Is Indymac endemic?

IndyMac one of the largest bank failures in U.S. history
By Louise Story
International Herald Tribune
Published: July 13, 2008

The seizure of IndyMac Bancorp by U.S. regulators marks one of the largest bank failures in American history.

The bank, once part of Countrywide Financial, is the first major bank to shut its doors since the mortgage crisis erupted more than a year ago.

The closure Friday followed a frenzied week during which IndyMac executives tried to bolster the ailing bank. IndyMac, based in Pasadena, California, stopped making new loans and announced layoffs of more than half of its 7,200 workers. But IndyMac's customers, afraid their savings might disappear, stampeded tellers, demanding their money back. Most of Indymac's deposits are guaranteed by the Federal Deposit Insurance Corp., which will operate the bank and try to sell it.

The run on the bank came after a critical letter about it from Senator Charles Schumer, Democrat of New York. U.S. regulators said Friday that Schumer's letter had prompted the collapse by causing the run and scaring away potential acquirers.

"The senator made comments in his letter questioning the viability of the institution," John Reich, director of the U.S. Office of Thrift Supervision, said during a call with reporters. "When a member of the United States Senate makes such a statement, it frightens depositors."

In the days after Schumer's letter was released June 26, IndyMac customers withdrew an average of $100 million a day from the bank, or a total of $1.3 billion, the government said. Before Schumer's letter, the bank had been receiving net inflows of money from depositors, Reich said.

Schumer, who has been critical of bank regulators for months, released a statement criticizing Reich's agency.

"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," he said.

For all the write-downs and bad news on Wall Street over the past year, only five local and regional banks have shut their doors. The handful that have failed have been a small fraction of the size of IndyMac. IndyMac held $32 billion in assets as of late March, according to the government. It has been 15 years since any bank larger than $10 billion in assets collapsed. The largest bank failure on record was in 1984 when Continental Illinois National Bank & Trust in Chicago hit trouble, presaging the savings and loan crisis.

IndyMac ran into trouble late last year when it was unable to sell a portion of its Alt-A mortgage loans, which go to homeowners with credit that is better than the subprime category. It was being shopped to potential investors this summer, but their interest disappeared after Schumer's comments, said Timothy Ward, deputy director of examinations, supervision and consumer protection at the OTS.

William Isaac, chairman of the Federal Deposit Insurance Corp. in the early 1980s, cautioned against panic. Bank failures so far pale against the 3,000 failures in the 1980s, he said.