Bill Black: OCC as Case Study of How Regulators Decide to Fail

Posted on by

Yves here. The continued dereliction of duty at the Office of the Comptroller of the Currency (OCC), the most bank-friendly of the major banking regulators, may seem too much like a dog-bites-man story for Naked Capitalism regulars. That view is a mistake.

The OCC, despite being less visible to the general public than the Fed, Treasury, and the FDIC, played an important role in deregulation, specifically, the notion of pre-emption, which allowed OCC regulated “national” banks to ignore state banking rules. The OCC was also the evil genius behind the get-out-of-jail-almost-free card of the 2011 servicing consent orders. The consent orders mandated what was meant to be an exercise in compliance theater, the Independent Foreclosure Reviews. Unfortunately, it was badly enough thought out that it served as a ginormous fee-generating exercise for not-really-that-independent consultants while failing both to understand how bad the borrower abuses were and providing capricious, inadequate compensation to wronged homeowners.

A new Comptroller, Tom Curry, took the helm when the Independent Foreclosure Review embarrassment, which he inherited, was major news. Curry gets high marks from insiders as being serious about wanting to reform the OCC. He took some decisive steps early on, forcing out its dreadful, long-standing bank stooge Chief Counsel, Julie Williams, and was widely believed to have demoted another bank-friendly senior staffer (it was dressed up as a voluntary reassignment).

But Curry’s big challenge was reforming the bank’s badly captured examination staff. As readers will see, Bill Black gives Curry a failing grade for the approach he’s choosing to implement. Black pins the badly-conceived plan on the choice of a failed regulator as designer of the new program. I haven’t sussed out why Curry made this choice, as in whether he was pressured or this was bad judgment on this part.

I’m highlighting this post for a basic reason: there’s a lot of cynicism about regulation. Many Americans have bought the right-wing line that regulations can’t work. But here, whether by accident or design, a reform plan is going off the rails due to bad strategic choices. By all accounts, Curry at least at one point was deadly serious about taking on the badly captured OCC examination staff. I’d be curious to get informed intelligence as to why events have taken this turn.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives

The reason we have recurrent, intensifying financial crises is because we learn the wrong lessons from our prior crises and actively make things worse.  The consistent explanation for our making things worse is that dogmas lead to “doubling down” on failed faith-based policies.  The dominant ideologues in the U.S. and Europe on financial policies are theoclassical economists and their fellow choir members – neoclassical economists.  A small article in the Wall Street Journal provides a classic example of the continuing destruction driven by these dogmas.

The WSJ article, of course, sees none of this.  It fails to distinguish between two very different concepts.  The Office of the Comptroller of the Currency (OCC) is supposed to regulate “national banks” – the largest banks. The first concept is where examiners’ offices are located.  The OCC uses “resident” examiners in the largest banks.  This means that hundreds of OCC (and Fed) examiners have offices in the huge banks.  Resident examiners are a terrible idea because they invariably “marry the natives.”  When the Fed “marries the natives” it constitutes incest because the NY Fed (which examines many of the largest bank holding companies) has traditionally been one branch of the inbred Wall Street family. The OCC, under Presidents Clinton and Bush, was nearly as bad because it was engaged in a “race to the bottom” with the Office of Thrift Supervision (OTS) to see which could “triumph” as the worst federal banking regulator.


If the OCC proposal was to cut back dramatically on resident examiners in order to beef up normal examination frequency and scope that would a very good thing that we could applaud.  That would be the obvious fix that any effective supervisor would have implemented as soon as he or she was appointed.  This is the second concept that the OCC could have meant by its proposal.  It does not appear that the second concept is what the OCC’s leadership has in mind.  Their system has increasingly deemphasized examination in favor of off-site monitoring (analysts in government office buildings looking at their computers). The OCC has not announced that it adopting an increase in examination frequency or the scope of examinations as a result of its decision to reduce the number of resident examiners.

We Know How to Make Examination and Supervision Succeed

In a normal examination the examiners’ offices are located in a federal building but the examination takes place in the bank’s offices.  These examinations are our paramount function as banking regulators.  In a well-functioning regulatory agency everyone adds value, but none of us can succeed if the examiners fail.  During the S&L debacle, the reason we were able to reregulate successfully, to bring thousands of successful enforcement actions, and hundreds of civil actions, and to make it possible for the Department of Justice to obtain over 1,000 felony convictions in cases it designated as “major” was the examiners’ success.  George Akerlof and Paul Romer recognized this point.

The S&L crisis, however, was also caused by misunderstanding. Neither the public nor economists foresaw that the regulations of the 1980s were bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself (Akerlof & Romer 1993: 60).

“The regulators in the field” were our examiners.  Similarly, when we drove “liar’s” loans out of the industry in 1990-1991 we were able to do so because our examiners identified the fact that the loans were inherently fraudulent.  Our modern financial crises have all driven by epidemics of accounting control fraud.  Only examiners can identify and document these frauds. Examiners also serve as our “scouts” who keep the rest of us apprised as to how the industry is changing.  Examiners are the indispensable component of any effective financial regulatory agency and they must function through onsite examinations in which they can not only see the documents but judge the credibility of the bank employees and officers.

The people who do not spot developing credit quality crises – and never have – are office analysts.  The worst of these office analysts are economists.  They do not simply fail to spot accounting control frauds – they praise them.  They were the leading problem that slowed, and in the case of junk bonds halted, our regulatory and supervisory crack down on the S&L control frauds.

There are some exceptionally capable examiners and supervisors who understand exceptionally well how to create a superb examination force integrated into an overall agency to conduct effective, vigorous supervision.  Anyone serious about improving examination would start by bringing in Chris Seefer and Dick Newsom to design and train the examination forces that have become so degraded over the last two decades.  Anyone serious about integrating the examiners with the supervisory, enforcement, and regulatory aspects of the agency would start by bringing in Mike Patriarca.  You go with people who have a track record of enormous success.

The OCC Carefully Studies How to Make Examination Worse

Or, if you are OCC Comptroller Thomas Curry, you hire Jonathan Fiechter and a band of failed “international” regulators who have never faced an epidemic of accounting control fraud.

Mr. Curry, who took the reins at the OCC in March 2012, asked external experts to review the agency’s examination program and recommend changes. In a report last year those experts—which included regulators from other countries—suggested the large number of on-site examiners hindered the OCC’s ability to spot risky activities building in multiple institutions at once and suggested the agency scale back its program.

Mr. Curry said Wednesday he would accept many of those recommendations, vowing to institute a new regime for rotating examiners among banks and to beef up groups of staff who specialize in evaluating various types of financial activities.

Jonathan Fiechter, a former OCC official who led the external review, said the OCC’s announcement Wednesday was a positive step, but ‘the follow-up and meaningful implementation of the planned actions are critical.

The Fiechter report is available on line.

If You Want to Fail, Hire an Architect of Failure like Fiechter

The only virtue of making Fiechter, one of the important architects of regulatory failure, the OCC’s “expert” on effective regulation is that it reaffirms our family saying that it is impossible to compete with unintentional self-parody.  The international “experts” the OCC chose lack even Fiechter’s familiarity with accounting control fraud epidemics.

Fiechter’s report describes a disaster waiting to happen – and prescribes responses that will make it worse.  While the article describes Fiechter as “a former OCC official,” his claim to infamy is as acting director (from late 1992- mid-1996) that did so much to ruin the OTS and set the stage for the most recent crisis.  (Think about the implications of that for a moment: President Clinton left an “acting” director that he inherited from President Bush in charge of a federal agency for four years – and then replaced him with a part-time director.)  Fiechter was an avid supporter of the “Reinventing Government” crusade during the Clinton-Gore administration that gutted the FDIC and the OTS.  The FDIC lost over three-quarters of its staff and the OTS over half its staff.  The gravest damage, however, was Fiechter’s elimination of the vital loan underwriting rule that we had used to drive liar’s loans out of the S&L industry in 1990-1991 and his embrace of the regulatory “race to the bottom” in which OTS attempted to have weaker rules than the banking regulators.

The Fiechter “study” made only the barest pretense of being a study.  For example, “the on-site work of the team … took place from October 28 to November 5, 2013…. The nature of the exercise did not permit an in-depth analysis of any particular areas.”  Yes, an entire week and not a single area considered “in-depth.”  OK, but they could have used their time when they were not “on-site” at the OCC to read the key OCC documents.  Except, they didn’t do that:  “The team did not review the extensive set of OCC supervisory handbooks and supervisory guidance.”  Oh, and their “on-site” visit consisted largely of reading documents selected by the OCC for their review.  There was no pretense that Fiechter was conducting an independent review.

The Existing and Coming Disasters that Fiechter’s Team Ignored

Fiechter is a conventional neoclassical economist who shares the usual tribal taboo about fraud.  In my experience, he is never deliberately evil.  His every instinct, however, is contrary to what it takes to be an effective regulator.  As a result, he actively makes the banking environment far more criminogenic as an unintentional consequence of his embrace of the three “de’s”: deregulation, desupervision, and de facto decriminalization.  His report to the OCC, unsurprisingly, never mentions the words “fraud” or “crime” even though stopping the fraud epidemics that drive our financial crises is the OCC’s paramount function.

Even though at the time Fiechter’s report was being compiled the regulators and prosecutors were under severe criticism for the failure of the banking regulators to make criminal referrals and the failure of DOJ to prosecute it does not even mention the need to reestablish the criminal referral coordinators and systems that are essential to successful prosecutions.  Indeed, the Fiechter report is so bad that it does not even contain a substantive discussion of enforcement.  Enforcement is a critical OCC function, and it has been eviscerated, but Fiechter’s group ignored the problem.

The other obvious crisis that exists and will get far worse is the systemically dangerous institutions (SDIs) that pose the grave and gratuitous threat to the global economy, make “free markets” impossible, and enshrine the crony capitalism that is the gravest threat to representative government.  The Fiechter report mentions their existence, but no plan or even goal to shrink them to the point that they no longer cause these three grave harms.

The Fiechter Report Documents a Coming Disaster: and Makes it Worse

The Fiechter report provides two critical facts that should have been the focus of the WSJ story and the OCC’s response to the report.  First, the OCC is already suffering from a serious shortage of examiners.  Second, a “high proportion of OCC examiners are at or near retirement age.”  The serious shortage is about to become a crisis.  Examiners are cheap – financial crises are catastrophically expensive.  The current crisis cost over 10 million American jobs and an estimate $21 trillion loss in GDP.  To respond to the S&L debacle, we doubled our examination force – hiring 750 new examiners.  We did this over the fierce opposition of OMB, which responded by threatening to make a criminal referral against Federal Home Loan Bank Board Chairman Edwin Gray for the “crime” of closing too many insolvent S&Ls.  Now ask yourself how often you have heard Curry, the Treasury Secretary, and President Obama demanding that Congress approve immediate authority for the OCC to hire 500 examiners?

Does Fiechter’s report contain a clarion call for such hiring authority?  No.  Instead, they call for privatizing further.

To further address staffing shortfalls devise a program to use retirement-eligible staff as mentors and explore how to accelerate the integration of private sector experts into the examination force.

Privatizing the examination function is a prescription for disaster.  The crisis was caused in considerable part by the claim that examiners could rely on “private sector experts.”

The Fiechter report primarily endorses the OCC’s “strategic plan” for personnel, but that “plan” is a non-plan that does not even seek a substantial expansion of its examination force.  Bold is concept foreign to the OCC’s leadership and Fiechter’s team.

Fiechter Endorses the Regulatory Race to the Bottom

I have explained Fiechter’s adoption of the regulatory race to the bottom strategy when he headed the OTS.  There were multiple races to the bottom.  The international race to the bottom was “won” by the City of London, but the losers were consumers and investors throughout the U.S. and the EU.  The Fiechter report is so pathetic that it endorses the race to the bottom as a “good reason” for OCC “policy paralysis” when bank CEOs lead “undesirable practices” such as accounting control fraud.

“[P]olicy paralysis” could be for good reasons (e.g., the wish to have a level playing field that does not inadvertently drive undesirable practices into non-OCC supervised institutions or into the shadow banking sector)….

Fiechter’s language is so obtuse that his parenthetical is probably not understandable to most people.  What he is saying is that it could be “good” for the OCC not to crack down on an “undesirable practice” (such as making fraudulent liar’s loans) because the frauds might respond by dropping their national bank charter (which makes them subject to OCC regulation) and instead getting a charter from the FDIC or the Fed or forming a mortgage bank that would be unregulated (i.e., in “the shadow banking sector”).  It may help to know that the OCC is funded by assessments from those it regulates, so if banks give up their charters as “National Banks” the OCC’s budget falls and it may have to fire (RIF) its already inadequate staff.  This conflict of interest causes despicable reasons for failing to crack down vigorously on “undesirable practices” to be labeled “good reasons” by anti-regulators like Fiechter and Curry.

Fiechter Finds a Sick OCC Culture – and Suggests Making it Worse

OCC examiners have been so infected with this “race to the bottom” disease that they seek to evade the law and protect favored banks from the statutory consequences of their bad actions.

OCC staff raised concerns that legally-mandated consequences made some examiners hesitant to downgrade CAMELS ratings because such consequences were viewed as inappropriate in particular cases. In particular, there may be some hesitation in instances when an institution falls between a ‘2’ and ‘3’ (sometimes referred to as a ‘borderline’ or ‘dirty 2’) to rate the institution a ‘3’ because of automatic consequences for the institution of certain downgrades, such as a restriction on the institution’s operations.

The Fiechter report goes on to encourage this violation of the law by OCC examiners even though experience has shown that the examiners’ evasions of the Prompt Corrective Action law have greatly increased losses.  The Fiechter report encourages future violations by spreading this bald-faced lie:

Unlike the OCC, intervention actions in the foreign jurisdictions are not ‘hard wired’ to risk ratings. Intervention is proportionate and appropriate to the circumstance driving increased risk.  While this provides flexibility to examiners’ recommendations, an accompanying peer review of supervisory actions ensures greater consistency across institutions. All of the foreign jurisdictions felt that having this additional supervisory flexibility associated with ratings downgrades was more effective in influencing institutional behavior.

Other than the first sentence, each sentence in the paragraph is untruthful.  Banking regulatory “intervention” by the EU, for example, during the lead up to the crisis was neither “proportionate” nor “appropriate.”  It was farcical.  “Peer review” did create a certain “consistency” in EU banking regulation – it was consistently farcical.  The EU anti-regulators did not use their “flexibility” to “influence institutional behavior.”  First, they rarely downgraded bank ratings.  Second, they used the “flexibility” consistently to avoid taking “effective” actions – they looked for every excuse not to “influenc[e] institutional behavior” to prevent the mounting disaster.  It is sick to note the OCC examiners’ sick culture arising from the regulatory race to the bottom and then add a passage claiming (dishonestly) that the sick culture is the international norm because it is a brilliantly successful policy.

Fiechter’s report makes an explicit recommendation designed to help examiners evade the (highly desirable) requirements of the Prompt Corrective Action Act.

Consider ways to incorporate more flexibility into CAMELS ratings. One approach would be formally splitting the ‘2’ rating into a ‘2’ and ‘2+,’ which would allow for more directional guidance to an institution.

How much money did we have to pay to create this disgraceful and dishonest report that encourages evasions of a law even though all our experience is that the evasions increase costs and disproportionately favor the largest and most politically powerful banks?

A Report Composed of Consultant Jargon

The Fiechter report goes on at length about the supposed critical need for the OCC to specify its “risk appetite” in numerous contexts.  The entire exercise is an extension of long-discredited “reinventing government” jargon that claimed that all would be well if government officials were willing to take greater risks – by which they meant trusting the industry’s self-reporting.

Print Friendly, PDF & Email


  1. Banger

    By all accounts, Curry at least at one point was deadly serious about taking on the badly captured OCC examination staff. I’d be curious to get informed intelligence as to why events have taken this turn.

    A there’s the rub! Why do even honest public officials, somehow, seem to go off the tracks when it is time to tangle with very powerful forces? American Exceptionalism infects all levels of American thought both on the right and the left. We believe, somehow, that because we are (theoretically) and “open” society that the usual Machiavellian principles at work in all other cultures at all other periods of history are not in play. So we miss the obvious.

    I have no intelligence on the matter of Mr. Curry. But I do know how politics works in Washington and it is not so much different from what I saw on “the street” i.e., the criminal underground I knew as a youth. Whew we saw cops and public officials ignoring the crimes of certain important people or drug dealers–we knew why. Let’s look at it realistically. Big players on Wall Street have a lot of money more money and wealth than they report. They have networks of operatives, lawyers, bag men, fixers of all kinds. Someone od’s in your apartment–you know who to call, you get a little rough with a prostitute, you know who to call–money buys power and there’s virtually no limit to that power unless you step on the toes of equally powerful people. If a regulator seriously tries to reform a system that ensures a flow of wealth to these people what do you imagine they would do? What would anyone at any time in history do? Could it be, just maybe, that they would make some kind of offer that the regulator could not refuse–just speculating here.

    When push comes to shove the niceties of the law are ignored. We see this in U.S. foreign policy that consists of urging others to follow international law while systematically ignoring it when the USG interests collide with that law. In the same way major corporations like to stick with the law and U.S. law is written in such a way that armies of lawyers can twist and manipulate it to do 99% of the job–but when they have to deal with that 1% of the problem caused by those who actually have a little power they have to use force and this force need not be violent–it can mean acts of harassment, odd phone calls to family members, being followed, auto accidents, deflated tires, whatever. The fact remains that the oligarchs who profit from the illegality that created the 2008 crisis have access to coercive force legal and illegal that they are more than willing to use and we have to face this fact. Things, btw, are not worse than they are because there are still people within the industry that still have a modicum of decency. There are people in government who try to do the best they can but know they have to compromise so they can negotiate at least small reforms from those with the power I described.

    Please note that in the particular case of Tim Curry it certainly is possible that pressure on him has been minimal and that he is acting in good faith and he believes that his course is the best course. But everyrone knows who has come close to power that there are people who will go to the mattresses if you really mess with them.

    1. RUKidding

      Sure looks that way to me. I’m sure some forms of “bad govt/bad regs” comes from incompetency and/or policies/procedures that seemed good in theory but were crap in practice. It happens to anyone, no matter how generally good they are at running things.

      But the US govt has been captured (if not always that way) by powerful rich criminals who’ll do anything, literally anything, to have their way. They make mobsters look like sweet kindly folk, and there’s no consequences for this crowd.

      I have no idea about Curry, but… seems like anyone who has any power in the District of Criminals is brought to heel in one way or another. Expecting to “fix” the system from the inside (as my parents used to adjure me) is a mug’s game. Not gonna happen. anything that happens that actually inures to the benefit of the 99s is by happenstance or just collateral usefulness.

  2. James Levy

    Good people are most likely to fall for the “The President trusted you and gave you this important job. If you go too far in alienating these people (pick your powerful interest within the Power Elite) they’ll be all over him, hurting him badly in the press and the court of public opinion. Is that how you reward a benefactor?” line. You’ve been given this plum job and now you’re acting like an ungrateful child. That’s perhaps the first line of attack they launch when you try to do the right thing and act independently. My guess is the next step is “we’ll ruin you, and you won’t get this policy implemented anyway.” The pay-off stage is, I’d guess, avoided if they know you’re not going to take the bribe (in whatever form); we are talking here about good people trying to do right, and they are the toughest to bribe. The sad fact is that carrots don’t work with honest people–after the guilt trip, it’s sticks.

  3. down2long

    Oddly, three years after I filed complains with the OCC about Ocwen/Deutsche Bank returning my court ordered payments for two years, and Chase foreclosing on my paid up loan, I recently got some follow-up forms from the OCC in the vein of “How did we do?” Well, considering I had to sue Ocwen, and lost the Chase building, I thought it must be some form of depraved sadism.

    In the case of Chase, I got a call from some mucky-muck in Houston (where the OCC had its compliance headquarters, at least during the crisis) saying that in response to my OCC complaint, they were sending me docs for an refi. The day after the call they filed an NOD and moved to put a receiver in place. And they had accepted that month’s payment check. It was unbelievable.

    Yves is correct in that attention must be paid to the ongoing OCC story, if nothing else than to highlight the level at which regulatory capture has occurred, i.e. basically giving legal/official cover to the banks to break every law in the book. I also feel that the revolving door between OCC regulators and the Chase modification/special situations offices in Houston must’ve been spinning (in one direction) at a blinding pace.

  4. flora

    Excellent article. So the once feared OCC watchdog has over the last 20 years become a fig leaf. The other ‘side’ of the OCCs failure to regulate the too-big-to-fails is their increased scrutiny and clamping down on smaller, regional banks that have a national charter – probably to claim they are still fierce regulators. The OCC is putting its finger on the scales in the competition between banking sectors – too bigs vs everything else. I know of a few smaller local banks that had national charters, but, when they realized the OCC had gone off the rails (unreasonably bashing local nationals and suggesting the local sell out to a big, while coddling the bigs) changed their banks from national to state chartered businesses. The state regulators are just tough but still honest as far as I know, not playing favorites.

    1. flora

      and –
      as early as the mid-1990’s OCC examiners looking at small local nationally chartered banks were telling some owners/boards that the bank, while clean and sound, really should be sold to one of the bigs since big banks were more efficient, the bigs were the future, and it was troublesome to have to examine so many small banks. These post-examination conversations were relayed to me by at least 2 bankers. Make of that what you will.

      To me it sounds remarkably like the one-Europe project now on the skids. As in, 20 or more years ago a small group got together and decided, in this case, that a small number of incredibly large banks was the wave of the future and all efforts would be aimed at achieving that outcome. When it became clear that the result was fraud and one financial crisis after another requiring ever more tax dollars to paper over, the “big idea” of decades ago remains in place and defended to the last ditch by TPTB.

  5. susan the other

    If we did not have a private Federal Reserve posing as an “agent of the Treasury” we would not need an office of the Comptroller of the Currency.

    1. Nathanael

      OCC predates Federal Reserve by decades. It dates from the 19th century.

      …frankly, its 19th cenutry reputation was as a fairly corrupt regulator, too.

Comments are closed.