"UPDATE 2-U.S. bank regulators directed capital backdating
* Regulators were aware of practice and allowed it-report
* In one case, regulators directed backdating-report (Adds Grassley, Delmar comments)
By Karey Wutkowski and John Poirier
WASHINGTON, May 21 (Reuters) - High-level bank regulators were aware that thrifts were inappropriately backdating capital contributions, allowing the institutions to appear healthier, and in one case directed a thrift to engage in the practice, according to a U.S. government watchdog report released on Thursday.
The Treasury's Office of Inspector General report said it was "alarming" that high-level officials at the U.S. Office of Thrift Supervision approved or directed the backdating of capital at six thrifts, including failed lender IndyMac Bank.
Allegations of capital backdating have tarnished the reputation of the agency, a division of Treasury that largely regulates mortgage lenders.
In March, the inspector general placed acting OTS Director Scott Polakoff on leave pending a review of allegations of capital backdating in 2008. The report released on Thursday did not indicate the progress of that review.
The capital backdating allowed IndyMac to maintain its "well capitalized" status and avoid a requirement that could have made it more difficult for the thrift to keep taking risky brokered deposits -- a big source of funding for some banks, the report said.
"We consider these matters very serious and find it alarming that such high-level OTS officials were not only aware of the backdating at two thrifts, but either directed or authorized the thrifts to backdate the capital contribution," the report said.
It said the OTS senior deputy director directed the backdating of capital at a thrift in the agency's Southeast region, but not IndyMac.
Polakoff was senior deputy director before becoming the OTS acting director in February. He did not immediately respond to a request for comment.
"We have taken the necessary actions to remedy the situation," OTS spokesman William Ruberry said, adding that the OTS's error was in not making sure a valid note receivable existed.
"Each of these transactions would have been acceptable if such a note had been recorded. So, we're talking about a piece of paper in a file. That's what these cases amount to," he said.
Senator Chuck Grassley, the top Republican on the Senate Finance Committee, said the OTS needed to hold the appropriate people accountable.
"This report paints the disturbing picture of a regulatory agency being much too cozy with the industry it's supposed to be regulating," Grassley said in a statement.
Rich Delmar, counsel to the inspector general for Treasury, said the office planned "to review the other corrective actions taken" at OTS.
The Treasury audit report released on Thursday follows the inspector general's "material loss review" of IndyMac, which was seized in July after loan defaults mounted and tight capital markets caused losses on mortgages it could not sell.
That material loss review uncovered the capital backdating at IndyMac and other thrifts, prompting the audit report.
The report does not name the five other thrifts but notes that the capital contributions that were backdated occurred at the institutions from January 2007 through August 2008.
BankUnited Financial Corp (BKUNA.O: Quote, Profile, Research, Stock Buzz) is among the institutions that were included in the report but not named, according to a source familiar with the matter. The troubled Florida lender is in the process of being sold and has drawn at least one bid from a private equity consortium, according to a source familiar with the matter.
The OTS submitted a letter in response to the inspector general report, saying it has focused "extensive resources" on the issue of backdated capital contributions. It said it has provided detailed guidance to its staff and the institutions it supervises about proper recognition of capital contributions. (Reporting by Karey Wutkowski and John Poirier; additional reporting by Paritosh Bansal; editing by John Wallace)"