WASHINGTON – Botched regulatory oversight of Washington Mutual and turf warfare between the agencies that monitored it contributed to the bank’s failure and fueled the unraveling of the mortgage market at large, according to a Senate probe to be detailed at a hearing today.

The Senate Permanent Subcommittee on Investigations found the Office of Thrift Supervision repeatedly reprimanded the bank for shoddy underwriting, poor risk management and erroneous borrower information from 2004 through 2008.

Yet the agency failed to take action to stop these practices, figuring that the Seattle-based thrift would thrive as long as it kept selling its increasingly risky loans to investors, something it was no longer able to do after credit markets froze, the subcommittee concluded. OTS seized the bank in 2008 and sold it to J.P. Morgan Chase.

Sen. Carl Levin, D-Mich., the subcommittee’s chairman, criticized OTS for shedding its proper “cops on the beat” role in favor of a more collaborative relationship with Washington Mutual, which was once the nation’s sixth-largest depository institution and paid fees to OTS that amounted to about 15 percent of the agency’s budget.

Instead of acting as the first line of defense for taxpayers, OTS “stood by and did very little while all these loans flooded and poisoned” the financial system, Levin told reporters at a gathering in his office Thursday.

OTS also dismissed a more critical view of the bank’s financial soundness by the Federal Deposit Insurance Corp., another regulator, Levin said.

A separate probe by the inspectors general of OTS and FDIC reached similar conclusions about OTS’s handling of Washington Mutual.


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