by Calculated Risk on 4/11/2010 11:49:00 PM

From Sewell Chan at the NY Times: U.S. Faults Regulators Over a Bank

Regulators failed for years to properly supervise the giant savings and loan Washington Mutual, even as the company wobbled ... a federal investigation has concluded.
...
The report, prepared by the inspectors general for the Treasury Department and the Federal Deposit Insurance Corporation, is expected to be released Friday. A draft was obtained by The New York Times.

... WaMu was the largest institution regulated by the Office of Thrift Supervision ... Although regulators found problems ... the office consistently deemed WaMu “fundamentally sound,” giving it a rating of 2, the second-highest on a five-point scale ... The office did not lower the rating to 3 ... until February 2008, and to 4 ... until September 2008, days before WaMu collapsed. “It is difficult to understand how O.T.S. continued to assign WaMu a composite 2 rating year after year,” the report found.

The FDIC rating system is called CAMELS and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest. Banks with ratings of 4 or 5 are included on the FDIC's official problem bank list (ratings are not made public). So WaMu wasn't considered a "problem bank" until days before it collapsed.

The report will apparently be released on Friday. Earlier reports for other bank failures showed that the field examiners identified the problems early - and then for some unexplained reason, no action was taken. The regulatory system failed.