Countrywide: K-Mart Mortgages Regulated by Walmart Regulators

Via Dean Baker, as reported by the Washington Post:

When Countrywide Financial felt pressured by federal agencies charged with overseeing it, executives at the giant mortgage lender simply switched regulators in the spring of 2007.

The benefits were clear: Countrywide’s new regulator, the Office of Thrift Supervision, promised more flexible oversight of issues related to the bank’s mortgage lending. For OTS, which depends on fees paid by banks it regulates and competes with other regulators to land the largest financial firms, Countrywide was a lucrative catch.

But OTS was not an effective regulator. This year, the government has seized three of the largest institutions regulated by OTS, including IndyMac Bancorp, Washington Mutual — the largest bank in U.S. history to go bust — and on Friday evening, Downey Savings and Loan Association. The total assets of the OTS thrifts to fail this year: $355.7 billion. Three others were forced to sell to avoid failure, including Countrywide.

Hmm. . I’m thinking this is a clue to the problem. Did you happen to notice that the regulatory agency is dependent on fees paid to it by the companies it regulates? In other words, companies that it regulates that don’t make money are of no value to them, because they can’t pay for the regulation. That’s a strong incentive to keep companies profitable in George Bush’s administration, I am thinking.

I’m all for companies paying their way: they have to pay to dispose of their waste, they have to pay to get ISO certification, I would probably be OK with them having to pay for their regulatory duties as well. Still, the monies paid them aught not to factor into their budget, but rather be rolled into the general funds of the government. Or given away to starving children in Africa. But tying a regulatory body to the fortunes of the regulated is as clear a conflict of interest as one could imagine.

By Tommy Belknap

Owner, developer, editor of DragonFlyEye.Net, Tom Belknap is also a freelance journalist for The 585 lifestyle magazine. He lives in the Rochester area with his wife and son.