The Office of Thrift Supervision, the regulator of Washington Mutual before it became the biggest banking bust in U.S. history, came under fire on Friday by lawmakers probing the roots of the financial crisis.

A slew of former and current OTS officials were hauled before the Senate's Permanent Subcommittee on Investigations, which produced a trove of documents detailing what it called the agency's lax oversight in the years leading up to WaMu's collapse.

You're the cop on the beat, Senator Carl Levin, the Democratic chair of the panel, said to former OTS chief John Reich. Not a ticket, not a fine?

Levin's questioning built on a report released Thursday finding that before the giant mortgage lender collapsed in 2008, the thrift's regulators squabbled over its condition.

The Office of Thrift Supervision, Washington Mutual's primary regulator, insisted on giving it a higher quality rating than the Federal Deposit Insurance Corp, which insured its deposits and was its backup regulator, the panel found.

The OTS eventually agreed with the FDIC's lower rating, but by then the nation's biggest savings and loan, with more than $300 billion in assets and $188 billion in deposits, was just days from collapse.

Depositors withdrew $17 billion from WaMu following Lehman Brothers Holdings Inc's bankruptcy on September 15, 2008. The OTS placed it in receivership 10 days later and the FDIC sold it to JPMorgan Chase & Co for a bargain at $1.9 billion.

The turf war between the regulators was generally well known, but the panel's more than year-long probe uncovered a nearly dysfunctional relationship between the two agencies.

The report also documented FDIC warnings that WaMu's financial condition was crumbling and resistance by OTS officials to let the FDIC examine the bank's books.

Reich protested the efforts of the FDIC in an email to a colleague cited by the subcommittee.

I cannot believe the continuing audacity of this woman, Reich wrote of FDIC chairman Sheila Bair.

Reich testified on Friday that emotions ran high during the crisis.

These were tense times, he said when asked about the tension between the two agencies. Rome was burning.

The panel is examining the causes of the 2008 financial crisis and using Washington Mutual as a case study. Several former and current regulators testified before the committee on Friday.


FDIC's Bair painted a picture that backed up the panel's report.

In one case, OTS indicated that should FDIC want to review asset quality, FDIC could review OTS workplaces only, Bair said in her prepared testimony.

OTS officials defended the agency. The current chief said it was helpful to have one regulator take the lead.

One of the complaints by Congress coming out of this crisis was that no one was in charge, acting OTS director John Bowman said. To the extent that we mix up who the primary federal regulator is, we can get into trouble again.

The recommendations of the panel may become moot if Congress passes legislation to overhaul the financial regulatory structure. Both versions of the effort, whose fate is not certain, more or less merge OTS into other regulators.

The FDIC needs more timely access to information on the large banks whose deposits it insures, a watchdog told the panel on Friday.

The FDIC and OTS had an interagency agreement designed in part to avoid duplicative examinations. That agreement appeared to drive a wedge between the OTS and FDIC, as attempts by FDIC to review information at WaMu were seen as an affront to the capabilities of OTS examiners, FDIC Inspector General Jon Rymer said in prepared remarks to the panel.

Rymer said the FDIC must have sufficient and timely access to information at all large insured depository banks and that it may not be in the FDIC's best interest to place too much reliance on the bank's primary regulator to assess risk to the deposit insurance fund.

The U.S. Treasury Department's inspector general, Eric Thorson, said OTS identified core weaknesses that led to the demise of the bank but failed to ensure the thrift corrected those weaknesses.

The OTS derived up to 15 percent of its budget from fees paid by the thrift.

(Reporting by Kim Dixon, Dan Margolies and Rachelle Younglai; Editing by Gary Hill)