Monday, July 14, 2008

Did Sen. Schumer cause the run at IndyMac?

Federal regulators closed the California-based bank and mortgage-lender, IndyMac, on Friday. The Federal Deposit Insurance Corporation (FDIC) will step in to run the bank and may have to pay off depositors with insured accounts. With some $19 billion in deposits, the FDIC payment to depositors could be the largest in nearly a quarter century. Even with the FDIC bailout, depositors could lose half a billion dollars from accounts that exceeded the FDIC maximums, and of course, investors would lose their funds.

IndyMac was active in the mortgage market just below the prime level but just above the sub-prime level. The bank had been struggling, with losses in the hundred of millions of dollars over the last several quarters and with no expectations of profitability for at least the rest of this year. The share price of the bank plummeted 80% from October until February, briefly rebounded, but then resumed its decline. So, the fundamentals of the bank were fraying.

Things, however, came to a head two weeks ago, when a letter from Sen. Charles Schumer (D-NY) to banking regulators was leaked. The letter expressed fears that IndyMac was likely to fail without an intervention. A run began almost immediately and continued until the FDIC stepped in on Friday.

In announcing the closure, The Office of Thrift Supervision blamed the senator, saying his letter was "the immediate cause of the closing." The announcement went on to criticize Sen. Schumer's "interference in the regulatory process." Sen. Schumer has, in turn, has said that IndyMac's condition was well-known and that regulators were "asleep at the switch."

Was Sen. Schumer right in publicly airing his concerns about a specific bank? It's hard to see how his comments could have helped IndyMac continue as a going concern or how the comments could have headed off a takeover. The only reasonable positive motivation would be to force the feds to move in while the bank still had some funds left.

Banks are extremely fragile propositions. At any time, they have more loaned out in illiquid investments than they have on hand to cover nominally liquid deposits. Regulations, deposit insurance, and the ability to borrow from the Federal Reserve are intended to maintain confidence and solvency. However, investors and large depositors can still get spooked and withdraw a bank's capital. "Naming names" as Sen. Schumer did was sure to make that happen.

There is little doubt that Sen. Schumer's letter forced the issue. Now that the feds have moved in, the remaining question is whether anything could have been done to save the bank or to mitigate its losses. If Sen. Schumer's letter pre-empted an orderly and less expensive bail-out of the bank, he's a self-aggrandizing scroundel. Then again, if he prompted a takeover while there was still something to save, he deserves our thanks.

1 comment:

Doug Johnson said...

Seems like your liberal buddy Chis Dodd has his hand in this, $75,000
from Country Wide. Seems the libearls do not want to talk about this.