IndyMac is latest credit turmoil casualty By Joanna Chung and Saskia Scholtes in New York Published: July 12 2008 00:44 | Last updated: July 12 2008 01:24 IndyMac Bank on Friday night became the biggest savings – or thrift – bank to fail in decades and the latest victim of the credit crisis as regulators closed down the troubled mortgage lender. The closure came after it was no longer able to meet continued demands by customers for their deposits. Regulators said the bank was in an “unsafe and unsound condition”. Regulators said the California-based bank, with assets of $32bn, is the second largest US financial institution to be closed down, ranking only behind the $40bn Continental Illinois National Bank & Trust Company, which closed in 1984. The Office of Thrift Supervision (OTS), the bank’s main regulator, said ”the immediate cause” of the closing was the deposit run that began and continued following the release of a letter from Charles Schumer, the New York senator, expressing concerns about the bank’s viability. IndyMac was seeking to arrange a capital infusion or find a buyer, but the letter “undermined the public confidence essential for a financial institution and took away the time IndyMac needed to pursue a recovery,” OTS said. In the 11 days after the release of the letter, which was dated June 26, depositors withdrew more than $1.3bn from their accounts, with about $100m withdrawn every day. “This institution failed today due to a liquidity crisis,” John Reich, director of the OTS, said. IndyMac had been in a precarious financial situation caused in part by stress in the residential real estate market, regulators said. But Mr Reich said: ”We’ll never know whether IndyMac would have survived if not for the deposit run. IndyMac was a troubled institution, but the deposit run pushed it over the edge.“ The bank’s operations have been transferred to the Federal Deposit Insurance Corporation (FDIC), which insures deposits in banks and thrift institutions for up to $100,000 per depositor and has been named conservator. It will transfer insured deposits and assets to a successor bank and will open for business on Monday. According to data from the FDIC, resolution of IndyMac is expected to be among the most expensive rescues of its insured institutions, costing an estimated $4bn-$8bn. Mr Schumer said in a statement on Friday night: ”IndyMac’s troubles....were caused by practices that began and persisted over the last several years, not by anything that happened in the last few days.” “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.” IndyMac is the fifth bank to fail this year, compared with three for the whole of 2007 and none in 2005 or 2006. IndyMac specialised in making and selling so-called Alt-A mortgage loans, provided to customers more credit worthy than subprime borrowers but unable to qualify for a prime-rate loan. This week the bank said in a letter to shareholders that it had been unable to raise new capital and would stop taking new loan applications and cut half its workforce. Shares in IndyMac closed in New York on Friday down 9.7 per cent at 28 cents. Copyright The Financial Times Limited 2008
Yup, Alt-A, next thing to go after sub-prime. It'd be wise to spread your savings among several different banks.
I can't believe we are back to putting our money under mattresses. The FDIC insures up to 100 thousand, but even they have their limits.
That sucks. Indymac is one of the best banks to work deals with. Their loss mitigation reps are thoughtful and competent.
If you really had 32bn in gold assets and someone called in a 1 bn note would you really be in trouble? No Banks get away with all kinds of shady book keeping. They book all kind of things as assets and keep on lending.
Yep... Privatize profits, but socialize the losses. OH, and pay the Fanny/Freddie execs unholy amounts of money. What could be more American.
I guess the concept of a run on the bank is unclear to you. Banks don't keep 32B of gold on hand. If banks did that, how would they lend? Banks take short term money (ie, your deposits) and lend it out for longer terms (ie, your car loan, home loan, business loans). If you go and ask for your money, yes they'll have it since they keep a % held back for withdrawal. But if $1B, $3B, etc. is demanded, the banks can't simply go to their borrowers and say, hey pay us back now! No matter how strong a bank is, you can bring it to its knees if everyone tries to withdraw. I can't speak to how good the loans on IndyMac's books are, or their specific position, but I'm sure that Schumacher's concerns didn't help the situation. Ultimately, if the bank has equity, the government won't have to put its own $ out and be able to pay back depositors in full. If the banks assets aren't worth much (ie, lots of bad loans in excess of equity capitalization), then the guys over $100k would start seeing losses on repayment. And then in a worst case scenario, if the bank is just a sham, the government has to put up $ to repay guys up to $100k in deposits. And you don't want to be a shareholder in any of the above scenario (the necessary punishment side of capitalism to keep reckless business behavior in check).
the asset to the bank is a loan, a loan can go bad, a loan can't be spent. edit: after reading the article, it doesn't say how much in assets went bad, the bank has $32BB in assets (loans) it had run against of $1BB in deposits (liabilities) withdrawn.
You just gotta love the free market. Any bets that the Bank Lobbyists will making their rounds Mondays, saying that federal regulations were responsible for this bank's failure. W will probably blame the Democratic Congress. Laissez-faire rocks. Good times.
This is a common misconception and absolutely false. Banks DO NOT get their money from customer deposits and lend out accordingly. They operate from the rule of "9's" dictated by the Fed - for every 1000 dollars deposited, they are allowed to lend out 9 times that amount, and the return deposits are allowed to be stacked, so in essence with a 1000 dollar deposit the bank can create 100K in real debt. Banks CREATE the money when you sign a loan as debt. I suggest anyone interested in where our money comes from to watch this informative movie: http://video.google.com/videoplay?docid=-9050474362583451279 It's truly an eye-opener.
This is kind of the point of the banking system, though. It would be silly to only lend out what you received. Banks couldn't make any money that way and there would be no banks - an economy wouldn't even function in this scenario if money couldn't be created. The 10% reserve is designed to be sufficient in 99.99% of cases - and it is. The only time it's not is when there's a run on a bank.
look at bank balance sheet, banks lend on deposits and they are required by law to keep a certain amount of deposits as reserves, i don't know what the 9s rule is banks are in an all out struggle to get deposits and have been for a while now, that's why you see all these free checking offers edit: this is how banks create money depositor puts 100 in bank, the bank has a liability. keep it simple, it then lends 100 dollars, it now has a 100 asset and 100 liability person who borrowed money buys product, now some company has 100 in its bank account, but depositor at lending bank still has his 100 on account. thats now 200 in money from the initial 100. the film is right that a producing economy creates more money, as well it should. there's no conspiracy
You're 100% correct..I was trying to keep it simple, but yes they leverage the deposits in this way - also how the fed can help control money supply...
banks lend on actual deposits edit: look at this video about the 16 min point, it even says that a banks balance sheet shows more deposits than loans, but it says its misleading but the video doesn't say how its misleading
Chuck Schumer's reckless pessimism and talking down of the situation directly contributed to the run on the bank that led to the failure. No one can say that the incessant drumbeat of negativity by the Democrats isn't taking its toll, after learning about this. When your political survival depends on a bad economy and dead troops in Iraq, you stoop to these types of levels. Chuck Schumer should be censured at a minimum for this selfish act. More of the same from the party of pessimism -- the libs. http://online.wsj.com/article/SB121581435073947103.html?mod=hps_us_whats_news The director of the Office of Thrift Supervision, John Reich, blamed IndyMac's failure on comments made in late June by Sen. Charles Schumer (D., N.Y.), who sent a letter to the regulator raising concerns about the bank's solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a "heart attack."
i thought you neocons were all about accountability, this is ridiculous even for you, the bank was looking for a new buyer before the run, its a public company
