Friday, July 11, 2008

Goodbye Indymac, Goodbye $500 Million

Indymac Bank officially failed a few minutes ago. The FDIC has taken it over, and will begin liquidating assets on Monday. The failure will cost the FDIC trust fund between $4 and $8 Billion. Sadly, it looks like many depositors will lose a lot of money as well:

At the time of closing, IndyMac Bank, F.S.B. had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors. The FDIC will begin contacting customers with uninsured deposits to arrange an appointment with an FDIC claims agent by Monday. Customers can contact the FDIC for an appointment using the toll-free number above. The FDIC will pay uninsured depositors an advance dividend equal to 50 percent of the uninsured amount.
That's an average of $50,000 per uninsured depositor. Keep it under $100,000 people!


The Office of Thrift Supervision (OTS) has blamed the failure of IndyMac on Chuck Schumer's letter at the end of June which caused a run on the bank. The OTC press release doesn't pull any punches:
The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors’ demands in the normal course of business and is therefore in an unsafe and unsound condition. The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.

“This institution failed today due to a liquidity crisis,” OTS Director John Reich said. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”

IndyMac is the largest OTS-regulated thrift ever to fail and, according to FDIC data, the second largest financial institution to close in U.S. history.

IndyMac had been in a precarious financial situation that was caused, in part, by an unprecedented stress in the residential real estate market, combined with the evaporation of the non-agency secondary mortgage market in August of 2007. The OTS had significant concerns with the bank’s funding strategy, had directed appropriate changes and was finalizing a new set of enforcement actions to address its numerous problems.

As a result of an OTS examination that began in January 2008, the OTS deemed IndyMac to be in troubled condition. An overwhelming majority of problem institutions are able to successfully modify their operations and business plans, work closely with their regulator and eventually return to a healthy condition.

IndyMac had reacted to market conditions and OTS concerns in November 2007 by changing its operations and business plan to build a foundation for recovery. IndyMac was actively seeking to arrange a significant capital infusion or find a buyer. The recent release of the senator’s letter undermined the public confidence essential for a financial institution and took away the time IndyMac needed to pursue a recovery.

With no viable alternatives and insufficient liquidity, IndyMac was placed into receivership. The OTS has appointed the FDIC as conservator of the newly chartered successor institution and will transfer most of the assets and liabilities of IndyMac to the new thrift.
**Update 2**

Chucky responds:
"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," said Schumer, a Democrat from New York. "OTS should start doing its job to prevent future IndyMacs."


patient renter said...

Any idea what the FDIC's total reserves are?

"This institution failed today due to a liquidity crisis," OTS Director John Reich said.

The idea that a "run" caused by Schumer caused Indymac to fail is just stupid. Excessive leverage, under-capitalization and terrible management (normal for Wall Street?) caused it to fail. All the liquidity in the world can't fix those problems.

... said...

Hey Chuck, any other stocks I should short?

PR - if the market worked on fundamentals, we wouldn't be watching it minute by minute. There's a lot of emotion and speculation.

It took me a long time to grasp that the concept of "technical" analysis was nothing more than watching graphs and predicting the emotional changes.

Wonder how much of the 1.3 bill that was pull out was protected anyway?

Max said...

Wonder how much of the 1.3 bill that was pull out was protected anyway?

That's exactly right. I bet a large fraction of that $1.3 bil was over the FDIC limit anyway. A stiff breeze could have knocked it over.

Second largest bank failure in US history by dollar amount. Interesting times.

patient renter said...

PR - if the market worked on fundamentals, we wouldn't be watching it minute by minute. There's a lot of emotion and speculation.

Yea, but nowadays liquidity isn't a very good excuse when there are more Fed lending facilities than one can count.

Coincidentally, Barry Ritzholtz just earlier today addressed the idea of companies being brought down by rumors:

Why is it that all these rumor-mongerers and shorts are only bringing some firms to their knees? How come they always seem to be the over-leveraged, under-capitalized, unhedged, most poorly-managed companies? Isn't it funny that all of the firms that are the subject of such rumors have so many similar characteristics? Bear and Lehman and Fannie Mae and Freddie Mac and AIG and . . . the list goes on and on.

Anonymous said...

PR, supposedly around $50B minus the 8 or 10 that this bailout will cost them. They also have a credit line with the Treasury of another $80B. Like the GSE's, is FDIC too critical to let fail?

Pretty soon the Fed and government will have to make some hard choices as the financial "crises" may be too big to bail.

patient renter said...
This comment has been removed by the author.
patient renter said...

Like the GSE's, is FDIC too critical to let fail?

Banks, private and public insurers, investment firms, quasi-government lenders, the world bank, foreign nations (little known fact that the Fed, on its own self-assumed authority, can give loans which are never repaid directly to foreign nations)... at the end of the line for all of this crap is the lowly taxpayer and an incomprehensible amount of debt, in the most indebted nation in the world. You have to wonder how it all can go on?

Max said...

You have to wonder how long it can go on.

There has to be triage at some point. The Fed won't choose to print money Zimbabwe style, since that will be the end of the Fed. This debt has to be destroyed; losses will be taken.

Welcome to deflation.

Anonymous said...

This seriously makes me want to purchase 100 gold eagles and stay the hell away from banks.

... said...

"hey, its not like any lives were lost..." Senator Chuck

Anonymous said...

I'm not sorry to see another insolvent bank go, and am happy that a politician actually had the stones to warn the public about it before it happened (wanna bet that this was done to keep OTS on a short leash?). The whole home equity run-up was madness - I was going for a HELOC about two years ago, and the loan officer was so hot to close the deal he called me to meet him at a restaurant at 8pm to sign the papers. I stopped everything right there and paid the house off, and have not had the slightest desire to take out a loan for any reason since. I smelled something bad in the air at that time, and now finally, the bill lay due. Plenty more failures are coming, and I make sure that I am not keeping more funds than necessary in my bank. I'll return faith in the banking system when the regulating agencies do their jobs and we have regulations with very sharp teeth. Triage is necessary, but not enough. When the patient gets its health back, it's gonna be put on a strict diet. No more socializing risk and privatizing reward.