Another high-ranking official in the Obama administration has had to leave his position, and in this case, one has to wonder how he got the job in the first place. Scott Polakoff, the top bank regulator for the Treasury, has taken a leave of absence after internal audits uncovered his allowance of backdated capital infusions, which could amount to cooking the books for IndyMac and other institutions. But the OTS chief had also been responsible for regulating AIG as well (via The Boss):
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.
Surprise? Maybe it shouldn’t have been a surprise, considering this point from the Wall Street Journal:
Polakoff also has come under fire for the agency’s inability to prevent the problems at American International Group Inc. (AIG). The OTS was a top regulator for the giant insurance company, which eventually needed a huge government bailout.
We know that the Obama administration hasn’t exactly set speed records for staffing Treasury. Now they’re going backwards, but one has to wonder why they promoted Polakoff in the first place. If Polakoff’s last big entry on the resumé involved regulating AIG, why would the Obama administration promote him to the top position among financial regulators? It’s not as if no one heard about AIG’s collapse.
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. …
“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).
Anderson Cooper then spends the rest of the blog entry making excuses for Polakoff, but the truth is that Polakoff had the responsibility for oversight at AIG-FP, the division that crashed the company and led to the $150 billion bailout. Its failure does not make Polakoff a criminal (although the backdating of capital infusions might), but it should have set off some warning bells for anyone looking to promote him.