Friday evening, where bad news for the Bush Administration goes to die. And things don’t get much worse than the second largest, and most expensive bank failure in US history.
In what could turn out to be the most expensive bank failure ever, troubled mortgage lender IndyMac Bank was taken over by federal regulators on Friday.
The operations of the Pasadena, Calif.-based bank – once one of the nation’s largest home lenders – were shut down at 3 p.m. by the Office of Thrift Supervision and transferred to the Federal Deposit Insurance Corp.
According to the FDIC, 10,000 IndyMac customers could lose as much as $500 million in uninsured deposits. The agency says the failure will cost the Deposit Insurance Fund between $4 billion and $8 billion, based on preliminary estimates.
“It’s possible this will be the most costly bank failure in history, but it’s too soon to say,” FDIC Chairman Sheila Bair said in a conference call late Friday night. The failure could also affect premiums paid by all banks for deposit insurance, she added.
IndyMac, with assets of $32.01 billion and deposits of $19.06 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.”
IndyMac marks the largest bank collapse since 1984, when Continental Illinois, which had $40 billion in assets, failed, according to FDIC records. The two most expensive failures were in 1988: American Savings and Loan Association in California ($5.4 billion) and involved First Republic Bank in Texas ($4 billion).
More bank failures will come. Too many of financials in trouble are the ones that were in the subprime loan business, especially in Western states like California and Rust Belt states like Ohio.
Systemic failure is beginning. Like any avalanche, it starts slowly. Note the FDIC went out of its way to close this bank on a Friday afternoon on the West Coast, long after the US markets had already closed down near 11,000, off more than 25% from last year’s 14,000 plus numbers.
Again, more banks will follow, and some already have failed this year. Fannie Mae and Freddie Mac are on the brink of insolvency as Steven D pointed out earlier.
Of course, we’re told there’s no need for alarm. Do you trust THIS administration on that?
We’ve known the FDIC has increased hiring to deal with the massive increase in expected bank failures for several months now. We’re all seeing the reasons behind that strategy now.
But what of IndyMac’s customers?
Bair said that the FDIC will try to sell IndyMac as a complete entity within 90 days.
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.
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.
IndyMac customers will have their funds 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.
For additional information, the FDIC has established a toll-free number for customers of IndyMac Federal Bank, FSB. The toll-free number is 1-866-806-5919 and will operate today from 3:00 p.m. to 9:00 p.m. (PDT), and then daily from 8:00 a.m. to 8:00 p.m. thereafter, except Sunday, July 13, when the hours will be 8:00 a.m. to 6:00 p.m. Customers also may visit the FDIC’s Web site at http://www.fdic.gov/bank/individual/failed/IndyMac.html for further information.
Would you continue to do business with IndyMac? What about companies that had investments with the bank? The blurred lines between financial company and investment company are all but gone. Investments are NOT FDIC insured, as the commercials tell you. Those customers are out millions, if not billions.
What about YOUR mutual fund? What about the investments your employer is making for you in 401(k) plans? They’re not insured either.
Do a Google News search for IndyMac. News stories about the company have it on a wild roller-coaster ride as California’s “Son of Countrywide.” Like many subprime players, it got into serious trouble…and now it’s dead, being chopped up for parts.
How many other IndyMacs are out there?
We’re going to find out. Check the epitaph carefully.
IndyMac specialized in loans it had long argued were of minimal risk: low documentation loans to residential mortgage borrowers.
On Tuesday, IndyMac – which had 33 branches – announced that it was firing 53% of its workforce and exiting its retail and wholesale lending units. Last year, the lender was ranked 11th in residential mortgage origination, according to trade publication Inside Mortgage Finance.
More importantly, IndyMac also disclosed that regulators no longer considered it “well capitalized.” As a result, since Tuesday, the bank wasn’t able 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. Shares traded down nearly 10% on Friday to close at 28 cents.
IndyMac lost $184.2 million in the first quarter and 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, where it originates loans to borrowers who fall between prime (or conforming) and sub-prime on the credit spectrum. The lender’s chief executive, Michael Perry, had long argued that it was being unfairly punished given its relatively paltry exposure to sub-prime mortgages.
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. As it turned out, IndyMac was a leader in loans requiring little income and asset documentation, a category that has had disastrous levels of delinquencies at other troubled lenders. 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, in its filing 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.
Even efforts to prop up the bank hurt it. Last month, Sen. Charles Schumer, D-N.Y., wrote a series of letters to regulators in Washington and California asking them to take steps to prevent the bank’s “likely collapse.” In response, about $100 million in customer deposits has been withdrawn from the bank, according to one of its filings.
Like all banks, it simply doesn’t have the cash on hand to give to customers should they all withdraw funds at once. Considering most banks have a fraction of a percent on hand in cash, IndyMac was the victim of a good old fashioned bank run.
Keep that last section in mind. You can replace IndyMac there with the names of more banks that will fail over the next several months, because the story will be that similar.
IndyMac will not be the last bank failure by any means. But you’re going to pay for each and every one of them.
The systemic failure of the global financial system is now beginning to claim entire banks. When confidence in the banks ends, the system will end. It is a multi-trillion dollar exercise in faith. When that faith runs out, so does the money. People will stop taking bank numbers on faith. They will want to see the money up front.
Remember your Roubini, class! Step number six on our Nature Trail to Hell:
Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors’ panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide – an institution that was more likely insolvent than illiquid – has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks’ bankruptcies will add to an already severe credit crunch.
With Freddie Mac and Fannie Mae almost insolvent and the FDIC closing banks, war with Iran looming and an oil crisis already here, families increasingly stretched to the breaking point and the system balanced on knife-edge, we need real leadership right now or we may not make it to January 2009.
Right now we have Bush. If the fecal matter impacts the oscillator, are you convinced we’d even HAVE an election? We’ve been one national crisis away from a police state for years now, and the new wiretapping bill is the final nail in America’s coffin.
You think it’s bad now? I’d say you have no idea how bad it could get, but I’m pretty sure most of you in fact have a very damn good idea of just how bad “bad” could be between now and January 20…if Bush hasn’t dropped the hammer and suspended the rule of law by then as we face riots over $250 oil and Iran sinking a carrier group or two.
And if this doesn’t blow up during Bush’s watch, Obama will have to handle it. Do you think he has any clue what’s coming? I’m fairly sure he does…and he wants the job anyway.
Or will it be McCain at the helm of this time of crisis? You think Grandpa Angrypants is qualified to handle this, should the fix be in?
Or somebody not yet on the main stage altogether may be in charge, who knows? A lot can happen in six months.
Be prepared.
