Bank regulators whiffed in regulating

Hindsight is always perfect, but you've got to wonder where bank regulators were during the real estate boom.

Case in point: A recent review by the Federal Reserve's inspector general of Naples-based Orion Bank's failure in November.

The review noted that federal bank examiners at the height of the real estate boom in November 2005 gave Orion high marks despite the fact that the bank was making big and ultimately fatal bets on construction and development on the Gulf Coast.

These regulatory investigations are the prostate exams of banking. Regulators typically camp out at the bank and dig through records for days, analyzing loans and requiring mountains of documents. Unlike the public, regulators' special access to confidential materials gives them the truest picture of a bank's condition.

Among other accolades, federal regulators in late 2005 praised Orion's low levels of loan losses and delinquencies. They also noted “the bank operates with a seasoned management team who has demonstrated the ability to effectively manage risk.” What's more, they said the board of directors appeared well informed and was active in committees. A subsequent review by state banking regulators in December 2006 also gave Orion top grades.

In her cover letter to the Federal Reserve Board of Governors, Inspector General Elizabeth Coleman acknowledged that “given the rapid decline in the real estate markets served by Orion, it is not possible to determine whether earlier supervisory attention would have affected Orion's subsequent decline or the failure's cost to the deposit insurance fund.”

Think about that the next time you hear a politician in Washington promise to save us from the next financial crisis with more regulation. Even the regulators who had access to the bank's books couldn't foresee the recession's impact.