A $745,800 mortgage taken out in July 2007 on a live-work condo near the San Francisco Hall of Justice illustrates the pitfalls of IndyMac's business. The mortgage holder apparently rented to two tenants, and by the end of the following year owed $816,400 on the loan before losing the property to foreclosure in December.
IndyMac's lax lending standards made it easy for unscrupulous borrowers to defraud the bank. A scenario where a borrower puts no money down, makes no mortgage payments, and collects rent on a property until it is finally foreclosed upon theoretically could allow the borrower to walk away with more than $20,000 in profit merely for signing on the dotted line.
AP /J. Scott Applewhite
Charles Keating takes the Fifth during a 1989 congressional hearing.
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A look at IndyMac's financial filings show unqualified borrowers infected the bank like tuberculosis, which can create in the patient a sort of languid beauty before killing it. At first, these sinking loans made the bank look healthier. When borrowers ended up owing even more money on mortgages than when they started, IndyMac's loan portfolio grew in value. But that growing tissue was diseased.
"These people taking out loans, particularly at IndyMac, a lot of them weren't qualified at all," Newsom says. "They just turned a blind eye, so you'd have waiters who were making more than $100,000 per year. Anybody looking at these things would say it's preposterous what the claimed income was. And initial payments on these things were so low: People were getting teaser rates, but as soon as the rates ratcheted up, they couldn't possibly pay. That seems to have been the crisis in a nutshell."
This made it all the more confusing as to why the OTS and the FDIC hadn't moved earlier to declare IndyMac a troubled institution and prepared to take it over. One clear lesson from the 1980s S&L crisis was that stalling the inevitable only made matters worse, and ended up costing taxpayers a fortune.
While reviewing postcollapse IndyMac data, Newsom also perused the OTS organizational chart and was stunned by a name he saw toward the top: Darrel Dochow, who was named director of the agency's West Region in September 2007.
Newsom knew that name from his days investigating the savings and loan scandal. In the '80s, Dochow was chief of examinations for the Federal Home Loan Banks Board in Washington, D.C. He had gone to great lengths to shield Keating from examiners who might reveal the true state of his fraudulent banking and real estate empire.
Examiners with the San Francisco office of what was then the Federal Home Loan Banks Board — an enforcement arm eventually spun off as the Office of Thrift Supervision — had raised serious questions about Keating's operations and had recommended that Lincoln Savings be shut down. Keating demanded a new examination from a different regional office. He found an unlikely companion in his regulatory window-shopping excursion. According to congressional testimony by Dochow's underlings, the senior regulator became impressed by Keating and his team, and allied with them in attempting to subvert rank-and-file regulators.
"It is fair to describe Dochow as the job foreman of the 1988 federal effort to whitewash the 1988 examination of Lincoln Savings and Loan," Newsom wrote in an 8,000-word letter examining the IndyMac debacle, which he sent in August to Senator Chris Dodd (D-Conn.), chairman of the Senate Committee on Banking and Urban Affairs, to alert Dodd to Dochow's past.
In the late '80s, when regulators with the Federal Home Loan Banks Board of San Francisco determined that Lincoln Savings and Loan was an insolvent zombie — one that was poised to ultimately devour more than $3 billion in bailout funds — Dochow told them to, in essence, chill out, according to their sworn testimony before Congress. As the direct boss of thrift examiners nationwide, Dochow repeatedly pestered them to "keep an open mind" about Keating's quest to find bank examiners more malleable than the ones in San Francisco. The idea was to allow Keating to buy an insolvent bank in Washington state and then claim he was headquartered there, and thus was not subject to examination by California-based officials he considered too tough.
To their credit, Dochow's Seattle staffers rebuffed his entreaties. "Dochow looked Mr. Keating in the eye and became captivated by him," House Committee on Banking and Urban Affairs Committee Chairman Henry Gonzalez said at the time, summarizing testimony from the Seattle officials.
After it became clear that Lincoln was among the worst villains of the savings and loan crisis, Gonzalez, the whip-cracking Texas lion tamer of the '80s banking crisis, called a series of hearings. The most sizzling moments came when he invited a dozen on-the-ground investigators to testify about how their Washington bosses like Dochow had tried to undermine their work.
It emerged that, rather than allow regulators to pursue leads suggesting Lincoln Savings and Loan was a bankrupt shell, Dochow had cut a deal with Keating characterized as a "memorandum of understanding" that limited investigators' ability to examine the bank's financial archives. When low-level regional regulators called Washington with news of problems at Lincoln, they'd hear a version of the Reagan-era refrain about the need for creative entrepreneurs such as Keating needing regulatory leeway to perform their magic.
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