A Thrift Regulator Fades (Sort of) into the Sunset

As Ronald Reagan noted in a 1964 speech, "a government bureau is the nearest thing to eternal life we'll ever see on this earth." In that spirit, consider the Office of Thrift Supervision, targeted for abolition in the Dodd-Frank financial reform law.

The regulator that oversaw such sinking ships as IndyMac Bank, Washington Mutual, and American International Group (AIG) is scheduled to go out of business in July 2011. In truth, OTS is going away in name only. The law devoted 18 pages to making sure none of the 1,000 or so employees (except the director) lose their jobs or have their compensation cut when the agency officially enters the history books.

The new law calls for workers to move to the Office of the Comptroller of the Currency (OCC) or the Federal Deposit Insurance Corp., both of which are assuming some OTS duties. OTS employees may also end up at the new Consumer Financial Protection Bureau. To help smooth the transition, Congress declared that for 30 months after being transferred OTS workers can't be fired or have their salaries cut. The protections show a "complete double standard" by lawmakers who spent much of the crisis calling for bonuses to be cut and heads to roll at the biggest banks and AIG, notes Peter Wallison, a former White House counsel under President Reagan. "The government never punishes anybody who is in the government," he says.

Created in 1989 from the ashes of the savings and loan scandal, the OTS examines mainly small thrift institutions, banks that are required to use the bulk of their assets for home mortgages and other consumer loans. The OTS managed to stay out of the limelight for years until several spectacular failures highlighted its lax oversight. Senator Carl Levin (D-Mich.) and other congressional critics charged the agency with pioneering the practice of "charter shopping"—offering lighter regulation in exchange for regulatory fees.

The banks that OTS supervises lobbied to keep their regulator, arguing that it was singled out because it is a tiny agency overseeing firms that lack the influence of Wall Street banks. The Federal Reserve, they note, supervised Citigroup (C) and Bank of America (BAC), both of which were rescued with double doses of bailout money. "There was plenty of blame to go around, but OTS paid the price," says Camden Fine, head of the Independent Community Bankers of America, which has about 250 OTS-regulated members. Fine says his members now worry that large financial companies will dominate their new regulator and community banks will be "the redheaded stepchild at the family reunion."

The OTS declines to discuss its endgame plans. Officials from other agencies, however, say the OCC, which is part of the Treasury Dept., is mapping out a new division to house former OTS workers and regulate the agency's banks. Acting Comptroller John Walsh, in a late September letter, said the two agencies would hold meetings around the country early next year in an effort to allay banks' concerns. "Our examiners understand the importance of evaluating the condition and future prospects of each institution based on its unique characteristics and performance," he wrote.

For now, the OTS is focusing on more mundane issues. A group of parents has launched a campaign to save its on-site day-care center. Officials from the OCC, the FDIC, and the new consumer regulator are jockeying to take over the OTS's prime headquarters building, a block from the White House. Unlike the OTS's employees, the sign over the door is actually going away.

The bottom line: The Office of Thrift Supervision, scheduled to close its doors in July 2011, will shut down in name only.

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