Regulators Seize IndyMac In The Second Largest Bank Failure In U.S. History

Ever hear of IndyMac Bancorp? Well, it’s gone! Federal regulators seized the California bank spawned by Countrywide founder Angelo Mozilowhich, which had giddily doled out mortgages to lenders without requiring proof of income. Rather than blame the second largest bank failure in U.S. history on the subprime meltdown, the charmingly politicized regulators at the FDIC blamed the bank’s demise on Senator Charles Schumer (D-NY). Huh?

The Senator recently criticized the Office of Thrift Services for allowing banks to underwrite cruddy mortgages, and specifically mentioned that IndyMac might be in trouble. Afterwards, the bank’s depositors started a run on the bank, withdrawing up to $100 million per day. According to the director of OTS, a political appointee: “The senator made comments in his letter questioning the viability of the institution. When a member of the United States Senate makes such a statement, it frightens depositors.”

Schumer responded:

If OTS had done its job as regulator and not let IndyMac’s poor and loose lending practices continue, we wouldn’t be where we are today. Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.

Now, now, Senator, man up for your actions. Your persistent questions about the subprime meltdown are obviously what got us into this mess in the first place.

The bank’s failure will cost the FDIC around $10 billion. IndyMac customers, like the woman who pointlessly banged on the bank’s doors pleading, “please, please, I want to take out a portion,” will be able to access their money via ATMs over the weekend, and will have full access by next week. The 10,000 customers who collectively deposited $1 billion above FDIC insurance limits will lose half of their uninsured funds.

The latest bank failure is a reminder that your FDIC insured bank account will always be safe, but only if you keep your deposits within FDIC limits.

Regulators Seize Mortgage Lender [NYT]
IndyMac Bank seized by federal regulators [L.A. Times]
IndyMac Seized by U.S. Regulators; Schumer Blamed for Failure [Bloomberg]
(Photo: The Associated Press)

Comments

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  1. MickeyMoo says:

    narrowly ducked that one – had a CountryWide CD up for renewal – and BankRate.com listed IndyMac as having a much higher interest rate but with the dreaded 1Star rating… WHEW!

  2. madanthony says:

    In general, the FDIC does normally try to keep quiet when a bank is failing. The WSJ had an article a few weeks ago about how they dealt with a small bank failure – to the point that they get hotel rooms an hour away so people don’t know they are in town. They usually want to prevent people from making a run on the bank.

    So while they probably would have failed eventually anyway, publicly mentioning it was probably a bad idea, something the FDIC usually discourages, and sped up it’s collapse.

  3. Eldritch says:

    We’re all so incredibly doomed. This is terrible news. I hope all those people get their money. Stuff like this is what makes me want to take all my money and hide it in my matress…

  4. Stephen Colon says:

    I always thought that the bank sounded too good to be true, judging by the signage on the outside of one of there branches in my area (Whittier, CA), but I’d never researched it.

  5. InThrees says:

    They’re both right.

    Banks don’t keep the full balance of customer deposits available for those customers to withdraw all in one day – they lend some of it other customers, invest it, etc. Then (depending on account details) they pay those depositing customers interest on it.

    The problem comes when they lend it STUPIDLY, invest it STUPIDLY.

    Statistically any one of those depositors can go to the bank and withdraw the full amount. The problems come when ALL the depositors do an end-run on the bank, as witnessed here.

    Banking is every bit as much about consumer confidence as it is about smart fiscal management on the part of the bank, and Senator Schumer did do his part to undermine the former.

    However, the bank apparently had the undermining of the latter well in hand.

  6. PurplePuppy says:

    @Eldritch: You can see these sorts of things coming a long way off. We’re not “doomed”; quite a few banks and Credit Unions are in wonderful financial shape. You can look up yours at [bankrate.com]

    @InThrees: I’m sooo sure it was Schumer’s fault, because sooo many people sit around watching C-SPAN.

    I think more likely it was the news of the public announcement to all there investors (via their company BLOG, no less) that they were immediately ceasing lending and would dilute the stock by selling shares to raise capital.

  7. humphrmi says:

    FDIC putting the blame entirely on Schumer makes me seriously question the competence of the FDIC. Even some commenters here note that it was a bunch of factors, not the least of which the already-in-progress sub-prime lending meltdown, and yes possibly Schumer’s comments, that contributed to IndyMac’s failure. Pinning it all on Schumer indicates to me that FDIC doesn’t understand the fundamentals of the market right now.

  8. Johnyq1982 says:

    Why on earth would anyone blame Schumer for this, sure his comments started a “run on the bank” but they obviously had some merit considering the fact that the bank did go belly up shortly after he predicted it.

  9. Well, I guess I’m part of history now seeing that I have a CD at IndyMac bank. At least I’m under the limit…

    Is our country going to heck in a handbasket or what??

  10. ChuckECheese says:

    If the North Koreans can print U.S. currency, why can’t IndyMac?

  11. masterthundar says:

    @humphrmi: Overall, though, the FDIC is handling this very well. I mean, it’s offering back half of all deposits over the insured amounts; that’s pretty good. They may be incorrectly placing blame, but that doesn’t change how well they have handled the problem. At least they didn’t pull a FEMA here.

  12. MickeyMoo says:

    @Serenefengshui: handbasket = yes

  13. @humphrmi:
    @Johnyq1982:
    I don’t think they were putting the blame entirely on Schumer, but it’s obvious that his comments had some marginal impact on peoples’ decisions to withdraw their funds. I thought InThrees put it very well, in his comment above. What’s important is that Schumer did not have to put out a public press release, which contributed to a run on the bank… if he did not, the bank may have had a little bit of breathing room to get their balance sheet in order, possibly preventing their demise, and having taxpayers (i.e. us) on the hook for billions of dollars. Schumer was just trying to play populist and get favorable attention (notwithstanding he’s right about the bank’s lending practice, and he hastened IndyMac’s demise.

  14. SarcasticDwarf says:

    @PeteCarrollInACage: I guess the question becomes how much did he contribute to it? Unless he contributed to it in any *significant* way then putting any blame on him is ridiculous. There has been *no* indication at this point that the threshold was met.

  15. JustinAche says:

    We’re not in a depression, no /sarcasm

  16. Trai_Dep says:

    We really need a law that says all executive bonuses and stock option profits for the last five years are retroactively seized and placed in a restitution fund whenever a company – especially one this size that requires public monies to be made whole – goes bankrupt.
    The LA Times story said that the bulk of IndyMac’s “product” the past several years were the so-called Liar’s Loans. In other words, stupidity so blatant that it’s criminal.

  17. Trai_Dep says:

    @humphrmi: The LA Times article also says that the FDIC guy making the claim against Schumer was a political appointee – ie, a Bushie trying to score political points instead of doing the job he was hired for.

  18. Angryrider says:

    @Trai_Dep: Expected. Most Bush appointees do the opposite of what they’re supposed to do. They supposedly help the people, when in fact they’re screwing them over. EPA, FDIC, whatever.

    I hope Schumer becomes the Banhammer of banks.

  19. dirtleg says:

    Paraphrasing our fearless leader “You’re doing a heck of a job Mozi’.”

    More Countywide droppings for taxpayers to clean up.

  20. rateoforange says:

    It’s clear that Schumer’s comments contributed to a run on the bank, making a bad situation immeasurably worse.

    The Consumerist is just making excuses for him because they are (by their nature) in the tank with the democratic party.

  21. Karl says:

    The 10,000 customers who collectively deposited $1 billion above FDIC insurance limits will lose half of their uninsured funds.

    From what I understand, this isn’t quite true. They will receive AT LEAST half of their uninsured funds, and will probably get more once the FDIC sorts things out.

  22. laserjobs says:

    @Karl: It will be 50% unless the FDIC can make money on the sale of IndyMac. Ha ha, like that is going to happen.

  23. secretoftheeast says:

    My mother has several accounts at Indymac. I looked into the FDIC insurance and what would happen to depositors with accounts in excess of the insured amount. They aren’t going to “lose” half. You need to submit a claim, and FDIC will give you half of the amount up front, and once they get everything straightened out, they will return what they can, in a particular order (depositors first).

    Fortunately, my mother’s stuff is insured.

    There’s a FAQ at http://www.indymac.com

  24. stanhubrio says:

    “Now, now, Senator, man up for your actions. Your persistent questions about the subprime meltdown are obviously what got us into this mess in the first place.”

    Friggin’ hilarious.

  25. Landru says:

    Regarding that loud-mouthed Senator, I’ll bet all those people who mangaged to get their money out are relieved, even if they get their money back eventually (sorry @Serenefengshui: )

    @rateoforange: and @petrarch1610: Just because someone didn’t drink the kool-aid doesn’t mean they are Democrats.

  26. humphrmi says:

    @PeteCarrollInACage: I had to go back and read John Reich’s quote before I answered. Given the vague wording, I have to agree – he didn’t come right out and say “This is all Charles Schumer’s fault.” His exact words: “This institution failed today due to a liquidity crisis. Although this institution was already in distress, I am troubled by any interference in the regulatory process.” Feh, however you want to read it, I guess.

    @rateoforange: I’m a Republican. And I’m sick and tired of this administration using political appointees to try to win political battles rather than solving problems. Other fine examples? Firing U.S. Attorneys who didn’t investigate political rivals. Outing a career intelligence officer who’s husband disagreed with the intelligence review of Iraq. The list goes on and on. I’m quite sure that somebody in the administration tapped on John Reich’s shoulder and said “Psst, make it sound this way…”

  27. SacraBos says:

    @Johnyq1982: A “run on the bank” for a health bank will ruin it. They don’t have everyones money just sitting there waiting for them to return. Now, IndyMac may (even a small chance) have been able to recover, but in the face of a run like that.

  28. legwork says:

    Public servants know better than to publicize the name of a distressed bank. That stuff stays behind closed doors. It’s been mentioned repeatedly, no bank has liquid assets available to cover this sort of situation. Sure they were fragile, sure they probably would have failed, but it could have been a softer landing. By yelling “fire” he did more harm than good to depositors and everyone who’ll have to foot the bill.

  29. howie_in_az says:

    OK so the FDIC insures deposits up to $100,000, sometimes more. So if one had, say, $500,000, would they have to deposit it in 5 different accounts as insurance? Is there a safer way of handling $100k+ accounts without having to remember twenty different banks?

  30. bohemian says:

    If I had over 100,000 it would be in five separate banks. I have a limited level of trust in the entire system. There has been so much blatantly criminal corrupt activity going on in supposedly reputable financial institutions you really can’t trust any of them.

    As for Consumerist being “democratic”. In the last 8 years of the crap the Bush admin has done to this country and their practice of putting people in jobs to undermine various agencies, it has really changed my outlook. I went from a fairly right leaning independent to a registered Democratic Party card holder. I even donated an volunteered for a couple of Democratic candidates. Something the previous 20 years of being a registered voter could not do. Mission Accomplished.

  31. Imaginary_Friend says:

    Helpful links:

    Top 10 FDIC Misconceptions
    [www.fdic.gov]

    Electronic Deposit Insurance Estimator – EDIE is an interactive application that can help you learn about deposit insurance. It allows you to calculate the insurance coverage of your accounts at each FDIC-insured institution. (Turn javascript on.)
    [www4.fdic.gov]

  32. smarty says:

    @howie_in_az: Talk to your banker. Banks want much money, and they can offer additional insurance for your deposits over $100k through Lloyd’s or other big insurance outfits. Of course, I think it’s only available for the really big multi-millionaires, but there’s no harm in checking with your bank, and other banks.

  33. chilled says:

    Schumer is a big mouth piece of crap.He was trying to draw attention to himself with that letter.I hope he can be sued..we’ve got enough economic problems without political hacks getting involved..

  34. azntg says:

    In light of this bank failure, I could only come up with one conclusion: the FDIC has to raise the deposit insurance limit.

    Sure, people should know better than to keep more than $100,000 in deposit accounts at an insured bank, but it is 2008 and $100k isn’t that much compared to 1980 when it was raised to this level (from $40,000)

  35. TACP says:

    They gave loans to people who couldn’t prove how much they made and went bankrupt. DUH.

    Undocumented workers in California? Unpossible!

  36. johnva says:

    @bohemian: I did pretty much the same thing. I was a libertarian with some right-leaning tendencies, and now I’m a solid Democrat (for the time being) because of people like George W. Bush, Tom Delay, and Dick Cheney. I just feel that the most important thing right now is to get those people and everyone associated with them out of power.

    @azntg: While I do agree with you that the limits should be raised, it should be noted that in practice most people these days don’t lose all their money that is above the $100,000 FDIC limit when a bank fails. The FDIC most often covers many or all of the losses, after they sell the bank’s assets, especially when we’re talking about the failure of a smaller bank. Now obviously doing that is a bit more costly in the case of a bank like IndyMac.

  37. Trai_Dep says:

    @azntg: Then they can spread their money across different institutions. That’s better for the system, anyway.

  38. @legwork: Because quietly propping up banks that were inevitably approaching insolvency, to help them … well, what exactly? … rather than calling out the weak institutions for what they were worked so well for the Japanese in the 90s.

    Sorry, I’m all for soft landings, but the market has to shed several trillion (!) in overinflated liquidity before it reaches equilibrium (defined by a housing market based on sustainable lending practices in this case) again. The sooner that happens, the sooner we can get back to the important national business of bombing the shit out of our neighbors or whatever. I’d rather have a couple years of crushing losses – and get the pain over with quickly – than a couple decades of anemic growth and slowly bleeding capital.

    Personally, I’d rather see Paulson and Bernanke give a press conference every day naming the lenders that are on the brink, and watch them get crushed like bugs.

  39. @TACP: well done, sir. How you managed to pin the morgage meltdown on immigrants escapes me, but it’s quite a feat. Too bad we don’t have laws against that sort of thing anymore; though, those laws were targeted against the Chinese anyway, which we’d never pull off again since we’re totally their bitches now.

  40. joebobfunguy says:

    A bank could be in all right shape, and if someone causes a run on it, it would collapse. I think the Senator did cause a run on the bank, but his job is to protect the consumer and the smart choice was to get your money out.

  41. Legal_Eagle_In_Training says:

    The problem started for IndyMac when they realized that they were in SERIOUS trouble and had to take drastic action if they were going to try and save the bank. So they decided to cut around 3,800 and immediately stop approval of any new loans whatsoever. That caused investors to sound the ‘abandon ship’ call. The Senator’s comments just put IndyMac on the uber fast track to bankruptcy.

  42. Gordon2 says:

    The most dangerous place be in America:

    Between Chuck Schumer and a TV camera.

    Not an original thought; others have said it before.

  43. Gordon2 says:

    @executor Elassus: “Personally, I’d rather see Paulson and Bernanke give a press conference every day naming the lenders that are on the brink, and watch them get crushed like bugs.”

    Oh sure, why not? After all, it’s not YOUR money that’s at risk. Why not create a circus that requires billions in government bailout, as well as screwing anyone who has deposits over the limit?

    There’s a reason these things are handled quietly. Usually a buyout can be arranged that minimizes taxpayer exposure and protects depositors. But no, you’d rather get a snit on.

  44. godlyfrog says:

    So my question is, are the American people going to get their $10 billion back? Someone made money off of this shenanigans, and they should be held accountable. We should probably start from the top of that company and work our way down. Figure out when this decision was made, then fine the executives involved the exact amount of money they made after making the decision. Make this the standard when the government has to bail out a company, and maybe those CEOs won’t be so easy to forget their morals.

  45. aliencam says:

    It was all the SISA loans that did this. Pretty much the worst idea ever… who’s idea was that. ugh.

  46. avantartist says:

    we should have more political leaders like Senator Charles Schumer that are willing to draw attention to important issues.

  47. @Gordon2: Like I said, handling it quietly didn’t work so well for Japan in the 90s; to the contrary, it put their financial markets on a slow bleed that kept their economy week for almost two decades. They’ve only fairly recently started crawling out of that hole.

    The US housing market right now has trillions in overvalued equity, and won’t reach a state of decent growth again until that surplus gets shed. This is different from just a few otherwise-healthy banks, that just need a little propping up from the Fed to make it through rough times. I don’t think it is wise policy at all to follow the alternative course, which would be exposing the US taxpayers to trillions in extra debt with no collateral.

    So sure, bail ‘em out if you must, but if so, then nationalize them. I’m not a big fan of subsidizing stupid decisions without getting something in return.

  48. bobpence says:

    Just heard on the radio that 400 people were waiting outside one Indymac branch this morning. These are among the dumbest people on the planet and, if any of them asked you for time off from work to do this, should immediately go to the top of the layoff list, or being fired outright for stupidity.

    Theirs are the safest deposits on the planet right now, yet one woman expects to take out her retirement funds and keep them at home. She gave her name and said she drove from Arizona(!), making her home a prime target for burglers. Of course she’ll leave not with cash, but with a check for the amount she invested which, regardless of her age, will be subject to much taxation, probably at a higher rate than she normally pays because she is taking it all at once, and depending on her age perhaps with an outright penalty. Duh.