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The strange sacking of a top Treasury official

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By Michelle Malkin  •  March 27, 2009 05:08 AM

It’s not like Tim Geithner can afford to lose any of the few officials who are actually working at the Treasury Department with him, but last night, he put one on leave. Very curious — especially given the sacked employee’s recent increased visibility for his public statements about the government’s (mis)handling of AIG. The WSJ reports:

The acting director of the Office of Thrift Supervision has been put on leave pending a review of the agency’s role in the backdating of capital infusions by some banks, the agency said Thursday evening.

OTS said in a surprise statement that Scott Polakoff, who has been serving as acting director of the OTS, would be replaced by OTS Chief Counsel John Bowman during the review by the Treasury Department.

The OTS, a division of the Treasury Department, has come under fire after it was revealed last year that the agency had allowed IndyMac Bancorp Inc. (IDMCQ) to backdate a May 2008 $18 million capital infusion to the first quarter. IndyMac failed a few months later, a collapse that cost the Federal Deposit Insurance Corp. $10.7 billion, the costliest failure in U.S. history. A subsequent review of the issue by the OTS uncovered four other cases of backdating by banks, cases which the agency said in a January letter to U.S. lawmakers “were not acceptable to current OTS standards.” Allowing the banks to backdate capital infusions to earlier quarters could allow firms to avoid regulatory penalties for having too little capital.

The Treasury Department Inspector General is investigating the matter, and it is unclear what sparked Polakoff’s sudden departure…

Did Polakoff rubber stamp the backdating of those capital infusions or take a more active role in dishonestly and unethically engineering them? Like the WSJ says, it’s “unclear.” He was second-in-command during the period being investigated. Geithner has installed John E. Bowman, the agency’s deputy director and chief counsel, to take Polakoff’s place.

Meantime, go back and read this via CNN:

When Ben Bernanke told the Senate Budget Committee that American International Group (AIG) “exploited a huge gap in the regulatory system” and that “there was no oversight of the Financial Products division,” it seemed to make sense. The Federal Reserve Chairman went on to say, “This was a hedge fund basically that was attached to a large and stable insurance company.”

If nobody was keeping an eye on them, well no wonder it blew up.

But it turns out Mr. Bernanke was not quite accurate when he said “no oversight.” He made that statement on March 3rd.

Just two days later a man hardly anybody has ever heard of explained to yet another Senate committee that — hold the presses — there WAS a regulator for the Financial Products unit of AIG…

That man was Scott Polakoff and he’s the Acting Director of the Office of Thrift Supervision (we call that OTS). OTS is the regulator for thrifts and savings banks. Polakoff has told any committee that will listen that OTS had responsibility for AIG FP. Why was OTS involved? Because among the seventy odd companies and units that make up AIG, one of them happened to be a Savings & Loan Bank.

When you think of a Savings & Loan it’s hard not to picture Jimmy Stewart facing down the evil banker Mr. Potter, but at AIG, Potter was trading derivatives at the FP unit, and FP was attached to the S&L as far as the regulator was concerned.

“We were clearly responsible as a consolidated regulator for FP,” says Polakoff, and adds, “We, in 2004, should have taken an entirely different approach than what we wound up taking regarding the credit default swaps.” By now, the term credit default swap is practically a barbershop term, but basically it’s just a sort of insurance policy on another financial product like a mortgage-backed security (often stuffed with foreclosed mortgages, as we have all learned to our sorrow).

So when Mr. Polakoff says they should have taken a different approach, what he’s really saying is that the OTS regulators weren’t sophisticated enough to realize that FP was heading for BIG trouble. And why should they have been that prepared? OTS mostly regulates S&L’s which generally take deposits and then make loans for houses and other purposes. Would you expect these civil servants to really understand the risks attached to derivatives that are designed by Math PhD’s to play the odds on pieces of paper that “derive” their value from a mortgage backed security that can’t be valued itself (except maybe by another math nerd).

Curious.

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Categories: AIG, Subprime crisis, Tim Geithner

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