Very few philosophical texts stand the test of time better than “The Godfather.”
Although Mario Puzo’s classic chronicled the lives of America’s favorite fictional crime family – until the Sopranos – his murderous Mafiosi were like the philosopher kings of old; dispensing wisdom on life, death, love and even the economy.
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When Vito Corleone’s adopted son Tom Hagen – played to perfection by future Oscar winner Robert Duvall – sought permission to drop out of college so that he could join the family business; his beneficent patriarch threw a fatherly arm around his shoulder and assured him that “a lawyer with a briefcase can steal more than a thousand men with guns.”
Never has an insight been more apt.
The collapse of Pasadena-based Indy Mac Bank illustrates the point.
What’s Another $9 Billion?
Recent revelations have shown that Indy Mac, one of the nation’s largest subprime lenders, was permitted by federal regulators to cook its books by backdating a capitol infusion. This cozy relationship between the Armani-wearing crooks at Indy Mac and federal Office of Thrift Supervision (OTS), may have cost the taxpayers nearly $9 billion.
Back in May, two months before the FDIC stepped in to take over the failing thrift, federal bank regulators allowed Indy Mac’s parent company to backdate an $18 million contribution to preserve its status as a “well-capitalized” institution. The backdated capital infusion allowed Indy Mac to plug a hole that its auditors had belatedly found in the bank’s financial results for the first quarter.
While the $18 million transaction may seem microscopic in comparison to Indy Mac’s then $32 billion in assets, it ultimately had tremendous significance. If Indy Mac had lost its well-capitalized status, it would not have been allowed to accept billions of dollars in brokered deposits from other financial institutions.
Investors Were Not Accorded a Hint
Brokered deposits are typically high-yielding certificates of deposit arranged by brokers and sold to savings and loans. Indy Mac relied heavily on brokered deposits, which amounted to $6.8 billion or 37 percent of its total deposits last spring.
To unwitting Indy Mac’s investors, who eventually lost everything, there was no sign that the thrift’s capital had ever dipped below what was required to qualify for well-capitalized status. In fact, the amended report slightly increased the capital ratio above what the bank had originally reported.
The terrible irony of this episode is that the regulatory official who allowed this lenience also played a central role in the savings and loan scandal of the 1980’s by overriding a recommendation by federal bank examiners to seize Lincoln Savings. Lincoln’s founder, Charles Keating Jr., and several of its officers were later imprisoned for fraud.
Too Late? It Depends Who Is Counting
By the time the FDIC took over Indy Mac in July, sparking thousands of its depositors to swarm the troubled bank to withdraw their money, it was too late. Although the FDIC calmed the waters by assuring depositors that their funds were secure, the top execs had already fleeced the til.
A pending report by the Treasury Dept.’s Inspector General hints that this comfy relationship between regulators and the regulated may not be isolated to Indy Mac but widespread throughout the banking industry.
Over the coming months, if the FBI financial fraud unit is on its game, we should see more execs of these failed banks standing in the criminal courts’ docket.
In the immortal words of Puzo’s mafia assassin, Peter Clemenza, to his homicidal apprentice, “Leave the gun, take the canoli.”
John Cohn is a senior partner in the Globe West Financial Group[ based in West Los Angeles. He may be contacted at www.globewestfinancial.com
