The end-game for what was very briefly the nation’s biggest mortgage lender, IndyMac, seemed inevitable, although the signals even as a of a few days ago were that a takeover was not imminent. The timing, coming in the midst of Famnie and Freddie worries, is particularly bad. One can only conclude that this action could not be help off until next weekend or later, and the authorities decided to act on a summer Friday in the hope of minimizing adverse market reaction.
Note this is the largest bank failure since Continental Illinois which went under in 1984 with $40 billion of assets. While in real terms, that was a vastly larger collapse (IndyMac has $32 billion in assets), the rest of the banking system was on solid footing back then.
Note that the Journal reminds readers that IndyMac specialized in Alt-As. We have been told that while banks and securities firms have written down subprimes to realistic, perhaps even conservative levels, Alt-A and Option ARM writedowns are a completely different matter. A side effect of the IndyMac failure may be more aggressive Alt-A writedowns.
From the Wall Street Journal:
IndyMac Bancorp Inc., a prolific mortgage specialist that helped fuel the housing boom, was seized Friday by federal regulators in one of the largest bank failures in U.S. history……
IndyMac 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 Federal Deposit Insurance Corp., a federal regulator, and will reopen Monday.
In a written statement, the Office of Thrift Supervision, which regulated IndyMac, said “the immediate cause” of the failure was statements made by New York Democratic Senator Charles Schumer. Mr. Schumer in late June publicly raised concerns about the bank’s solvency…..
An exodus of depositors added to IndyMac’s woes. Deposits are the lifeblood of banks, providing them with a stable, low-cost source of cash to fund their daily operations and lending activities. After Mr. Schumer raised questions about the bank, depositors withdrew $1.3 billion in 11 days.
It’s unclear how much the failure will cost the FDIC.
The Office of Thrift Supervision press release was even more pointed about Schumer’s role than the Journal quote suggests:
The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.
“This institution failed today due to a liquidity crisis,” OTS Director John Reich said. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”
Note that reader Steve had pointed out earlier this week that regulators were trying to shrink IndyMac prior to a regulatory seizure because it would would strain FDIC resources.
We need to be clear: IndyMac alone does not pose a problem to the FDIC. But the FDIC is gearing up for more bank closures, and this is a big call on its resources relatively early in the game. The assumption has been that bank failures will be concentrated among smaller banks, but even enough small banks in trouble add up to real money.
The problem comes from IndyMac having taken loans from the FHLB which were required to be overcollateralized.
Note there is a very real possibility, as Steve intimates, that some emergency measure will eventually need to be implemented, such as having the FDIC be able to somehow assign FHLB portfolios to the Fed, or more likely, go to the Treasury for emergency financing.
Evidently the regulators can’t find a buyer for Indymac, and are shrinking it as a prelude to nationalization….
The prohibition on opening or rolling brokered deposits is an obvious thing to do, but forcing Indymac out of the non-GSE mortgage business is not. The problem for FDIC is that non-GSE mortgages wind up getting pledged to FHLB, and as a secured creditor with an over-collateralized position, FHLB borrowings must be paid off by FDIC if the bank becomes insolvent. This is a large cash flow hit to the insurance fund (over $10B or 1/5 of the Fund in the case of Indymac), but the obligation of FDIC as Receiver to marshall the assets of the estate leaves no discretion for over-collateralized borrowings. The Board of the FDIC made some public comments about this problem a few months ago. FDIC has no access to the Fed to liquify and park a FHLB portfolio. In a bridge bank scenario, the FHLB borrowings remain in place, but FDIC is still obligated to provide a combination of capital and guarantees against loss sufficient to launch a new, well-capitalized institution (perhaps in partnership with private capital)–also a large figure, and the main driver behind Fed/FDIC’s push to modify the bank holding company regulations to allow in more unregulated capital….
The obvious danger to this stratagem is a deposit run requiring intervention….
When Northern Rock blew up, invidious comparisons were made in the British press between the US system of deposit insurance and the hodge-podge of miniscule deposit guarantees and vague regulatory responsibilities in the UK. We’ll see how the US system holds up in a systemic crisis that has reached large institutions that aren’t `too big to fail’, but have combined liabilities many times larger than the Insurance Fund. FDIC could fall back on Treasury for additional emergency funds, but that’s precisely what the current—and no doubt next—administrations want to avoid at all costs.
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Blame Schumer — since they didn’t regulate IMB properly to begin with.
I wonder who they’ll blame when the next domino falls.
Let’s do a little back-of-the-envelope math…
FDIC insurance fund has approximately $50 billion in assets currently. Due to normal bank leverage, this would support about $65 billion in bank assets (taking into account equity and a normalized asset-to-deposits ratio). Assuming that 90% of average bank deposits are insured (that is, they fall within the limits for FDIC insurance coverage) and further assuming a 75% recovery rate on liquidated bank assets (in receivership) suggests that the FDIC insurance fund currently has enough funds to cover the deposits for failing depositories aggregating roughly $300-$450 billion in assets (again, roughly). So, IndyMac’s failure alone will probably take up at almost 10% of the FDIC’s insurance fund… and we’re just getting started. SOS taxpayers.
Thanks for the envelop math Dave! I was wondering.
Update to my math (above): I just read the “real” estimated numbers (and I wasn’t far off)…
Apparently the FDIC Insurance Fund has $53 billion in assets (pre-IndyMac payouts). The FDIC itself is assuming a $4-$8 billion hit to the Insurance Fund as a result of IndyMac’s failure. My guess is it will be on the high side (isn’t it always?). So, IndyMac’s failure alone should suck up 10%-15% of the Insurance Fund. Good Times!!
In the Dept. of Rich in Irony, Lyle Gramley, former Federal Reserve Governor, was a long-time Director of IndyMac… how pathetic…
“Lyle E. Gramley has been a director of Indymac Bancorp, Inc. (Indymac) since January 1993. He is also a director of Indymac Bank F.S.B. (Indymac Bank). Mr. Gramley is a former member of the Board of Governors of the Federal Reserve System. From September 1985 through May 2002, he was employed by the Mortgage Bankers Association of America as its chief economist and as a consulting economist. During that period he also was self-employed as an economic consultant. Since June 2002, Mr. Gramley has been a Senior Economic Advisor with the Stanford Washington Research Group. He serves on the Board of Trustees of the following mutual funds distributed by Dreyfus Service Corporation: Cash Management, Cash Management Plus, Inc., Government Cash Management, Treasury Cash Management, Treasury Prime Cash Management, Tax Exempt Cash Management, Municipal Cash Management Plus and New York Municipal Cash Management.”
Yes, thanks Dave.
Per Anon of 7:18 PM, Schumer may have known full well what he was doing.
I don’t have any special insight into DC machinations, but it is pretty clear that the Administration is trying to kick the can down the road until the new guard comes in if at all possible. And per the discussion of Fannie and Freddie, delay could (probably will) make matters worse.
So Schumer may have decided to play some very high stakes poker.
Reader Steve e-mailed this comment:
The Administration may not want to pick this fight with Schumer. The level of brokered deposits at Indymac was outrageous, and permitting it smacks of regulators trying to keep this thing on life support until after the election. Against Indymac’s cost to raise insured funds they had…what? Phantom income on neg am loans? Jesus. The best this Administration can do is to encourage the banks to loot the deposit insurance fund?
Fred and Fan were bankrupt this morning and somebody (?) came to the market late in the day (a Friday) and reversed the fall.
Then after the market closed IndyMac becomes bankrupt.
Should not American Taxpayers be more concerned about the manipulation of the stock market by their Government rather than speculators? Who is Blank Cheque Benny meeting this weekend? Will Monday provide the world with the nationalisation of Fred and Fan? Is this a precursor of a USA default by the back door of exported mortgage debt?
Per above, I don’t mean to suggest that Schumer set out to create a run on the bank. It’s likely he wrote his notorious letter after discussions with regulators were ignored. Going public was thus a way to force them to deal with his concerns.
The fact that there has been so much discussion and outrage over the shorts while the fed and the treasury are leaking stories about the discount window opening to the GSEs is outrageous! And then the Fed has the audacity to have no comment when the rumor was leaked but decides after the close deny discussions are ongoing. Watching that idiot Dodd get on TV and talk about something that is so far above his pay grade was embarrasing. Then we had Treasury Sec, then the President. This is a complete circus. All these guys are in so far over there head it should be unsettling to every American. We desperately need new and competent leadership. We need to have an independent commission set up and given extra-judicial/legislative powers to impose order on the Fed and the banks. Jamie Dimon should be tapped immediately with heavyweights like Jack Welsch, Volker, Romney even dare I say a voice form the hedgies Jimmy Rogers (if he will come home)/Druckenmiller/Robertson for the sorely need cross/global market perspective. Add Kissinger and perhaps former president Bill Clinton. Keep the academics out of the mix unless they have real world experience. We need pragmatic people willing to truthtell. And act!!!
It is going to be painful and the sooner we get on with it the better. Lead or get out of the way as they say. You want to show the world that the US isn’t yet another hegominic has been, lets get on with it. Every American needs to be challeneged and it is about time we get our era’s Patton. Welsch is the kind of hammer we need. Perhaps throw Schwartzkoff into that role. We need a leader and there simply is no option in the political sphere.
Keep it to less than 10 people and broadly representivite across parties, but free of partisons. You want confidence this is what we need. We need it NOW! The politicians can be there to ensure that the solutions meet the lowest common denominator of political acceptability (or figure out a way to simply communicate the neccessary sacrifice).
Paulsen should be asked to join this council as a voice of perspective. In fairness to him, he walked into this storm and is doing his best with a horrible team. He needs support and he should get it ASAP. Congress would appoint this committee and vest them with the powers to undertake actions with some sort of confirmatory vote. Congress could appoint Volker to an open Fed seat and he would be elevated to the role of Chief and thus bring the Fed into the mix. Any nationalization should be accompanied by a structure whereby the taxpayer captures any upside. GS could help on this front. Deposits should be ringfenced and the rest open season. Nothing is too big to go. The great financial minds in this country need to be asked to once again be Americans first. I think all would be surprised at the response. Some just needs to ask!! You don’t ask an infantryman to do the work of a SEAL, unless you want to fail.
The democrats were fond of asking where is the sacrafice when we went to war. Well now is the time for the country to eat crow, take our medicine and get on rebuilding. You want to send a message to the world. I think you could send JPM and BAC under and the dollar might still rally. The hissing sound is growing.
It is time for leadership. We need people who are vested with the power to act and have the experience and understanding to attack the malignancies. We need to demonstrate to the rest of the world that the US is an idea and that idea isn’d going away. There isn’t an American worth their salt that woudln’t respond to such a call by diging in. it is the American way. If only they could look to the front and know someone is out front. Not some pathetic politician telling us about change. A guy who is going to scream, shout, direct traffic, insult these moronic politicians and get on with fixing the problems and retaking the high ground.
I don’t know what the list looks like, but it should be done ASAP. People like Shiela whoever and every other pathetic technocrat should be demoted to typing the minutes. These people should be thanked for their service and ased to step aside and provide any support structurally/executionally. Perhaps this would mark the final nail in the coffin of the feel good society. And it wouldn’t come a moment to soon.
Start with aggressive moves in the banking space to clean it up. Move to pointed plans for fiscal spend with spending offsets. Create war bond like produts at a more reasonable interest rate to entice savings, maybe even mandate 401K purchases (could even market is saying that stocks have been flat for a decade so a descent return is not such a bad thing especially with clawbacks for money creation). Move to the infrastructure side to create jobs and rebuild the USA. This stuff isnt rocket science. how is it that we can mobalize an army halfway around the world and we can’t get this logistics puzzle figured out.
Good leaders know their limitations. Absolutely no senator should be involved in this process – especially Dodd the idiot. It is time for Americans to take back the country. These folks are waiting for the call. Yet again Bush absent on the leadership front.
Get these people in there and let them go to work Aasp. No fact finding. Action. ASAP. Overly simplistic, but the surest and quickest way to turning this cespool around.
“the immediate cause” of the failure was statements made by New York Democratic Senator Charles Schumer.”
The reality is, there was a lack of GAAP accounting honesty and regulation by this government, and this mess has been going on far too long! Schumer is a hero in the face of almost 99% corruption and collusion!
Jeez, you all must be New Yorkers the way you are sticking up for him. The guy was way off base and most likely using confidential information that he received as a privilige of his office. Whoever else dropped the ball here will be debated and it should be but
Schumer has a lot to answer for.
These were the thoughts I published when this broke and the article also carries a link to a decent article in the LA Times that also discusses the issue.
http://blog.metro-real-estate.com/?p=664
Schumer may be a grandstanding windbag, but he is not to blame for this. And comments blaming him miss the point. I’m a Texan, not a New Yorker. What’s playing out here, played out in the Southwest in the oil bust, and the playbook for the last 8-10 years of sweeping the dirt under the rug and looking the other way at dirty, bad, or corrupt accounting (and lack of capital) won’t solve the problem. Nor will blaming people like Schumer, who identify the problem. IndyMac was going to go under, and if Schumer alerted people to the extent of the problem, he is doing the average American a service, not a disservice.
The S&Loans went under regardless–you can kick the can down the road only so far. Blaming Schumer distracts from the real issue–which is solvency, now of Indy, then of WAMU, and of Freddie. A solvent IndyMac would not go by a comment by a windbag.
Period. I’ve seen this before but I never thought the FED and FDIC would let it happen again on a national scale.
They did–not Schumer. And I don’t even like the man. If he keeps a widow from losing her retirement funds at Indy or the next bank, whatever his motives, he’s done a public service.
I have a one year CD maturing at WAMU on the 13th, with a son going off to college, so I’ve been dreading this for WAMU, even though
it would only be an inconvenienc–at least until the FDIC runs out of funds. We set up another account at Schwab as insurance in February when my wife received a bonus and half of the salary is going there, and I’m going to send my older son in CA some money to set up a second savings bank in a different bank than WAMU (probably BAC), as a backup. I recommend hedging your bets in some such fashion, in case the early 80s S&L does replay. I hope not but think so.
Lack
What are we learning, yet again?
Count on government at your peril.
How might you be “counting on government”?
tomd
The regulators need to be held to account for standing by and doing nothing. Government has failed us.
It is incredible to me that OTS, until last week, considered Indymac to be “well capitalized”. As of 3/31/08:
— Indymac had 1/3 of its assets ($10B) booked as level 3.
— An unbelievable 40% of its deposits were money desk deposits (which OTS categorizes as brokered deposits).
— Indymac had lost all access to the commercial paper markets.
— No one would do repo with Indymac.
— Indymac’s sole sources of liquidity were insured deposits and FHLB borrowings.
— Moody’s had pulled its ratings at Indymac’s request after cutting Indymac to junk way back in Sept of ’07.
–S&P and Fitch downgraded Indymac to junk in Q1 08.
Now it’s amusing to see our “business knows best” Administration decide that the private sector had it all wrong, and that Indymac was in fine shape.
Basically Schumer asked the same questions that many people in the credit markets had been asking for months.
Guys, if you read my comments you may note that I said others are to blame as well. The point is that
Schumer is able to speak from a very high bully pulpit and when you have that privilige you need to zip it up from time to time.
Schummer as Steve implies was not asking questions. Rather he was making accusations. Unless we are to believe that he or his staff spent a lot of time analyzing and tearing apart the financial statements of a middling bank (why in the world would they care) it seems reasonable to assume that he used confidential information to help spark a run on a financial institution that may or may not have had a chance of survival. His attack was a very big and totally unecessary nail in the coffin.
Tom,
I was going to write about your comments last night and held back, and it’s even worse tonight. This has been going on pretty much all week.
You make ham-handed editorial comments on NC posts to steer traffic to your own site. And what you say is pedestrian at best.
Your last comment reveals your ignorance. Schumer is on the Senate Banking Committee. As Steve indicates, it does not take an in-depth analysis to see the bank was in trouble. Senators have staffers who do grunt work, and they are often sharp. Oh, maybe you didn’t you know that either?
Yves, this guy is a troll.
And so it begins . . . . Reading the NYT mashup on this, the precipitating vector was a classic bank run at the withdrawal window in recent days, presumably of those ‘non-brokered’ depositors. The NYT had the unmitigaged mendacity to describe Indymac’s deposit situation as “improving in June” before Schumer’s remarks. Right; all those brokered deposits flooding in, ‘improving’ the visuals—while ballooning the eventual losses.
This to me was likely the driver for Schumer’s letter; some staffer brought home to him that the colossal size of Indymac’s brokered deposits marked a ‘Savings and Loan’ debt spiral which was going to cost the FDIC more after the Election. I don’t doubt that he called the regulators on the carpet and got voicemail for several months before his letter. I don’t like him personally, but in this instance his action is nothing but a public service, this rotting zombie had to be put down before it swallowed even more of the FDIC.
So Steve at 12:53, ‘preciate the summary there: that tells the real story on IndyFake.
And a re: “The best this Administration can do is to encourage the banks to loot the deposit insurance fund?” Yes, really, and the White House and the Cabinet level ones for the most part Just Don’t Care. It has been clear for two years that their goal was to sandbag the weeping levy until January, 09, then blame the Incoming Fool for dropping the ball. The conduct of senior public officials in this Administration is indescribably selfish and irresponsible, but that has been their trademark since they took office. Everything is spin; nothing is accountability; absolutely nothing is responsibility. Congress really needs to take the bull by the horns but the current lot has made ducking tough issues such a career move than their spines are wrapped in a C-curve to navel level. In that case, Sen. Shumer going it alone is the only kind of action really possible—and we should applaud. WyMe, Citifunk, Layman’s, Countryfried, Wachouttau, and a slate of similar undead financials need to be put down, like, NOW before they soak up anymore capital. UBS, RBS, and their ilk are someone else’s problem. Inshallah all it takes is a letter and a microphone.
We have the leader we need. His name is Ron Paul.