California National Bank expected to be seized tonight

Bank regulators are expected later today to take over Los Angeles-based California National Bank in what would mark the fourth-largest bank failure in the country this year, according to people familiar with the situation.

The bank, a unit of FBOP Corp., is expected to be acquired by the U.S. Bank unit of Minneapolis-based U.S. Bancorp, with no losses to be incurred by depositors, the sources said. The branches would reopen as usual Saturday or Monday as U.S. Bank branches.

Seven other banks owned by FBOP, a privately held Oak Park, Ill., company, are also expected to be seized by regulators and acquired by U.S. Bank. They include San Diego National Bank, with 28 offices, and San Francisco’s Pacific National Bank, which has 17.

FBOP's owner, billionaire Michael Kelly, didn't return a call seeking comment today.

California National, with $7.1 billion in assets and $5.6 billion in deposits as of June 30, is the fourth-largest commercial bank based in Los Angeles County. Only City National Corp., East West Bancorp and Cathay General Bancorp are larger.

The collapse of FBOP's banks would be the latest in a rash of financial failures that began last year with government takeovers of 25 banks. Before today, 106 banks had failed this year.

California National has had its share of lending problems. As of June 30, the last time it reported its financial results publicly, the bank had five times as much foreclosed property on its books and twice as many non-current loans as it had a year earlier. But the bank's main problem was its loss of about $500 million on heavy investments in Fannie Mae and Freddie Mac preferred shares, securities that were rendered nearly worthless by the government takeover of the giant mortgage firms last year.

U.S. Bancorp has been buying the remains of a number of failed banks. It acquired the remains of Downey Savings of Newport Beach and PFF Bank & Trust of Pomona when those struggling thrifts failed last November. Just this month, it bought 20 Nevada branches from BB&T Corp., which had acquired them as part of its deal to buy Colonial BancGroup Inc. At $25 billion in assets, Montgomery, Ala.-based Colonial was the largest bank to fail this year.

-- E. Scott Reckard

FDIC's Bair offers no comfort to uninsured IndyMac depositors

The head of the Federal Deposit Insurance Corp. delivered some bad news personally to uninsured depositors who lost money last year when IndyMac Bank crashed and burned, saying an act of Congress is their only hope for recovering their funds.

“When a bank fails, we have to do what’s least-cost to our deposit insurance fund,” FDIC Chairman Sheila Bair said during a public appearance Wednesday in Los Angeles.

That’s not the answer the IndyMac depositors wanted to hear, of course. But it’s the answer they have been getting since the bank, which had specialized in stated-income mortgages and high-yield CDs, collapsed in July 2008. That left about 10,000 customers of the Pasadena-based savings and loan with losses of $270 million on deposits that exceeded FDIC insurance limits.

Congress later last year raised federal insurance coverage from $100,000 per depositor to $250,000 and loosened the requirements for trust accounts so that anyone could be listed as a beneficiary, not just immediate family members.

One of the contentions of the uninsured IndyMac depositors is that bank employees misinformed them about who could be a beneficiary of accounts, increasing their losses when the bank failed. Why not make the changes retroactive to their cases? they ask.

The uninsured depositors’ anger was intensified earlier this year by a report from the Treasury Department's Office of the Inspector General, which excoriated the Office of Thrift Supervision, IndyMac’s chief regulator, for ignoring warning signs that the bank’s loan portfolio was in trouble. Had the regulators done a better job,  IndyMac's loan losses would have been limited, the depositors say.

Bair’s comments came during a question-and-answer session after she spoke to a Town Hall Los Angeles meeting at the Regency Club in Westwood.

“In light of the OIG report, how can you justify not giving us our money back?” one of the IndyMac depositors asked. “We were misled by bank officials. We set up accounts as we were told to by the bank, and they were wrong.”

Bair said her hands were tied by the laws governing the deposit insurance fund, which already is strained by losses from a surge in bank failures.

“I know you feel it wasn’t fair,” she told the depositors, a group of whom attended the session. The situation “troubles me greatly,” Bair said, but added, “It’s something that Congress has to fix.”

The bank’s failure cost the FDIC nearly $11 billion. The remains of IndyMac were taken over by private equity investors who now are operating it as OneWest Bank.

The FDIC has repaid 50 cents of every uninsured dollar to IndyMac depositors. Last year the agency had held out hope that the uninsured depositors might get more money as the bank’s assets were liquidated, but Bair said Wednesday that it was unlikely there would be any further payments.

-- E. Scott Reckard

Photo: Sheila Bair. Credit: Toby Canham / Getty Images

IndyMac had a pension plan -- and managed not to ruin it

IndyMac Bancorp’s former executive team ran the Pasadena lender into the ground with their ridiculously risky mortgage lending.

Yet the company did get one financial-management job right: its employee pension fund.

The defined-benefit plan for IndyMac Bank was taken over by the federal Pension Benefit Guaranty Corp. on Tuesday, after the plan was in effect abandoned because the holding company for the bank is in liquidation.

But the PBGC said the pension plan was in much better shape than many of the funds the agency has been forced to absorb.

The IndyMac plan is 89% funded, with assets of $33 million and benefit liabilities of $37 million, the PBGC said.

The 89% coverage of liabilities "is a high number . . . it’s a well-funded plan," said Gary Pastorius, a spokesman for the PBGC in Washington. That's a good thing, considering  other challenges facing the PBGC.

It seems unlikely that the IndyMac fund owned much, if any, of the bank's stock, which now is virtually worthless.

IndyMac was declared insolvent in July 2008, and its failure is expected to cost the Federal Deposit Insurance Corp. fund almost $11 billlion. The FDIC in March sold most of IndyMac’s assets to an investor group that has renamed the successor bank OneWest.

But OneWest didn’t want responsibility for the pension plan, which covers nearly 1,900 workers and retirees of the bank. So under federal law the PBGC was obligated to step in and guarantee the promised benefits of the plan.

Pastorius said he didn’t know if former senior executives of IndyMac were covered by the pension fund, though he said such plans "tend to cover rank-and-file workers." Though many companies halted enrollment in their defined-benefit pension plans years ago, IndyMac's plan wasn't frozen until May 2007.

For pension plans terminated in 2008, including the IndyMac plan, the maximum annual pension guaranteed by the PBGC is $51,750 for workers at age 65. Many beneficiaries, of course, will get much less, depending on their plan's original rules.

The PBGC also noted that, in general with plans it takes over, "Certain early-retirement subsidies and benefit increases made within the past five years may not be fully guaranteed." So future IndyMac retirees may not yet know exactly what their benefits will be.

But current IndyMac retirees "will continue to receive their monthly benefit checks without interruption," the PBGC said.

-- Tom Petruno

Photo: IndyMac's former headquarters building. Credit: Al Seib / Los Angeles Times

In financial agency turf wars, at least one loser is obvious

Evidently, Treasury Secretary Timothy Geithner failed to strike fear in the hearts of the nation’s top financial-system cops, after he lambasted them late last week for publicly opposing parts of the Obama administration’s regulatory-overhaul plan.

In testimony before the Senate Banking Committee on Tuesday, banking regulators including Federal Deposit Insurance Corp. Chairwoman Sheila Bair and Office of Thrift Supervision Acting Director John Bowman hardly sounded contrite -- despite Geithner’s expletive-laced attempt to quash agency turf wars.

On the administration’s proposal to place oversight of major financial firms under a single regulator -- most likely the Federal Reserve -- Bair was right back with her previous objections.

"We do not see merit or wisdom in consolidating all federal banking supervision," she told the Senate. "The risk of weak or misdirected regulation would be exacerbated by a single federal regulator that embarked on a wrong policy course. Prudent risk management argues strongly against putting all your regulatory and supervisory eggs in one basket."

Of course, no government bureaucracy ever believes that it should shrink itself or give up authority. But even Bair, in arguing for the regulatory status quo, seems to think that we could do without at least one financial agency: the Office of Thrift Supervision.

The OTS, recall, had responsibility for Washington Mutual, IndyMac Bancorp and Downey Financial, all of which went down in flames last year, with the latter two costing the FDIC fund dearly. Another OTS-regulated giant, Guaranty Bank, is on the brink of collapse.

The Obama administration wants to kill off the OTS, hand its oversight functions to a single national-bank regulatory agency, and phase out thrift charters.

Not surprisingly, the OTS’ Bowman insisted in his Senate testimony that the agency should be preserved. His reasoning included this gem: "Failures by insured depository institutions have been no more severe among thrifts than among institutions supervised by other federal banking regulators."

In other words, the OTS should survive just because it's no worse than its peer agencies in preventing failures?

At another point, Bowman argued that the OTS' image suffered unfairly because it allowed insolvent thrifts like WaMu, IndyMac and Downey to collapse, while Citigroup and other big banks were propped up by the Treasury. As if that somehow absolves the OTS for what happened on its watch.

Sen. Charles Schumer (D-N.Y.), whom the OTS last year accused of helping to bring down IndyMac by publicly questioning the bank’s health, wasn't buying Bowman's line. "Almost everyone regards the OTS as having failed in its responsibilities," Schumer asserted.

As for the administration’s basic goal of consolidating regulatory authority, Schumer made a well-reasoned case in a relative few words:

"A hodge-podge of different regulators add to conflicts in regulation and creates confusing burdens for the banks. We’ve all heard from institutions who were told one thing by one regulator and another thing by another regulator, each of whom has authority.

"A single regulator could keep better tabs of industry-wide risks, dangers and developments. That’s pretty apparent. And . . . a single consolidated regulator can eliminate agency and regulatory arbitrage and gaps, and no bank could escape from being held accountable for violations and poor practices."

Sounds like what Geithner might have been trying to say -- without the expletives.

-- Tom Petruno

Photo: John Bowman, acting director of the Office of Thrift Supervision. Credit: Chip Somodevilla / Getty Images

FDIC seeks more commitment from buyers of failed banks

The Federal Deposit Insurance Corp. wants to tighten rules on private-equity firms that buy failed banks, seeking to reduce the risk that the firms could be seen as getting sweetheart deals.

The agency’s proposals, issued today for public comment, already have sparked a backlash from private-equity players who say the FDIC will just make life more difficult for itself as bank failures mount.

From Bloomberg News:

The FDIC said private-equity firms acquiring failed banks should hold them for three years, double the time imposed in the latest transaction, to prevent “flipping” them for short-term profit.

The proposal was among a half-dozen announced today by the FDIC as buyout firms such as Blackstone Group and Carlyle Group seek a bigger role in the banking industry.

Pasadena-based IndyMac Bancorp (now OneWest) was acquired by private-equity buyers in January. BankUnited Financial Corp. of Florida was sold in May to a group including Blackstone and Carlyle.

FDIC Chairwoman Sheila Bair said that she was "troubled by the opacity of some of the ownership structures that we have seen in our bidding process, though these have not been winning bids. We have seen bids where it has been difficult to determine actual ownership. We have seen bidders who have wanted permission to immediately flip ownership interests.

"So based on the experiences we have gathered, I think it is prudent to put some generic policies in place which tell non-traditional investors that we welcome their participation, but only if we have essential safeguards to assure that they will approach banking in a way that is transparent, long term, and prudently managed," Bair said.

Secrecy on the part of private-equity firms? The FDIC can’t really be shocked by that.

The agency’s proposals also include provisions that would require a greater commitment of capital from private-equity firms to the banks they buy. . . .

Acting director of thrift regulator is put on leave

The door keeps revolving at the Office of Thrift Supervision as more regulators are caught up in an investigation into thrifts that manipulated their books -- with the agency’s help.

The OTS announced Thursday that Treasury Secretary Timothy F. Geithner had appointed John E. Bowman, the OTS’ deputy director and chief counsel, as acting director "effective immediately."

He replaces Scott M. Polakoff, the agency's chief operating officer, who was acting director for less than a month. The short release from the OTS said that Polakoff "is on leave pending a review by the Treasury of the OTS’ August 2008 actions related to post-period capital contributions."

That’s shorthand for saying that Polakoff may have been involved in allowing thrifts to inflate their quarter-end capital positions in their regulatory filings by including money that actually came in after the end of a quarter.

Polakoff had replaced John M. Reich, who oversaw the agency during the collapse of IndyMac Bancorp last year.

It was Reich who had appointed Darrel W. Dochow to oversee the OTS’ Western region. Dochow was in charge last spring when IndyMac Bank backdated a capital infusion to make it look as if the thrift had met federal thresholds of financial health, when in fact it had fallen short. That allowed IndyMac to remain open longer and attract new deposits at high interest rates -- which raised the cost of its failure when the government finally seized it in July.

The Office of Inspector General for the Treasury is expected to release a report soon on the IndyMac case and at least four other cases of thrifts that backdated capital infusions.

Dochow was demoted in December after the backdating incident became public. Both he and Reich retired at the end of February.

-- William Heisel

Photo: Scott M. Polakoff. Credit: Michael Reynolds / EPA

U.S. thrift regulator shifts California oversight to Texas

The nation's savings and loan regulator gave a pink slip to its Western regional headquarters this week: The Office of Thrift Supervision said it would shift oversight duties of its San Francisco office to a new regional headquarters in Dallas.

The demise of the Western branch's authority is an acknowledgment that so many big S&Ls have failed under the office's supervision, its existence no longer could be justified.

The announcement comes less than a month after the retirements of OTS Director John Reich and former West Region chief Darrel Dochow. The latter left amid allegations he had allowed IndyMac Bancorp to illegally backdate a cash infusion that hid from depositors and investors the true extent of the company’s troubles last spring.

Pasadena-based IndyMac was just one of a string of major institutions that crumbled under the watch of OTS West. A quick recap:

-- March 2007: The Federal Deposit Insurance Corp. orders Fremont Investment & Loan in Brea to stop making subprime loans. The thrift is forced over the next year to sell off its units piecemeal.

-- January 2008: Countrywide Financial Corp. of Calabasas agrees to sell out to Bank of America Corp. after struggling to stay afloat as losses on risky mortgages pile up.

-- July 2008: Six months after the OTS started a review of IndyMac Bank, federal regulators declare it insolvent and seize it.

-- September 2008: The FDIC seizes Washington Mutual of Seattle and sells it to JPMorgan Chase & Co.

-- November 2008: The FDIC takes over two Southern California thrifts -- Newport Beach-based Downey Savings, one of the largest originators of "option ARM" loans that allowed borrowers to choose their own payment plans; and PFF Bank & Trust in Pomona, which specialized in home loans and loans to builders. The thrifts are sold to U.S. Bancorp in Minneapolis.

-- January 2009: First Federal Bank in Los Angeles enters into a cease-and-desist order with regulators that gives them strict oversight of the thrift's operations. A few days later FirstFed reports a $245-million fourth-quarter loss.

The OTS was gentle in its news release on the phase-out of the San Francisco office's authority: It simply cited "a change in the number and size of institutions supervised" by the office.

-- William Heisel

Photo: Outside an IndyMac branch last July. Credit: Al Seib / Los Angeles Times

Treasury report absolves Schumer in IndyMac collapse

Sen. Charles E. Schumer insisted last year that his surprisingly blunt public comments about IndyMac Bancorp weren't responsible for the Pasadena bank's failure.

In a report today on IndyMac’s collapse, the Treasury Department’s inspector general largely backs Schumer on that issue.

The New York Democrat on June 26 made public a letter he had sent to the Office of Thrift Supervision and the Federal Deposit Insurance Corp., saying he was "concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers."

When the OTS seized IndyMac on July 11, it specifically fingered Schumer in the bank’s demise, saying that "the immediate cause of the closing was a deposit run that began and continued" after Schumer went public with his concerns.

But the inspector general’s report says Schumer's letter just made clear to everyone else what the OTS and the FDIC already knew: that the bank was defunct.

"While the [deposit] run was a contributing factor in the timing of IndyMac’s demise, the underlying cause of the failure was the unsafe and unsound manner in which the thrift was operated," the report says.

Inspector General Eric Thorson told the Times: "We don't think the letter caused the failure. The bank was on its way going down already."

The OTS previously attempted to blame Schumer’s comments for scotching a deal that IndyMac was said to have been negotiating with potential investors to buy the bank. Those talks were going on weeks before the letter was released, the OTS said.

Darrel Dochow, who had been the Western regional director for the OTS, told the inspector general that "there were investors who were interested in investing in IndyMac" around the time of Schumer’s letter. Dochow asserted that "interest waned after the senator’s letter was published" and the run on deposits hit.

But the inspector general’s office said it checked on Dochow’s statement and talked with a principal at the investment firm that he had mentioned.

"Contrary to what OTS’ West Region director told us, the principal said that Sen. Schumer’s letter did not affect the firm’s investment decision," the report says.

-- William Heisel

Photo: Sen. Charles Schumer. Credit: J. Scott Applewhite / Associated Press

Regulator who had oversight of IndyMac Bank retires

A federal regulator who played a role in both the 1989 failure of Lincoln Savings & Loan and last year's collapse of Pasadena's IndyMac Bank is retiring.

Darrel W. Dochow had earlier been relieved of his duties as Western regional director of the federal Office of Thrift Supervision. That action came late last year after the Treasury Department's inspector general found that IndyMac had been allowed to report its finances in a way that delayed disclosure of the extent of its problems.

"I must admit that being singled out for a series of highly personal attacks after the failure of a prominent thrift has been painful, but I have been humbled by the tremendous support and words of encouragement by many people who truly know me and the job that I have done over the years," Dochow, 59, wrote in an e-mail to colleagues today.

IndyMac was seized by the Federal Deposit Insurance Corp. last July and is expected to cost the agency more than $9 billion. In addition, the bank held more than $600 million in uninsured deposits.

"After more than 30 years of government service Darrel Dochow has announced his decision to retire from the OTS. And we wish him well," said OTS spokesman William Ruberry, who declined to comment further.

Two decades ago, as head of supervision and regulation at the Federal Home Loan Bank Board in Washington, Dochow ignored pleas from California state regulators to intervene against Irvine-based Lincoln Savings. Two years after those requests were made, Lincoln collapsed in what was then the largest S&L failure.

Dochow was demoted but then worked his way back up the ranks and was promoted in September 2007 to be OTS’ regional director for the West. That put him directly over three of the nation’s largest savings and loans -- Washington Mutual, Countrywide Bank and IndyMac.

The Times revealed in December that the Treasury Department's inspector general was investigating how IndyMac was allowed to file financial statements that indicated that a capital infusion received from its parent firm last May had happened before March 31.

That was an important distinction because it allowed the bank to meet a key financial benchmark for the first three months of the year and keep its doors open through spring -- during which time it raised interest rates to lure in cash from new depositors.

-- William Heisel

Photo: Darrel Dochow. Credit: James Kegley

IndyMac sale may finally happen today

The sale of Pasadena's IndyMac Federal Bank is likely to be announced later today, according to sources close to the savings and loan, the private investors acquiring it and the Federal Deposit Insurance Corp.

The FDIC has been operating the former exotic-mortgage lender since IndyMac's chief regulator, the U.S. Office of Thrift Supervision, seized it last July following a $1.3 billion run on deposits. At the time, it was the third biggest bank failure (adjusted for inflation) since the government began insuring deposits during the Great Depression.

The FDIC hoped to sell IndyMac by October, later moving the target date to Dec. 31.  But as 2008 ran out no deal had been finalized despite ongoing talks with a New York investment partnership that includes J. Christopher Flowers, a buyout specialist known for targeting distressed banks; hedge-fund operator John Paulson, who made billions of dollars betting the housing markets would crash; and private-equity investor Steven Mnuchin, chairman of Dune Capital.

A source close to the partnership told me this morning that a deal was likely to be announced today. Sources at the FDIC and IndyMac confirmed that. They declined to be identified pending the FDIC's formal announcement of the deal.

Few details of the transaction were available in advance, although sources have said the emerging institution would be chartered by the Office of Thrift Supervision, the Treasury Department arm that regulates S&Ls. One regulatory source said billions of dollars in troubled loans will be spun off to unburden the new institution, but the structure of that transaction wasn't clear.

The FDIC last year managed to engineer takeovers of other wounded mortgage lenders by larger banks, such as JPMorgan Chase & Co.'s $1.9-billion purchase of Washington Mutual Bank. But private equity investors are a new twist and are sure to be scrutinized carefully.

I reported on July 26 that before IndyMac failed, its top executives had undertaken "Project Iron Man," an attempt to assemble a group of private-equity companies to pump cash into the thrift and become its controlling shareholders.  From that report:

Sources at the bank and among potential bidders were guarded in discussing the effort, citing confidentiality agreements and the fact that some of the firms involved may participate in the FDIC's planned auction of IndyMac, which the agency hopes to accomplish in 60 to 90 days. Project Iron Man appears to have reached only the initial stages when U.S. Sen. Charles E. Schumer (D-N.Y.) publicly questioned IndyMac's stability in late June and criticized regulators' lack of action. His remarks spooked some depositors, and IndyMac customers withdrew $1.3 billion in 11 days, even as private-equity firms were reviewing IndyMac's operations behind the scenes.

As part of the government's attempts to stabilize the financial system, the FDIC formally agreed in November to let private investor groups without bank charters bid for failing lenders.

IndyMac, which has 33 Southland branches, was among 25 banks and thrifts that failed last year.

--E. Scott Reckard