Dec. 23 (Bloomberg) -- IndyMac Bank’s regulator let the mortgage lender backdate a capital infusion to make it appear healthier than it was and escape regulatory restrictions two months before it failed, the Treasury Department’s watchdog said.

The Office of Thrift Supervision allowed IndyMac Bank to record $18 million of a $50 million infusion from its holding company on May 9 as first-quarter capital, Eric M. Thorson, the Treasury Department’s inspector general, wrote yesterday in a letter to U.S. Senator Charles Grassley of Iowa, the top Republican on the Senate Finance Committee. Thorson said similar backdating was discovered at other OTS-regulated lenders.

“It is unclear what information OTS had at the time and what its basis was for allowing the capital infusion to be recorded for the quarter ending March 31,” Thorson wrote. “A separate inquiry as to a motive for approving and recording this transaction in the manner it was recorded is still ongoing.”

The move came to light as part of a routine federal review of the July 11 failure of IndyMac, one of five OTS-regulated lenders to be shuttered this year. The OTS, a Treasury Department agency, also oversaw Washington Mutual Inc., whose September collapse was the biggest bank failure in U.S. history.

In his letter, Thorson said the U.S. Securities and Exchange Commission reviewed a “workpaper” prepared by Ernst & Young LLP, IndyMac’s auditor. The paper described a telephone conversation involving IndyMac’s chief executive officer, Ernst & Young auditors and OTS West Region Director Darrell Dochow in which they discussed the capital injection.

Problem Solved

The infusion solved a problem for IndyMac because Ernst & Young indicated it wouldn’t sign off on a review without “adjustments relating to the bank’s capitalization,” Thorson wrote. IndyMac needed Ernst & Young to sign the review to meet an SEC requirement for filing its first-quarter financial statement, he said in the letter.

Dochow, who approved the backdating, has been re-assigned, OTS Director John Reich wrote in a Dec. 21 letter to Thorson released yesterday by Grassley’s office. The issue “is a relatively small factor in the events leading to the failure of IndyMac,” Reich wrote.

The backdating let IndyMac restore its risk-based capital ratio to the 10 percent “well-capitalized” minimum threshold in the first quarter. It also enabled the lender to avoid complying with a law that requires banks to get an FDIC waiver to accept brokered deposits, Thorson wrote.

‘Costly Failures’

The deposits, bulk funds arranged by brokerages on behalf of their clients, can only be accepted by banks deemed well- capitalized. Brokered deposits accompanied by rapid asset growth “played a role in a number of costly failures, including some recent ones,” the Federal Deposit Insurance Corp. said in October.

“During our inquiry, we also discovered that OTS had allowed other thrifts to record capital contributions in an earlier period than received,” Thorson wrote.

The inspector general’s letter calls into question “the real financial condition of other banks” and “the independence of the Office of Thrift Supervision,” Grassley said in a statement.

“The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them,” he said. “If the Office of Thrift Supervision is turning a blind eye to capitalization requirements, Congress needs to know so that it can understand the impact.”

OTS spokesman Bill Ruberry declined to comment on Thorson’s findings beyond Reich’s letter. SEC spokesman John Nester declined to comment and Ernst & Young spokesman Charles Perkins had no comment.

‘Strong Concerns’

Treasury Secretary Henry Paulson “asked the inspector general to examine the matter immediately after it was brought to his attention,” Treasury spokeswoman Jennifer Zuccarelli said today. “After we saw the results of the inspector general’s inquiry, we communicated our strong concerns to the OTS that they address this matter.”

Thorson plans to release his review of the IndyMac failure at the end of February, Rich Delmar, counsel to the inspector general, said today in a telephone interview. It is “essentially a look at how the OTS did its job,” he said.

The office will complete a separate “formal audit” of the capital infusion “in the next several months,” Delmar said.

The future of the OTS is uncertain as Congress plans to write policy to overhaul U.S. financial regulation early next year. Paulson proposed eliminating the agency in recommendations released in March.

The OTS, which is funded by the institutions it oversees, supervised 818 thrifts with $1.18 trillion in assets at the end of the third quarter. The FDIC is running a successor to IndyMac called IndyMac Federal Bank FSB while seeking a buyer for the failed bank’s assets.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: December 23, 2008 14:30 EST