Monday, July 14, 2008

Indymac Line

I was able to make a short detour to Pasadena and check out the scene over at Indymac. There were a ton of local and national media on-site doing interviews; Pasadena PD were on hand for crowd and traffic control. A local AM radio news channel dedicated a whole hour to the story, including numerous interviews with people who lost tens of thousands of dollars.

Personally, I think this could be the start of something a lot bigger. One interesting aspect of this story (discussed by Calculated Risk last night) is the very large average deposit size of these Indymac accounts. CR pegs the average at around $90,000 per. And as I discussed earlier, the average loss is around $50,000 for accounts over the FDIC limit.

I will go out on a limb and argue that this so-called "run on the bank" was caused by people simply acting rationally to reduce their deposits below the $100,000 FDIC limit, and that Indymac was relying on these uninsured deposits to stay alive.

Going by the media presence outside Indymac, this will be top national news for quite a while. How many people with deposits over $100,000 will be making rational withdrawals over the next few days? How many children and grandchildren will be calling mom and grandma tonight making sure the savings account is safe?

How many other banks out there are relying on uninsured deposits to stay alive? I think we're about to find out.


10 comments :

Sippn said...

Acting rationally would have been prior to last week.

There was 20 months of heavy trading while the stock declined 50% every few months.

The business model it used was failing publicly at other lenders for the past 12 months.

NOPE. Plenty of notice given. Thats the risk for those extra few % of return those CD investors traded for.

Perfect Storm said...

I agree with exactly what sippin said.

Sippn said...

Max, I realize why I don't have a blog....So some blow hard like me doesn't have to disagree with everything I say!

Keep up the great work.

There's lots more fun things to do down there than that.

Max said...

Acting rationally would have been prior to last week.

I think we agree with each other. Any act of withdrawal to get deposits below the FDIC limit is a purely rational decision.

I'm trying (and failing) to make a distinction between a so-called "panic" (which is what the FDIC is supposed to prevent) and what happened to Indymac. WTF is the OTS doing when they allow a bank to keep soliciting uninsured deposits when they know the bank wouldn't exist without them?

This smacks of the same logic that people use to slam the subprime borrower. Yeah, these people should have understood what the FDIC limits were and what they meant. Yeah, they got slightly better returns on their deposits. But we're not taking about people who lied about their income, or greedy house flippers. These are people who saved their whole lives for their money. We should expect people like this to act rationally in the next few days and get their deposits below $100,000.

We've been trained to trust government agencies, and we've been lulled by years of outsized ROI and low risk. That state of affairs is now over.

Max said...

So some blow hard like me doesn't have to disagree with everything I say!

Don't worry about it; you guys are hard on me sometimes, but it keeps me honest. Seriously, I welcome the criticism. Anyone writing comments on my blog at 4 in the morning can say whatever they want. :)

Mike said...

I have close to FDIC limit in CD's at one of the banks that are in trouble right now.

I was bit worried about it and called the bank to see about my option of terminating the CD's early.

The lady at the bank said they were getting these types of calls and people asking about safety of their money all day. Did not make me very assured.

However, I am keeping my money in there as if this bank goes under. I am sure FDIC will pay out. And there is that $1,000 early withdrawl penalty.

Max said...

The lady at the bank said they were getting these types of calls and people asking about safety of their money all day. Did not make me very assured.

Today show and the Early show had "experts" on this morning, calmly recommending that people reduce their deposits to below the FDIC limit.

Mish calculated that there are over $2 trillion in uninsured deposts in US banks.

Patient Renter said...

Indymac was relying on these uninsured deposits to stay alive.

It's a good hypothesis. I wonder if there's any way to find out if you're right?

I am keeping my money in there as if this bank goes under. I am sure FDIC will pay out.

You might want to do some reading about how the FDIC goes about paying out. From what I've read, it can take years. If you don't need the money anytime soon though, I guess it wouldn't matter, but I'd think you'd at least want to have your money back ASAP so you could make some interest on it.

Sippn said...

Yea, not trusting 'em anymore, including Wall Street.

Starting to understand Bud Fox's dad and a lot of other senior citizens.

Darth Toll said...

Mike, the FDIC has roughly $50B in reserves and a possible $80B in credit line with the Treasury. I say possible because we don't know if the Treasury would be willing/able to support that without substantial foreign help (continuing to buy US paper at absurd low interest rates.) Now it looks as if the FDIC is looking at around $200B in losses over the next couple of years so it is virtually certain that the FDIC will go under or will face a crises like the GSE's where it may go under. Therefore, if you are below limit with some institutions, will it matter if the bank goes under?

Best to look at the Texas ratio and know which bank you are doing business with.

http://wallstreetexaminer.com/blogs/winter/?p=1770