The New York Times has gotten hold of a draft report blaming the FDIC and the Office of Thrift Supervision for not moving on Washington Mutual by lowering their rating. The official report will be released to the public next Friday. It appears the Office of Thrift Supervision received 15% of their assessment fees from Washington Mutual.

The two agencies that oversaw Washington Mutual, the investigation found, feuded so much that they could not even agree to deem the company “unsafe and unsound” until Sept. 18, 2008.

By then, it was too late. A week later, amid a wave of deposit withdrawals, the government seized the bank and sold it to JPMorgan Chase for $1.9 billion. It was by far the largest bank failure in American history.

Even Jim Cramer knew Washington Mutual was in terrible trouble, so this report's findings are no surprise. The real question is why were regulators asleep at the wheel while Rome burned? Perhaps the surprise is any branch of the government states the obvious in a report, after the fact.

The thrift supervision office was supposed to ensure the company’s safety and soundness, while the F.D.I.C. was tasked with assessing risks to its deposit insurance fund.

The report found that Washington Mutual had failed primarily “because of management’s pursuit of a high-risk lending strategy that included liberal underwriting standards and inadequate risk controls.” The strategy accelerated in 2005 and came to a crashing end in 2007 with the drop in the housing market.

But the report also leveled unexpectedly sharp criticism at the F.D.I.C., which by July 2008 concluded that the bank needed $5 billion in capital to withstand future potential losses. The report said the F.D.I.C., which had questioned the Office of Thrift Supervision’s assessments of the bank’s soundness, could have stepped in earlier and acted as the primary regulator, but decided “it was easier to use moral suasion to attempt to convince the O.T.S. to change its rating.”

There are more hearings this week in the Permanent Subcommittee on Investigations, Sen. Carl Levin, Chair. The hearing will be putting former Washington Mutual Executives in the griller.

What I want to know is how a regulator gets part of it's funding from the very businesses they are supposed to regulate? The roasting the WaMu executives show is on Tuesday, the real questions to the OTS and FDIC are on Friday.

Recall the Financial Reform legislation, including the Dodd bill, shuts down the OTS (Office of Thrift Supervision). So does the House bill.