The Fall of Indymac and the Failure of Sen. Chuck Schumer. Fifteen Painful Years Later, He Needs to Go.

Schumer: Don’t blame me for IndyMac failure

New York senator fires back at FDIC officials who claim he started a panic that led to Friday’s seizure of the California bank.

July 13, 2008

REPUBLISHED BY LIT: SEP 2, 2023

NEW YORK (CNN) — Sen. Charles Schumer said Sunday the Bush administration is trying to “blame the fire on the person who calls 9-1-1” by suggesting he had a role in one of the costliest U.S. bank failures.

Federal regulators with the Office of Thrift Supervision were “asleep at the switch” when it came to IndyMac’s “reckless” behavior, the New York Democrat complained.

“OTS ought to stop pointing false fingers of blame and start doing its job to protect the future of the banking system, so that there won’t be other IndyMacs,” said Schumer, a member of the Senate Banking Committee, chairman of Congress’ Joint Economic Committee and the third-ranking Democrat in the Senate.

OTS announced Friday that it was taking over the $32 billion IndyMac and transferring control to the Federal Deposit Insurance Corporation – and the agency pointed the finger directly at Schumer for the failure, accusing him of sparking a bank run by releasing a letter that “expressed concerns about IndyMac’s viability.”

“In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts,” the OTS said in a statement announcing the California-based lender’s takeover. The statement included a quote from OTS Director John Reich saying, “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”

Schumer’s letter on June 26 said he was “concerned that IndyMac’s financial deterioration poses significant risks to both taxpayers and borrowers.” But after Friday’s statement, Schumer swiftly rejected any suggestions of responsibility for IndyMac’s collapse — and in a Sunday news conference, he said “everything” in his letter was already known to the public.

“IndyMac was one of the most poorly run and reckless of all the banks,” he said. “It was a spinoff from the old Countrywide, and like Countrywide, it did all kinds of profligate activities that it never should have. Both IndyMac and Countrywide helped cause the housing crisis we’re now in.”

The embattled Countrywide Financial Corp. was recently purchased by Bank of America.

Schumer argued that the “breadth and depth” of the problems at IndyMac were “apparent for years, and they accelerated in the last six months.” But OTS, he said, “was asleep at the switch and allowed things to happen without restraint.

“And now they are doing what the Bush administration always does: blame the fire on the person who calls 9-1-1.”

The White House had no immediate response.

Schumer said OTS is “known as a weak regulator,” and added, “my job was to try and toughen them up and that’s what I tried to do.”

The fall of IndyMac

Feds seize bank – once a leading mortgage lender. It may turn out to be most expensive collapse ever. One thing is sure: The credit crisis is still with us.

JUL 12, 2008 | REPUBLISHED BY LIT:  SEP 2, 2023

NEW YORK (CNNMoney.com) — In what could turn out to be the most expensive bank failure ever, troubled mortgage lender IndyMac Bancorp Inc. was taken over by federal regulators on Friday.

The operations of the Pasadena, Calif.-based thrift – once one of the nation’s largest home lenders – were shut down at 3 p.m. PDT by the Office of Thrift Supervision and transferred to the Federal Deposit Insurance Corp.

About 95% of the $19 billion in deposits in the bank are insured, but that leaves $1 billion that was not covered by FDIC guarantees. According to the agency, 10,000 IndyMac customers could lose as much as half of that amount, or $500 million. The agency says the failure will cost the Deposit Insurance Fund between $4 billion and $8 billion, based on preliminary estimates.

“This will certainly be a costly failure. Whether it’s the costliest, we just don’t know at this point,” FDIC Chairman Sheila Bair said on a conference call late Friday night. The failure could also affect premiums paid by all banks for deposit insurance, she added.

The closure of IndyMac capped a dramatic day that offered a stark reminder that the credit crisis is not abating. An investor panic sent shares of mortgage finance giants Fannie (FNM, Fortune 500) Mae and Freddie (FRE, Fortune 500) Mac on a wild ride and fueled speculation of a government rescue.

How IndyMac rose in the boom

IndyMac grew rapidly during the real estate and home building boom. Its specialty was so-called Alt-A loans, those for which home buyers were asked to produce little or no evidence of income or assets other than the house they were buying.

While home prices climbed, Alt-A loans posed few problems for IndyMac. If a buyer wasn’t able to afford his payments, the bank got title to a home worth more than the amount owed. The bank was also able to find investors eager to buy pools of those mortgages that had been pulled together into securities backed by the future payments.

But when the housing bubble burst and prices began to fall, losses at IndyMac began to rise. Investors ran away from the mortgage-backed securities, leaving the bank to suffer the loan losses itself and without the funding it needed to make new, safer loans.

Most of IndyMac’s employees and executives will be asked to stay on, although the problems at IndyMac had caused it to cut 3,800 jobs, or more than half of its work force, earlier in the week in an attempt to stay in business.

One executive who will not stay is CEO Michael Perry, who was replaced on an interim basis by a top official of the FDIC.

Bair said that the FDIC will try to sell IndyMac as a complete entity within 90 days.

IndyMac, with assets of $32 billion and deposits of $19 billion, is the fifth bank to fail this year. Between 2005 and 2007, only three banks failed. And in the past 15 years, the FDIC has taken over 127 banks with combined assets of $22 billion, according to FDIC records.

“There will be increased failures, but it will be within range of what we can handle,” Bair said. “People should not worry.”

Largest collapse since ’84
IndyMac marks the largest collapse of an FDIC-insured institution since 1984, when Continental Illinois, which had $40 billion in assets, failed, according to FDIC records. The two most expensive banking failures were in 1988, during the nation’s savings and loan crisis: American Savings and Loan Association in California ($5.4 billion) and First Republic Bank in Texas ($4 billion).

The IndyMac failure brought finger pointing along with the federal action.

The OTS, which oversaw IndyMac, criticized Sen. Charles Schumer, D-N.Y. The OTS claimed that a June 26 letter Schumer wrote to regulators questioning IndyMac’s viability prompted a run on the bank in which customers withdrew more than $1.3 billion prompting a liquidity crisis.

“Although this institution was already in distress, I am troubled by any interference in the regulatory process,” said OTS Director John Reich in a statement Friday.

Schumer shot back. He said that lax enforcement by OTS was a primary cause of the problems at IndyMac, as well as those of the nation’s housing market and economy.

“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,” Schumer said. “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.”

What now for IndyMac customers? (LIT: 15 Years of Hell as at 2023)

When a bank shuts down, traditional bank accounts are insured to at least $100,000. Some accounts such as annuities and mutual funds are not insured at all. Individual Retirement Account funds are insured to $250,000.

If you had $100,000 at one bank and $100,000 at another, both would be insured, according to Allan Roth, a Colorado Springs, Colo. financial planner.

However, individuals with multiple accounts in the same name at the same bank are limited to the $100,000 cap, says Roth. But if an individual has a $100,000 savings account in her name and a $100,000 joint account with her husband, both accounts would be covered.

“The difference is not in the number of accounts [that each individual has at an FDIC-insured bank],” said Roth. “The difference is in the titling or name on the account.”

IndyMac customers with uninsured deposits will get at least half that money back, and they could get more back, depending on what the FDIC gets when it sells the bank, said Bair.

Customers’ funds will be transferred to a new entity – IndyMac Federal FSB – controlled by the FDIC. They will have uninterrupted customer service and access to their funds by ATM, debit cards and checks.

However, customers will have no access to online and phone banking services this weekend, according to the FDIC. Service will resume on Monday. Loan customers were advised to continue making loan payments as usual.

How it got to this point

IndyMac’s problems came into sharp focus earlier in the week.

The bank, which lost $184.2 million in the first quarter, announced on Monday that it was expecting a wider loss for the second quarter. It lost $614 million last year stemming from its focus on the Alt-A mortgage sector.

Then on Tuesday, IndyMac disclosed that regulators no longer considered it “well capitalized.” As a result, the bank was unable to accept brokered deposits, or short-term investments in large dollar amounts from brokers seeking the highest return on certificates of deposit.

Over the past two years, IndyMac dropped over 95% in stock price, or about $3.5 billion in market capitalization. By Friday, shares were down to 28 cents.

Ousted CEO Perry had long argued that it was being unfairly punished given its relatively paltry exposure to sub-prime mortgages.

But rising Alt-A and prime mortgage delinquencies likely were enough indication for investors that the housing crisis had moved beyond the weakest borrowers.

Even worse, with the securitization markets in collapse, IndyMac had no way to get new loans off its books. What loans the bank had made recently were to borrowers with well-documented assets and income, but those are sharply less profitable with respect to fees and interest income.

IndyMac on Monday said it would focus on its reverse mortgage business, retail branch network and mortgage servicing operations. But the growth restrictions placed on IndyMac by regulators and the banks and brokerages it did business with, as well as the sharply higher borrowing costs, placed the profitability of even its non-mortgage-related banking efforts in doubt.

Editor’s Note:

The FDIC has set up a special toll-free hotline for IndyMac customers: 1-866-806-5919. It will operate daily from 8 a.m. to 8 p.m. PDT (8 a.m. to 6 p.m. on July 13). Customers can also turn to the FDIC Web site: http://www.fdic.gov/bank/individual/failed/IndyMac.html for further information.

2014 SETTLEMENT

Pursuant to the Stipulation, the Underwriter Defendants will cause $340 million to be deposited into a settlement fund in exchange for a release of claims by Settlement Class Members.

This included the Burkes Predatory Loan from Indymac.https://t.co/5I7bfazd12 pic.twitter.com/6oNvNH2Vll

— lawsinusa (@lawsinusa) August 30, 2023