'People Should Not Worry' [Uh-Oh...]

There are some things you can count on in this world. When a politician says he is "not a crook," you can expect the lawyers will soon come calling. When a policymaker says the "fundamentals are sound," you can be sure that conditions are deteriorating rapidly. And when a regulator says "people should not worry," like FDIC Chairman Sheila Bair did on a conference call following the the fifth U.S. bank failure this year, you know you should be taking a long and hard look at where you keep your money. In "Crisis Deepens as Big Bank Fails," the Wall Street Journal details the latest development in the continuing economic unraveling.

IndyMac Seized In Largest Bust In Two Decades

IndyMac Bank, a prolific mortgage specialist that helped fuel the housing boom, was seized Friday by federal regulators, in the third-largest bank failure in U.S. history.

IndyMac is the biggest mortgage lender to go under since a fall in housing prices and surge in defaults began rippling through the economy last year -- and it likely won't be the last. Banking regulators are bracing for a slew of failures over the next year as analysts say housing prices have yet to bottom out.

The collapse is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC's $53 billion deposit-insurance fund.

The Pasadena, Calif., thrift was one of the largest savings and loans in the country, with about $32 billion in assets. It now joins an infamous list of collapsed banks, topped by Continental Illinois National Bank & Trust Co., which failed in 1984 with $40 billion of assets. The second-largest failure was American Savings & Loan Association of Stockton, Calif., in 1988.

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."

"Would the institution have failed without the deposit run?" Mr. Reich asked reporters. "We'll never know the answer to that question."

Mr. Schumer quickly fired back.

"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," Sen. Schumer said. "Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs."

IndyMac had been troubled for months, and investors were concerned about its possible downfall well before Sen. Schumer's comments. It specialized in Alt-A loans, a type of mortgage that can often be offered to borrowers who don't fully document their incomes or assets. The company sold most of the loans it originated, but continued to hold some on its books. As defaults piled up, IndyMac's finances deteriorated.

The bank will be run by the FDIC and reopen Monday. The FDIC typically insures up to $100,000 per depositor. IndyMac had roughly $19 billion of deposits. Nearly $1 billion of those deposits were uninsured, affecting about 10,000 people, the FDIC said.

IndyMac's arc -- rapid growth, followed by an even more rapid descent -- is a microcosm of the mortgage industry. It boomed in the first part of this decade, as investors were willing to fund loans on ever-looser terms, then hit hard times when the housing market began to turn down in late 2006.

Small mortgage lenders started going under quickly, with the number of failures climbing into the hundreds. Now the fallout has spread world-wide, bringing down some of America's largest financial institutions. Bear Stearns Cos., which suffered losses on mortgage-related investments, underwent a meltdown in March and had to be rescued by J.P. Morgan Chase & Co.

Countrywide Financial Corp., at one time the nation's largest mortgage lender, saw its stock price plunge this year and was forced to sell itself to Bank of America Corp. at a firesale price.

IndyMac, in a last-ditch effort to fend off collapse after it failed to raise fresh capital, said this past week it was firing more than half its work force and closing most of its lending operations. While its shares had been tumbling since early 2007, the move was nonetheless jarring for a company that ranked as the ninth-largest U.S. mortgage lender last year in terms of loan volume, according to trade publication Inside Mortgage Finance.

IndyMac is one of the few federally insured banks to fail in recent years. Banking regulators are bulking up their staff of bank examiners and taking a tough approach toward banks that are seen as risky.

Mr. Reich, the thrift regulator, noted that the IndyMac case had some "unique" features, including the involvement of Sen. Schumer and the rapid fall in its deposits. Officials said most of the recent withdrawals came from depositors at branches, rather than those making deposits at IndyMac's online bank.

IndyMac was set up by Countrywide in 1985, but the two companies severed ties in 1997 and became direct competitors. The company's name stands for Independent National Mortgage. It was created to specialize in jumbo mortgages -- those that are too big to be sold to government-backed Fannie Mae and Freddie Mac. In 1997, under the direction of Chief Executive Michael Perry, a protege of Countrywide chief Angelo Mozilo, IndyMac set off on its own.

The company grew quickly, pioneering the issuance of so-called Alt-A mortgages to people with blemished credit histories. The loans have gained notoriety as an example of the type of lax lending that came to characterize much of the mortgage industry.

Early last year, Mr. Perry remained optimistic about IndyMac's future, insisting that the company had the resources to remain independent. At the time, IndyMac's stock was trading for about $45 a share.

But the combination of the frozen credit markets and mounting defaults on IndyMac loans steadily sapped investor confidence in the company. In February, IndyMac reported the first annual loss in its 23-year history. By this week, its shares, which ended last year at less than $7 each, were trading for 28 cents apiece.

The company was desperate for more capital but couldn't find investors willing to put fresh funds into what looked like a crippled institution.

The failure could be felt across the entire banking industry, as the FDIC will likely have to raise insurance assessments for all banks to build up government reserves. "It takes a big chunk out of the FDIC insurance fund," said Chip MacDonald, a banking lawyer at law firm Jones Day. He said that if the FDIC hikes insurance fees, that will add to already-intense pressure on bank profits.

The OTS and FDIC didn't secure any outside firm to acquire the bank's assets. The FDIC will temporarily run the bank through a new bank it has created, called IndyMac Federal Bank, FSB.

Comments

[Fu]

Weak dollar sends Vatican into the red
http://www.liveleak.com/view?i=d21_1215884812

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http://www.bloomberg.com/apps/news?pid=20601087&sid=a_msl9XKzhkE&refer=home

Church Group Prays For Lower Gas Prices
http://www.liveleak.com/view?i=bce_1215886326

[Groty]

I just can't imagine why Schumer felt compelled to write that letter. Just like I can't imagine why Bill Poole felt it necessary to publicly express his views about Fannie and Freddie's insolvency.

Our leaders seem to be doing their best to expedite the collapse.

[Truesincerity]

It seems people tend to get angry and hate the person who shines the light on wicked ways. They get so angry that someone told the truth, they rather pretend that the king has clothes on.

[dukeb]

Schumer can probably be credited with saving several depositors their butts. The OTC/FDIC are prohibited from any signaling prior to a bank close/sale/takeover. Further, if you go to the FDIC site and look at the IndyMac FAQs, you might learn something new. If your combined balances are over $100k, even if titled (Joint, Individual, Trust In Funds, etc.) to get you FDIC coverage beyond that, it seems that you will come under extra scrutiny by an FDIC examiner and will need to submit forms attesting to the different types of titling before you're funds are free and clear. Also, if you had purchased IndyMac CDs through a broker, those FAQs indicate that your interest stopped on Friday, the brokerage needs to take steps with the FDIC before they receive your balance back (if it was covered by FDIC limits), and then you are supposed to get the credit from your broker. Sounds like you can easily loose a few hundred dollars in missed interest payments that way.

Everybody should read the FDIC's FAQs as if it was their bank in this situation so you can understand how you might be affected.... If I'm mistaken in any of the above observations, I'd very much appreciate to be corrected!

http://www.fdic.gov/bank/individual/failed/indymac_q_and_a.html

[dukeb]

Has it come to this??? I believe that the FDIC is supposed to MAXIMIZE the return of money to uninsured depositors of a failed bank via asset sales, collections, etc.. But on the very first day with the FDIC in charge of the bank formerly known as IndyMac, the FDIC reportedly announced that they are immediately FREEZING all IndyMac foreclosures in order to aggressively rework their terms to be as favorable as possible to the borrowers. This is something more akin to an economic eminent domain seizure in order to further political agenda, if you ask me.

http://online.wsj.com/article/SB121607890530252639.html?mod=hpp_us_whats_news

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A public service propaganda ad is worth a thousand words:

http://www.jsmineset.com/cwsimages/Miscfiles/6353_FDIC_Doc1.pdf

The FDIC insured individual depositors up to $5,000 in 1933. The price of gold was $26/ounce. Today they promise $100,000 but the price of gold is currently $965/oz and rising rapidly. FDIC would need to add an additional $85, 577 just to keep up with the federal reserve note inflation rate since 1933. Insuring the IndyMac depositors potentially wipes out more than 10% of the FDIC's $53 billion deposit-insurance fund.