David Apgar: The OCC – The Saint We Needed and the Devil We Got

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.

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  1. DownSouth

    It seems like the population has been cleaved into two separate parts.

    In the first part, those who want to eat, have a roof over their head, have access to medical care, send their kids to school and retire with dignity some day, individuals in this group must mind their Ps and Qs. They are playing with real money, and how they manage that money has real consequences.

    The other part is playing with some sort of monopoly money. When things don’t work out like an individual in this group thought they should, that individual gets to throw all the money back in the box and start the game over again. It’s as if nothing had ever happened, and how that individual manages money carries no real consequences. The individual may have to live with the stigma of not having “won” the game, but beyond this bit of shame the individual will continue to eat in the best restaurants, live in the finest neighborhoods, have access to premium healthcare, send their kids to the most prestigious schools and retire in opulence. But most importantly, he will continue to play the game. Actions carry no consequences for this group.

    So what we find is that in America today there are two sets of rules, one set for the first group and an entirely different set for the second group. And the gap between these two sets of rules is growing wider every day.

    1. ECON

      DownSouth is correct. The implosion that surely awaits will be worse than the enemy outside as happens to most corrupt and ill governed governments. The socio-cultural mileau as it exists will continue to believe otherwise to their detriment.

  2. Mother Facker

    This is terrorism. This has been terror, the irony is radioactive. One the one hand you had this elaborate ruse of muslim extremism which was front and center for some years – creating entire new Government agencies in it’s wake. Out of sight, guys like John Dugan were overseeing other acts of terror either through indifference, stupidity or criminal intent.

  3. Schofield

    This is not Social Capitalism. It’s Neo-Liberalism – Benefitting the Few by Disadvantaging the Many.

  4. Paul Tioxon

    This political control over what would under bureaucratic procedures for rational regulation and management of our banking and monetary system is not new in a struggle for power. In his book, “The Dual State”, by Ernst Fraenkel, the transformation of Weimar Germany to complete National Socialist domination, is analyzed law by law, dismissal by dismissal, as the state bureaucratic machine is put in the service of NAZI ideology. The process of political struggle and eventual control is what is relevant to this particular discussion of the US regulatory agencies which are under sustained and systemic political attack.

    “An Unsparing Analysis of the Legal Principles and Constitutional Developments of the Third ReichThis classic study is widely considered one of the finest analyses of totalitarianism. It was written in Germany in the late 1930s and completed in the United States in 1940, where Fraenkel lived after fleeing the Nazis in 1938. The title derives from Fraenkel’s thesis that National Socialism divided the law into two co-existing areas. The first of these, The Normative State, protects the legal order as expressed in statutes, decisions of courts and the activities of administrative agencies. Its counterpart is the Prerogative State, which is governed by the party. It exercised “unlimited arbitrariness and violence unchecked by any legal guarantees”

    I believe you can see a similar bifurcation in the areas of institutions, including public policies, of vital economic support for the the wealthiest 1% of the population. Irrational “terror hysteria” fomented by the waving of the bloody shirt in 9/11 defense of the homeland, security at any cost, mostly the cost of personal liberty. Demonization of Muslims, as seen at the World Trade Center Mosque kerfluffle. Other intensified attacks upon the legal status of foreign nationals who work in the domestic American economy. A constant legal and public state of tension and distress over threat levels, suspicions of foreigners, suspicion of cameras in tourist areas such as Independence Hall National Park, and the local laws passed and proposed for the criminalization of hiring, renting to, lending to or in many other proscribed manners, assisting “illegals” or known “watch list” named individuals.

    The litany of illegal and probably illegal and should definitely be illegal banking and trading practices of Wall St, that seem to go un-investigated or if investigated, toned down to parking ticket infraction status, are glossed over or diminished so much so, that they hardly qualify as newsworthy criminal acts. The smiling happy face dismissal of Mr Apgar’s findings is but one instance in the defusing of regulatory force into inconsequential inertia. Brooksley Born’s experience, as recounted many times is identical in the dismissive attitude of regulation when it comes to Wall St. breaking the law, pushing the envelope, or just getting into new areas that have total disaster stamped all over it. This is the dual state, American Style, where the sanctity of marriage and the rule of law since time in memoria is regularly invoked. And out of the other side of the mouth of some politicos, BP oil executives are feeling the jack boot of state oppression in the form of Obama’s foot on the neck metaphor. The MERS system, operating to rationalized and streamline the mortgage industry, is just a legal technicality, outside of the letter of the law. Another government nuisance fee for the recording of deeds, in the proper matter in country court house land records. But public employee unions need to be decertified, because they have, according to Republican Speaker of The House, Boehner, a machine gun to the head of the legislature and need to be stopped from extorting wages and benefits from the public treasury!! The laws that regularly apply to you and me on an everyday basis are kept intact, and the laws that need to be bent or repealed for political purpose of capitalism are dispensed with by THE POLITICAL APPOINTEES IN POSITION OF POWER TO DO SO, WHETHER ELECTED LEGISLATORS, BUREAUCRATIC FUNCTIONARIES, OR FEDERAL JUDGES, THE PEOPLE WE ELECTED TO OFFICE, CAN TRANSFORM THE MACHINERY OF THE STATE SERVE WHATEVER PURPOSE THEY PROPOSE. And they leave alone the other parts of the legal system and state enforcement agencies that do not matter that much to their economic power and privileges. It is too expensive to shoot or assassinate your way to power. The mass democratic society that we live in is being transformed by the sustained political assault and propaganda against a 300 million person nation, that is creating second class citizenry.

  5. sgt_doom

    This is really old news to anyone who reads Mother Jones, Matt Taibbi, and a host of other sources.

    Really old, old news.

  6. Francois T

    Another tell tale sign there will never be a real investigation of this financial crisis. There are so many people who are knee-deep in the scheme that we would need a return to the Jacobins during the era of La Terreur to unearth the malfeasance and root out all the REMFs.

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