Late Thursday, the Treasury Department's Office of Inspector General released a devastating audit (PDF) on the failure of IndyMac Bank.

For a decade, the California-based S&L gorged itself on nontraditional mortgage loans before collapsing last July. In 2006 alone it originated $90 billion in mortgages. The cost of IndyMac's failure to the FDIC's deposit fund is estimated to be about $10.7 billion.

The audit focuses on the failures of supervision of IndyMac's primary regulator, the Office of Thrift Supervision. As we reported earlier, the OTS continued to give strong ratings to the bank despite lax lending standards and inflated appraisal.

The audit reads like a case study in what happens when a regulator becomes too close to the institution it regulates. "OTS viewed growth and profitability as evidence that IndyMac management was capable," it concludes.

At about the same time the IG released the audit, the OTS put out a news release announcing new initiatives "to enhance supervision of large thrifts." A request for more detail from the OTS went unanswered.

Perhaps not coincidently, the director of the OTS, John Reich, is set to retire tomorrow.

A story on the audit by the Los Angeles Times is here.