By David Apgar, the Director of ApgarPartners LLC, a new business that applies assumption-based metrics to the performance evaluation problems of development organizations, individual corporate executives, and emerging-markets investors, and author of Risk Intelligence (Harvard Business School Press 2006) and Relevance: Hitting Your Goals by Knowing What Matters (Jossey-Bass 2008). He blogs at WhatMatters.
The OCC (Office of the Comptroller of the Currency) might have saved us from the mortgage crisis. Instead, as Matt Stoller’s post on the OCC’s actions to suppress bank data about possible foreclosure malfeasance suggests, we have a regulator that seems to have turned its back on transparency.
When Republicans in Congress wanted to take as much control of the economy as possible from the Clinton White House in 1999 they let the Federal Reserve draft the Gramm-Leach-Bliley banking reform. This is the bill that effectively put mortgage lending out of reach of the OCC examiners who traditionally reviewed a third of the loans every national bank made every few years.
The so-called reform empowered the Fed to keep OCC examiners — the only ones among all of the regulators who regularly reviewed significant pools of big banks’ actual loan files — from looking at the operations of those banks’ nonbank subsidiaries. You’d never believe that the major banks promptly moved their edgier mortgage operations into nonbank subsidiaries — and out of view of OCC examiners.
That’s right — Congress essentially halted US supervision of major bank mortgage operations in 1999. It took just eight years for those chickens to come home to roost.
The OCC’s low-to-ground supervisory practices have also undermined it, however. The agency simply gets too close to the institutions it regulates. Matt Stoller’s example is sobering. Here is another.
One of my most public-spirited colleagues on the OCC’s Policy Committee in 1994 (where I served as an appointee with a background in financial institutions from then-wonky Lehman Brothers) was General Counsel Julie Williams. So it was natural years later to turn to her when I unearthed compelling evidence of illegal tying whereby banks refused to extend critical lines of credit to nonfinancial companies unless those companies agreed to include the banks in lucrative bond offerings regardless of the banks’ expertise.
By 2003, a year of extraordinarily tight credit, I was running the country’s largest research network for corporate treasurers — the banks’ principal corporate customers — at the Corporate Executive Board. Literally dozens of these treasurers attested privately to explicit and blatant examples of tying from every major bank except to my recollection J.P.Morgan. But they were afraid to go public individually for fear that the banks would simply choke off critical lines of credit.
I took sanitized citations from this mass of evidence to Julie Williams in late 2003 or early 2004. She allowed the meeting as I had served at a senior level in the agency.
This smart and capable civil servant must have understood the importance and reliability of what the treasurers who participated in my research organization were protesting. And yet her response was a simple denial. Regardless of what I had to say she stated categorically that there was no tying in the national banks. None.
The OCC might have saved us from the mortgage crisis because it does its job (or at least used to) in reviewing loan portfolios. But its proximity to the banks it supervises tarnishes the judgment of even its best people. The General Counsel’s statement to me was preposterous. The agency seems to have come to the collective conclusion that because safety and soundness and transparency sometimes conflict, transparency is unimportant.
And that’s the kind of thing that will lead to the next crisis.