WASHINGTON — The merger of the Office of the Comptroller of the Currency and Office of Thrift Supervision is shaping up to be the match made in regulatory hell.

Three months after the regulatory reform bill ordered the OTS' elimination over the next year, efforts to bring the agency into the OCC fold have been plagued with bitterness, communication problems, unease on job placement and rampant conflicts. The latter range from the important to inane, covering everything from job titles to claims of unreturned phone calls to bickering over the placement of booths at an upcoming industry conference.

The fights go all the way to the top, with several sources suggesting acting OTS Director John Bowman is openly hostile to the merger and accusing him of being uncooperative.

"It's a little like the Middle East — the feud goes back so far it's hard to determine who threw the first stone." said Kip Weissman, a partner at Luse Gorman. "Both sides need to grow up a little bit and stop the personal attacks — there are plenty of difficult technical issues which need to be resolved."

In interviews with current and former officials from both agencies, the primary conflict stems from different views of the merger. OTS officials see the agencies' combination as a merger of equals and are frustrated at what they view as high-handed tactics by OCC officials who do not share that view. OCC officials, meanwhile, are frustrated by what they claim is a lack of cooperation from the OTS in efforts to coordinate activities of the two agencies and set a consistent agenda and tone.

The Dodd-Frank law abolishes the OTS but gives it time to wind down its operations and merge its functions into the OCC and Federal Reserve Board. As of July 21, 2011, the agency will formally transfer its authority over thrift holding companies to the Fed while the OCC will then supervise all federal thrifts. The OTS officially dissolves 90 days later.

While the tensions between the OTS and OCC are long-standing, the merger appears to have exacerbated them rather than putting them to rest. Although most agency officials did not want to publicly talk about the problems, it is no secret to outside industry observers, with several saying they understand the OTS is going into the merger "kicking and screaming."

"I've heard that the transition and the merger is not going very smoothly, that there is resistance on the part of the OTS to merging them into the OCC," said Camden Fine, president and chief executive of the Independent Community Bankers of America. "Things are not going swimmingly."

He said OTS officials resent any implication the agency is being eliminated because it did a poor job. "They probably feel they are being made the scapegoats," he said.

The OCC has been trying to coordinate functions of the two agencies to ensure the transition is as smooth as possible for thrifts, a move that many in the OTS see as essentially usurping their role.

Even a simple decision about where to place booths at an upcoming American Bankers Association conference has caused friction. The OCC wanted the two agencies to have booths side by side in order to provide a united front to attendees, but the OTS fought to place its booth far away from the OCC. OTS officials were worried that thrifts would not feel comfortable expressing concerns about the upcoming merger.

"There is a lot of fear on both sides, uncertainty," said Diane Casey-Landry, senior executive vice president and chief operating officer of the ABA. "The OCC folks are uncertain what the OTS folks are doing and the OTS folks are uncertain what the OCC is doing. I think they are really trying, but there is a natural tension that comes with mergers."

The most public sign of strife came in August, when the OTS sent a letter to the Small Savers Child Development Center, a day care provider that operates rent-free in the OTS building, saying it would have to shut down in a year and citing uncertainty over what the OCC planned to do with the building. The letter sent parents into a panic and sparked immediate lobbying on the issue.

But the OTS had not warned the OCC it was sending the letter, which quickly became public and the subject of media attention. In response, the acting comptroller, John Walsh, wrote a letter to the day care center on Sept. 17 notifying them the agency was prepared to keep Small Savers open. His letter made it clear, however, that the OTS had not coordinated with him. "We are very early in the transition process and this is an issue that has only recently come to our attention," Walsh wrote.

Sources at both sides accuse the other agency of not returning phone calls. Several blame the strained atmosphere on the top-level management of the OTS, particularly Bowman, who has reportedly been very vocal with staff about his problems with the merger. But William Ruberry, an OTS spokesman, said Bowman is simply trying to keep employees informed on the process.

"Acting Director Bowman and other OTS leaders are working very hard to keep OTS employees informed about the transition and I think the overwhelming majority of OTS employees appreciate these efforts," Ruberry said. "Employees understandably have a certain amount of anxiety because, at this early stage of the process, there are more questions than answers about important issues, such as where OTS employees will be working a year from now, what their specific responsibilities will be, who their supervisors will be and how they will fit into their new work environments. Change of this magnitude is not easy."

The OCC, meanwhile, said it has been reaching out to the OTS to smooth employees' anxiety. Officials recently invited OTS staff to an ice cream social for Walsh when he was named acting comptroller. "It's not easy to combine two agencies," said OCC spokesman Bob Garsson. "There is bound to be a certain amount of disruption, and we are sensitive to that, and we are doing everything we can to minimize the disruption. We are working through issues as they arise. We're looking forward to welcoming OTS employees into the OCC, and I honestly believe that they'll thrive at the OCC."

The OCC is also trying to allay the concerns of thrifts, many of which fear the OCC will take a harsher view in examinations. In a Sept. 24 letter, Walsh said the OCC has already started outreach to thrifts through trade groups and said the two agencies will sponsor a number of informational sessions across the country in early 2011. "Our early discussions have shown us that many thrifts are unfamiliar with the OCC," Walsh wrote in the letter to thrifts. "What many people do not realize is that the overwhelming majority of the banks we supervise are community institutions and that nearly three-quarters of our examiners are devoted to community bank supervision."

But sources said Bowman viewed that letter as a step too far, raising objections that the OCC was moving preemptively to talk directly with thrifts.

One of the most contentious issues is placement of OTS staff in the new OCC structure. The regulatory reform law protects OTS employees for 30 months after the transfer date for employees going to the OCC or Federal Deposit Insurance Corp. and two years for employees going to the Consumer Financial Protection Bureau. (The Fed does not have to take any OTS employees.)

Although the law says OTS employees must be placed at the OCC or FDIC with the "same status and tenure as the transferred employee," which is trickier than it sounds as it is unclear which OCC jobs are of the same status as that of the OTS. For example, the OTS has many more management positions than the OCC, with 112 managers who work outside Washington in regional offices. The OCC does not have nearly as many comparable positions.

The regional offices are also problematic. The OTS regional offices are in Dallas, Chicago, Atlanta and Jersey City while the OCC regional offices are in Dallas, Chicago, New York and Denver. The OCC has not yet made a final decision how it will structure the regional offices under the new OCC, but the Atlanta office is seen by many as likely to be eliminated.

The OTS has 150 employees who work in the Southeast region, 52 of whom work directly in the Atlanta regional office. Employees there are anxious about whether they may be forced to relocate. Several sources said how the OCC handles the situation could improve or worsen the relationship of the two agencies. "There are a large number of questions our employees have about what their jobs are going to be in the future," the OTS' Ruberry said. "It's the same thing you would have if your job was moving. What's my job going to be? Where am I going to work? Are my working conditions going to be the same?"

Pat Doyle, a lawyer at Arnold and Porter, said it's no surprise the merger is going so slowly.

"Anybody who thought it was going to be easy hasn't been around the regulatory agencies very long," he said. "I think it's going to take a long time. There will be slips and slides about."

Several others said many in the OTS are having trouble grasping that the agency will finally be eliminated. Since its creation in 1989, the OTS has been dogged by questions about if and when it would be eliminated.

"The entire OTS believed, and they were right based on history, that the OTS had nine lives and it was really hard for them to accept when the legislation passed that after all of these years, the OTS was going away," Weissman said. OTS staffers' feelings are "a reflection of a long trend where the OTS is very sensitive to any suggestion that they are a less effective or knowledgeable agency than the OCC. There has always been a big-sister/little-sister rivalry. It's reflected more than ever probably because events are forcing them together."

Casey-Landry said the merger will ultimately depend on whether the two sides can keep the lines of communication open. "They are going to need to know each other and trust each other and to do that they need to keep the communications line open," she said. "However, I don't think the tension is going to go away."

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