Falling on Deaf Ears

An article in yesterday's Washington Post provided some interesting details behind the collapse of Washington Mutual.  It appears that the Office of Thrift Supervision ("OTS") failed in its job to provide effective oversight by allowing executives at the nation's largest savings and loan institution to ignore the advice of its own risk managers.  Here is an excerpt from the article.

In 2005, a small group of senior risk managers drew up a plan that would have required loan officers to document that borrowers could afford the full monthly payment on option ARM loans. The plan was shared with OTS examiners, according to a former bank official who spoke on condition of anonymity because the bank's practices are the focus of a federal investigation as well as several lawsuits. "We laid it out to the regulators. They bought into it. They supported it," the former official said.  But when a new executive team at the bank nixed the plan, the former official said, "the OTS never said anything."

This is another example of the breakdown in regulatory oversight and management that fueled the current financial crisis.  It also shows that what is needed most is not necessarily more regulation, but more effective regulation.