Yesterday, the Inspector General of the Treasury Department released a report showing that regulators at the Office of Thrift Supervision (OTS) — which is responsible for monitoring banks that specialize in mortgage lending — “repeatedly ignored warnings, including from their own employees, about the dangerous excesses at California mortgage lender IndyMac Bancorp.” The collapse of IndyMac last year cost the U.S. government about $10.7 billion.

According to the report, “OTS viewed growth and profitability as evidence that IndyMac management was capable”:

OTS identified numerous problems and risks, including the quantity and poor quality of nontraditional mortgage products. However, OTS did not take aggressive action to stop those practices from continuing to proliferate. OTS had at times as many as 40 bank examiners involved in the supervision of IndyMac; however, the examination results did not reflect the serious risks associated with IndyMac’s business model and practices.

In 2005, the OTS found that IndyMac “was having trouble with its cash flow,” but the office “did not issue any enforcement action, either informal or formal, until June 2008.” And this is not the first such tale to emerge; in October, the SEC’s Inspector General found similarly ignored warnings with regard to Bear Stearns before its federally financed collapse into the arms of J.P. Morgan. If nothing else then, the report underscores the desperate need for regulatory reform, in the wake of a Bush administration that “made it clear they planned to deliver less supervision over the financial services industry.” We all know the outcome of that deregulatory philosophy.

This week, President Barack Obama laid out his framework for regulatory reform. These reforms are still short on detail, but the most important could be the one aimed at ensuring that “companies cannot cherry-pick among competing regulators.” After all, in 2007, Countrywide Financial “simply switched regulators” to come under the more lax supervision of the OTS. Countrywide proceeded to go bust due to risky mortgages, and needed to be rescued by Bank of America. Allowing banks to shop around for the regulator they like best will inevitably lead to trouble, as the banks will settle on the regulator that is most in tune with their business interest.

Rep. Barney Frank (D-MA) has floated the idea of a “systemic risk regulator” — possibly the Federal Reserve — that would be charged with identifying risk that could topple the financial system. This could work, but waiting until risk is systemic to identify it means that risk large enough to endanger the system has been allowed to build up.

Instead, a focus on reforming the smaller agencies, like the OTS, the Commodity Futures Trading Commission, and others may be the key to a successful reform effort. But perhaps most important of all is this — Obama needs to appoint regulators who believe prudential oversight is important, something the Bush administration excelled at not doing.

This morning on Fox News, Chris Wallace gave some advice to conservative politicians who oppose Barack Obama’s proposal to let the Bush tax cuts for the wealthy expire and limit deductions for tax filers in the top two income tax brackets:

I think you do it in terms of what’s best for everybody, and if you’re removing the incentives and profits, and a lot of the people that make over $250,000 a year are small business owners and small businesses, as we all know, are the prime generators of jobs. So I think the better argument for Republicans is going to be this is going to hurt the economy, the generation of jobs, this is going to result in layoffs and say for Joe Six-pack out there. It’s not just the taxes of the rich guy, your livelihood is in jeopardy.

Watch it:

Actually, Mr. Wallace, it is overwhelmingly “just the taxes of the rich guy.” Here are the facts:

Less than 2% of “small businesses” would be affected by Obama’s tax change:

According to an analysis by the Center on Budget and Policy Priorities, only 1.9% of filers with small business income file in the top two income brackets. Even among those 1.9% of filers, many of those individuals don’t have employees, are otherwise employed, and earn their income through passive investments.

A “small business” is very often an employed rich individual declaring business income:

As Len Burman and Eric Toder of the Tax Policy Center explained in October, “Members of corporate boards, for example, report their compensation for that service on schedule C of their individual tax return. Partners in many law firms, accounting firms, medical practices, and Wall Street hedge funds also report business income rather than wages, as do people who receive rents or royalties from investments in real estate and oil and gas partnerships.”

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Yesterday, in the face of “nearly unanimous opposition from Republicans” and “concerns raised by moderate Democrats,” the House delayed voting on a housing bill that would allow judges to “cram-down” mortgage payments for troubled homeowners. Part of the reason for the delay is that the bill has been continually mischaracterized as a bailout for irresponsible homeowners.

Embodying this idea, Rep. Virginia Foxx (R-NC) took to the House floor to decry the bill as helping those “who irresponsibly got mortgages” and now “continue to look for bailouts and continue to look for welfare”:

94 percent of the American people are paying their mortgages and they are paying them on time and they don’t understand why this is happening…Let me tell you a little bit about why that is the case and why I think that people who irresponsibly got mortgages to begin with continue to look for bailouts and continue to look for welfare. This is basically expanding the welfare program in our country.

Watch it:

First, about one-third of residents rent and one-third of homeowners own their homes outright, so how are “94 percent of the American people” paying their mortgages? Are the 62,948 renters in Foxx’s district not Americans? Also, Foxx’s stat isn’t right even if just people with mortgages are included, as about one in ten is behind on payments.

Plus, in 2008, there were 41,750 homes in foreclosure in North Carolina, a 16.2 percent increase from 2007 and a 153 percent jump from 2006. Does Foxx think that all of these homeowners were irresponsible?

What actually caused all of these housing problems is the economy tanked, home prices plummeted, and people got laid off. The proposed housing legislation is meant to complement the Obama administration’s housing plan by giving bankruptcy judges the right to cram-down homeowners mortgages “as a last resort alternative to foreclosure.”

The notion that this constitutes “welfare” is ludicrous. Bankruptcy is unpleasant. Those going through it “have to live under the supervision of a trustee and a judge, and under the observation of creditors for up to five years,” and a bankruptcy can remain on your credit report for up to 10 years. This is not a walk through the park we’re talking about here, but a step for those with, literally, nowhere else to turn.

Now, there will inevitably be some reckless borrowers who will be helped. In an attempt to aid 7 to 9 million homeowners, that’s almost impossible to avoid. But as Clive Crook wrote, this “is a price worth paying if it stems the tide of foreclosures.” Indeed, if the plan is implemented, the average homeowner will be protected from $6,000 in housing price declines as a result of neighbors staying out of foreclosure.