" and they "discarded the mantle of the American Republic for the cloak of a secret society of extortionists."

"It's hard to find a word that captures the essence of the FDIC's bringing this action. Irresponsible is close. Arbitrary, dishonest, exploitative, extortionate, and abusive all fit."

Judge Hughes concluded that Hurwitz and Maxxam "will recover their costs because the record reveals corrupt individuals within a corrupt agency with corrupt influences on it, bringing this litigation."

Anonymous said...

Washington Mutual Shareholders Want Answers From Congress

Written Statement of Kerry K. Killinger Submitted to the United States Senate
Permanent Subcommittee on Investigations-April 13, 2010

Letter to the court:

Contested Property:


JPMorgan admits that the FDIC took over a solvent bank in one of the latest court documents...

I'm enclosing a few more documents filed through the BK court in regards to a declaration of Thomas M. Blake ( ).

The declaration can be found in 103-4.pdf at
12. Based on my review to date, there is no indication that the OTS performed a solvency analysis consistent with the test for insolvency specified in the Bankruptcy Code. There is no indication that the OTS assessed the fair sale-able value of the assets of WMB (or WMI). Nor is there an indication that OTS compared the fair sale-able value of the assets of WMB (or WMI) to the total amount of either company’s respective liabilities. There is no indication that the OTS performed a comprehensive cash flow analysis of WMB (or WMI). Instead, the OTS found that “WMB met the well-capitalized standards through the date of receivership.”8 Thus, without a thorough analysis of the assets, liabilities and capital of WMI and WMB, it is not possible to come to a reliable conclusion concerning the financial solvency of either entity, whether on a consolidated or stand-alone basis.

Here is another document that says as of August 14, 2008:
"We propose to decapitalize WMBfsb by returning $20 billion of capital to its parent. The $20 billion will include the master note of approximately $7 billion, proceeds from $3.5 billion of Discount Notes and cash generated through additional wholesale deposits and advances from FHLB Seattle. We propose the payment of at least $10 billion by September 30, 2008 and the remaining $10 billion through December 2009."

"The net balance sheet of WMBfsb will be approximately $34 billion to $36 billion after Project Fillmore. The leverage ratio will decrease to 25% from 62%. A well-capitalized institution requires an 8% or higher leverage ratio."

Read reference page 45 of DOCUMENT 103-1.pdf from here:

Included, is the form to the OTS requesting a decapitalization of WMBfsb. Pg. 117

Enclosed is a link to the affidavit of Doreen Logan who is the Controller/ Assistant Treasurer of Wamu who states that there was no liquidity problems;

Remember, WMBfsb was also taken from the holding company and sold to JPMorgan/Chase with all of the other assets for only $1.88bil.....

Please, take some time and read these documents. Here is a link to all documents filed through the BK Court;

Jamie Dimon planted "moles" in Wamu??? JPMorgan committed corporate fraud???

Wamu's claims against JPMorgan/Chase;

Michael R said...

All the posts here arguing that WaMu wasn't bankrupt because the OTS failed to declare it bankrupt rather seem to be missing the point here.

Point being that investigations by Congress, the inspectors general of the FDIC, and of the OTS itself (and even, frankly, the email exchange heading this thread) conclusively demonstrate the OTS was thoroughly compromised by regulatory capture.

Any assessment of WaMu's solvency founded on official OTS findings is thus similarly compromised.

lassinruh said...

Michael R you seem to be missing the point that regardless of what the OTS and FDIC were thinking, WAMU was not insolvent. Take some time to do some reading instead of regurgitating the story line that is being told by the media.

Chris of Stumptown said...

All of this is good theater. But none of it really matters. It doesn't matter whether OTS was captured, whether Bair or Reich overstepped their boundaries, or whether JPM did Wamu a dirty. It's irrelevant.

The important point is that depositors were beginning to line up outside the doors. Make no mistake: the run on Wamu had begun.

Bank regulation is rooted in the protection of depositors. This means that well functioning regulators act in ways that may be adverse to shareholders. If shareholders were hurt, it is unfortunate. In this case, however, depositors need to take precedence. Additionally, at that time, a major run at Wamu would have been a disaster of major proportions. That the resolution of this was done without depositor or taxpayer losses is a credit to those involved.

Michael R said...

lassinruh: "regardless of what the OTS and FDIC were thinking, WAMU was not insolvent."

On what basis do you determine that WAMU was not insolvent. Just quoting from upthread, there was, at the time, no basis for a determination of solvency or insolvency:

"There is no indication that the OTS performed a comprehensive cash flow analysis of WMB (or WMI). Instead, the OTS found that “WMB met the well-capitalized standards through the date of receivership.”8 Thus, without a thorough analysis of the assets, liabilities and capital of WMI and WMB, it is not possible to come to a reliable conclusion concerning the financial solvency of either entity, whether on a consolidated or stand-alone basis."

lassinruh said...

Read the court documents and watch the ongoing bankruptcy proceedings.
You will be enlightened. And by the way I had two WAMU accounts at two different branches, never saw anybody line up to withdraw money.
I have since closed those accounts.
Keep watching this saga as it plays out. The truth will come to light. Big victory for shareholders in court today.

Hurricane said...

Do you really want to hang your hat with the OTS?

lassinruh said...

Keep reading folks, it's only getting better.

Izz-laru said...

WaMu was solvent. Chase hijacked them and the FDIC helped cover it up.

Nobody seems to have looked at the HUD Title II reports.... Look at the HUD info for WAMU and you will see a different story.

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