FireDream

The Collapse of IndyMac Bank Didn’t Have to Happen

There are some times when I just have to shake my head.  One of those days was last Friday, when the Office of Thrift Supervision (OTS) issued its press release regarding the closure of IndyMac Bank and its transfer to the FDIC.

In that release, OTS Director John Reich was quoted as follows: “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”

Reich was referencing a letter written by Senator Charles Schumer (D-NY) to the OTS and the FDIC expressing his concerns about IndyMac, which was in the process of restructuring and pursuing a recovery after taking a significant hit over the last year.  Specifically, he wrote “IndyMac’s financial deterioration poses significant risks to both taxpayers and borrowers and…the regulatory community may not be prepared to take measures that would help prevent the collapse of IndyMac or minimize the damage should such a failure occur.”

Senator Schumer’s concerns may have been valid.  The OTS, at least, was aware of the IndyMac situation and were working with the bank to bring it back into a more stable position.  What was unfortunate, however, is that the letter was released to the press-and the impact was devastating to IndyMac and, potentially, many of its depositors.

During the next 11 business days, $1.3 billion-yes, billion with a “B”-was withdrawn from IndyMac.  The removal of that amount within such a short timeframe threw the bank into crisis, necessitating its close.  Although the bank is now back open, having been transferred to the FDIC, consumers are still lining up-literally-to withdraw their funds.  And that’s not all.  Consumers across the nation have become increasingly edgy, wondering if their bank is next.

Hey-IndyMac was having some troubles, and I’m not going to say that they were in the best of shape.  They were at the forefront of offering no-doc loan products, and they got hit hard when housing prices adjusted and homeowners defaulted.  But, as noted in the OTS’s press release, they were reacting to market changes, responding to OTS concerns and actively seeking a significant cash infusion.  The decision to release Mr. Schumer’s letter, however, virtually destroyed any of Indy’s chance at recovering-and may have actually put depositors at higher risk for loss.

I am forced to point out that the senior senator from New York didn’t decry the mortgage industry when home prices in his state were skyrocketing and mortgage loans were being handed out like Pez candies.  He, like many of his colleagues from both sides of the aisle, rode to re-election on the strong housing market, seeming to forget that with every up in the market, there must also be a down.

Perhaps-even if it is too late for IndyMac-a valuable lesson has been learned here.  People in the public eye who have easy access to media outlets need to use wisdom and think about what the ultimate impact of their words might be.

We can only hope.

This blog is intended for informational/entertainment purposes only and is not meant to provide any financial or legal advice.