IndyMac Bank Failure Highlights: Another FDIC Insurance Example

Well, it finally happened. IndyMac Bank has been taken over by the FDIC, becoming the second-largest financial institution failure in U.S. history. I’ve been reading a bunch of new stories about it, and here are what I think are the highlights:

Customers: Don’t Panic!
Most people with regular checking or savings accounts don’t have too much to worry about. The FDIC has set up this official information page for customers. You can still use ATMs. Checks you write will still be processed. Electronic deposits and withdrawals will still go through. Online banking, phone banking and even the physical branches will re-open on Monday. You won’t even lose past interest:

All interest accrued through Friday, will be paid at your same rate. IndyMac Federal Bank will be reviewing rates and will provide further information soon. You will be notified of any changes.

From the LA Business Journal:

The Office of Thrift Supervision transferred control of the company to the Federal Deposit Insurance Corp. The FDIC said it will transfer insured deposits and assets of IndyMac Bank to a new federally operated institution called IndyMac Federal Bank that will open Monday. [...] Regulators said that customers of IndyMac will have uninterrupted access to their accounts beginning next week at the bank’s 33 branches.

This is consistent with when I explored What happens if my bank fails? The FDIC seems to do a pretty good job of cleaning things up.

…Unless you exceeded the FDIC insurance limits

Customers are insured 100 percent for deposits up to $100,000. The FDIC said the bank has about $1 billion of “potentially uninsured deposits” held by 10,000 depositors. The FDIC said it will begin contacting uninsured customers on July 14. The agency said it plans to give customers with more than $100,000 at least 50 percent of their uninsured deposit amounts.

Wade Francis, president of Long Beach-based Unicon Financial Services, said there is “very little” chance that uninsured depositors will get all their money back because IndyMac had a large number of home loans, which will be difficult to sell off.

It boggles the mind that so many of the very same people who have enough money to exceed FDIC limits in the first place, don’t bother protecting it properly. The whole point of keeping money in banks is so that it is safe… Instead, people are getting 50% and go home and pray to see the rest again. Ouch.

Ouch For the FDIC, Too
From the LA Times:

Federal authorities estimated that the takeover of IndyMac, which had $32 billion in assets, would cost the FDIC $4 billion to $8 billion. [...] The agency’s insurance fund has assets of about $52 billion.

That’s a big chunk of the FDIC’s own “emergency fund”…

Reality vs. Perception of Reality
There is a great quote from the 1992 movie Sneakers:

Cosmo: Posit: People think a bank might be financially shaky.
Martin Bishop: Consequence: People start to withdraw their money.
Cosmo: Result: Pretty soon it is financially shaky.
Martin Bishop: Conclusion: You can make banks fail.
Cosmo: Bzzt. I’ve already done that. Maybe you’ve heard about a few? Think bigger.
Martin Bishop: Stock market?
Cosmo: Yes.
Martin Bishop: Currency market?
Cosmo: Yes.
Martin Bishop: Commodities market?
Cosmo: Yes.
Martin Bishop: Small countries?

This is basically what happened to IndyMac bank. From CNN:

The banking regulator said it closed IndyMac after customers began a run on the lender following the [very public!] June 26 release of a letter by Sen. Charles Schumer, D-N.Y., urging several bank regulatory agencies that they take steps to prevent IndyMac’s collapse. In the 11 days that followed the letter’s release, depositors took out more than $1.3 billion, regulators said.

Comments

  1. You know, if I were a shareholder of IMB I’d be ticked off at Schumer. It’s really his comments that began the run and it was not based on any “new” information just that which had been publicly available beforehand; in fact I’d be ticked off at the institutional rules in which institutions have to sell holdings which drop below $1. Because of this rule, IMB pushed way lower that a buck, causing the comments from Schumer, causing the run and the capitalization problem, causing the takeover from the FDIC. I really don’t think IMB is too much worse off then some of the other financials out there but it sure is treated that way now.

  2. Democrats…

  3. Siggyboss says:

    All banks are inherently insolvent because their liabilities are current (depositors demanding cash) and its assets are long-term (loans). If this sort of fraud, claiming you can meet all depositor demands, was illegal only CDs, etc. would be sold and bank runs wouldn’t exist. The FDIC only makes it worse because no one cares about the banks ability to meet cash demands unless they have over $100K in the account. Sen. Charles Schumer didn’t cause the bank to fail; there’s probably some 1930′s law making it criminal to even to speak of a bank’s stability.

  4. yea, it’s not management’s fault for running the company… it’s not the lack of regulatory oversight…. it’s the guy who said “your bank is crap”

    anyone who was holding on to indymac shares deserves to lose money, same as the greedy fools who put over $100K in a failing bank….

  5. Still another example of what happens when politicians….well you know the drill.

  6. I work with the affluent clients at one of the top commercial banks. I have seen more than my fair share of FDIC accounts with balances of around $10,000,000. I’ve often wondered what their faces would look like if I had to tell them they’re only getting $100,000 back.

    Greedy bankers don’t bother telling their wealthy clients about FDIC because its very profitable to the bank to keep that much money in a typical FDIC account

  7. John back pain Austin says:

    Those with multiple accounts under $100,000 are probably screwed. During the S & L mess I had a friend with three accounts each under $100,000 that totaled $230,000. She was reimbursed a total of $100,000. Those at the bank assured her all the money was insured. There was another S & L across the street. She lobbied Congress to no avail.

  8. I have a small number of shares of IMB common stock. What will this recent news mean? Are these shares now worthless?

  9. Igg, you’re being sarcastic, but there’s some truth in your first statement. Most banks that are in trouble now, are not that way from management stupidity, but from government interference.

    We say banks are stupid because the made a bunch of subprime loans, but they were forced to by government regulators. Congress wanted the poor (read unqualified) to be allowed more mortgages. If the companies didn’t find a way to do that, they would be blackballed by the regulators, and would be denied anytime they needed approval by them.

    This, coupled with the extremely cheep money from the fed for the last 7 years, gave us our subprime mortgage “crisis” (though I hate that word, the media makes everything sound worse than it is).

    So, the government used regulation to make this situation as bad as it is. If we only had cheep money and not the congressional mandate, we would have far less people unable to pay their mortgages.

    Unfortunately, many people believe the answer to any problem is more regulation. Even when the problem was originally caused by government interference. In a free market, bad things happen occasionally, but eventually lead to the best situation for the vast majority. We have to stop trying to fix every issue because we end up with unintended consequences every time.

    And if I was Schumer, I would be embarrassed for causing a run on the bank, he should know better than make public statements about specific entities that he is not a part of, he had no business doing that, and as you can see, he didn’t fix anything by personally alerting regulators. What did he think he was going to accomplish?

  10. heather says:

    I don’t think we know enough to blame Schumer yet. From wikipedia: IndyMac “was founded… as a means of collateralizing Countrywide Financial loans too big to be sold to Freddie Mac and Fannie Mae.” And we know how well Countrywide did with the loans they were selling without IndyMac’s help…

  11. Siggyboss says:

    Steve,

    Sell your shares immediately because the odds are +90% that they will be worthless within a year, unless you hold preferred shares which will likely take a massive hit (lose +50% of value if not all). Bond holders will gets pennies on the dollar or shares in whoever buys IMB.

  12. This absolutely amazes me. Working in a S&L, I have had the joy of entertaining the OTS for 2 weeks. We are small enough (apparently that is the case) that they are able to go through EVERYTHING with a fine-tooth comb and make the 2 weeks hectic (to say the least).

    Knowing how they treat us, it amazes me that this happened. I’m going to have to say that Schumer was right when he said that OTS failed in their oversight of IndyMac. It’ll be interesting when the OTS brass are seated in front of some subcommittee to answer questions.

    That being said, our next OTS exam is sure to be even more crazy!

    BTW: IMB common stock: $.28/share

  13. politicians…

  14. The value of our financial system is largely perception based. It was really foolish of Schumer but, not out of his “low wisdom” character to do so.

  15. DollarBill says:

    Schumer’s reckless conduct resulted in a needless $1.3B “run” on the bank. Granted, there is a lot of blame to go around but what Chuck Schumer did was despicable, especially for a so-called public servant.

  16. I wonder if we will see a lot more takovers by the FDIC?

  17. Panic… it’s human nature, and politicians should have more sense when making statements to the public. Not his fault the bank was failing, but instilling fear and panic in the general public was not a smart move.

    On the topic of bank failures… I found an interesting chart and some surrounding stats. One of the most telling stats is that during the Savings and Loan scandal, 2 banks were failing… per day!

    I found this interesting chart: http://mjperry.blogspot.com/2008/01/history-of-us-bank-failures.html

    Hope you don’t mind me putting a link in my comment, just thought others may want to see the graph.

  18. I have a CD account with $8500 at IndyMac which matures on 5/1/09. What should I do? Shall I still keep the money there? Will I lose the interests I have earned? Thanks.

  19. Chuck Schumer is to blame here. IndyMac was a very well run bank, with enough capital to get them through the turbulent times they were facing. Its a shame to see such a sucessful organization go down like that.

    Chuck Schumer needs to face a federal grand jury. He needs to be put in jail, and Barack Obama has to do the right thing and withdraw his candidacy from the upcoming election.

  20. Indeed it is a dilemma. If only a few “insiders” have the information, less people will run on the bank. On the other hand, why should the government deny the American people the information it takes to be well informed and personally responsible for their investment decisions?

  21. Former IMB depositor says:

    Blaming Schumer is the same kind of delusional rant that created this mess. If Shumer was wrong, then all IMB’s management had to do was say he was wrong and then go right on turning huge profits for stockholders… right? Even without Shumer, they were already circling the toilet bowl.

  22. Where do people who have millions put their liquid assets ‘safely’. Aren’t all banks only FDIC insured up to 100,000?

  23. Indymac was destined to fail from their option arms and alt A mortgages – negative amortization California loans. Schumer didn’t do anything wrong. If you can make a company fail by rumors every company would be out of business by now. Seems like only the weakest go, like Bear. Watch out Wachovia and Wamu – you’re next.

  24. LargeTalons says:

    Nice John, what does Barack Obama have to do with anything? Keep dreaming and prepare yourself for the next four years. Anyways, the real enemy here is the fractional reserve banking system. The fed allows banks to loan out 90% of their deposits, and then we’re surprised when banks fail? We should be more surprised that banks don’t fail every day. You’d think that with this recent credit crisis we’d hear more about returning to a stable financial system backed by real assets. Of course not, we’ll continue to be used as pawns while the ruling class hoards the worlds wealth.

  25. Honestly, if you have amassed $10,000,000 and you really don’t know enough not to keep it all in one account that’s only insured up to $100,000, I really can’t find it in myself to feel sorry for you. I just can’t, on so many levels!

  26. Finanshill Girl says:

    I have a mortgage loan that was in foreclosure. What is the status of that loan now? I’m thinking that the new CA laws go into effect and I will start the clock over with a 30 day negotiation period. Any comments will be appreciated.

  27. Banditfist says:

    “IndyMac was a very well run bank”

    BULLCRAP! Their primary loans were Alt-A loans. It is the bank regulators that are to blame for not stopping banks and understanding the risks involved. Anyone with half a brain could figure out that this ponzi scheme could only continue for as long as residential real estate continued to go up.

  28. heh – well… I guess McCain could win if Barack gets out. Otherwise he is toast!

  29. One question:

    Are Business Checking and Saving Accounts FDIC-insured for up to $100K?

    Remark:
    I used to have an online saving account with netbank.com since Year 2001. When it was shut down last year, my money was automatically transferred to ING under a new saving account in less than 2 months. So, bascially it is a non-event for me when bank was shut down.

    As a New Yorker, I always dislike Chuck Schumer. He never got my votes.

  30. “Where do people who have millions put their liquid assets ’safely’. Aren’t all banks only FDIC insured up to 100,000?”

    US Treasury Bills and Bonds are backed by the full faith of the US Government. Most retail money market funds from reputable companies are very safe and not subject to the bankruptcy of a single entity or even the brokerage running the fund. You can also buy mutual funds containing only Treasuries.

    Finally, the $100,000 is per titled bank account. There are hundreds (thousands?) of banks out there, just gotta spread it out a little.

  31. Definitely lots of banks out there, easy to spread money around. Typically when I park cash into a CD, I break it up in $80k hunks to avoid the risk of having uninsured overage. IndyMac had nice rates for a while and I’ve got no worries that my 80k + interest will be there when the CD matures shortly.

    IndyMac is my 3rd bank to fail in the last few years. I wonder if I’m self-selecting here — poor health bank cranks up rates to get deposits to make their books look good. Rates catch my eye, park money and wait for the failure.

    Jeff

  32. “It boggles the mind that so many of the very same people who have enough money to exceed FDIC limits in the first place, don’t bother protecting it properly. The whole point of keeping money in banks is so that it is safe… Instead, people are getting 50% and go home and pray to see the rest again. Ouch.”

    be a cool thread to show people how to protect themselves in this case…if one day we get over that limit. :D

  33. Justjoeguy says:

    Schumer did in fact cause IMB to fail by creating panic. Since it’s not possible to predict the future we can’t really know if IMB would have survived or not. Right now we don’t know why Schumer did it assuming the explanation he gave is either false or not completely true. But we do know that short seller made billions. And now the FDIC and other government agencies will collect billions because of the takeover. It is only fair to ask what relationship if any Schumer has with the short sellers and government regulators and whether he benefits by these relationships.

  34. By Jeff’s logic, I believe WAMU will be the next to fail… They just gave me $100 to deposit $20 there…

    There was another bank (Chase?, Citi?) that was offering a great rate if you deposited a lot of money and jumped through numerous hoops. Same thing. Trying to get cash on their books temporarily to shore up the balance sheet.

    By saying this however, I will probably cause a run on these banks and people will pull their money and I will single handidly pull a Schumer.

    (Actually, with so many banks NEEDING cash on the books, it will be interesting to see what happens when all these people with more than $100K start pulling their money and depositing it in various banks after the scare put into them by IndyMac.)

    I’m wondering if there isn’t some sort of Black Swan event about to happen that will seem completely logical after the fact.

  35. Another John says:

    well, are you ready to short the next failing institution? High oil, low tech, high food, etc. Are the health care companies next to falter? With the joblessness rate raising, wouldn’t stress will be a factor here?

  36. clicclic says:

    For those discussing Schumer and whether he’s at fault…

    Everyone in the financial world is sitting on their hands waiting through this downtick (which is actually a massive implosion) – hoping that things turn around before they go belly up.

    All Schumer did was speed up the inevitable. The Office of Thrift Supervision is just like the FDA – in bed with the same people they’re supposed to be monitoring.

    The bottom line people: Do not expect the gov’t to save you – EVER. You are a fool to think they will.

  37. Side Comment: I love that quote from the movie Sneakers too. Great Movie!!

  38. Bob Keyster says:

    There are two ways to spread out CD deposits to get around the $100k per titled account holder. CDARS (www.cdars.com) and MaxSafe (www.maxsafeaccount.com). That’s at least what I found out when looking around the web.

  39. People…

  40. Hi Jeff,
    I have a online CD account (1 year term) with IndyMac. The account value is well within the $100K insured amount. Does that mean that I am safe to continue keeping my money there? Is it OK to open another CD account (last week, their online rate for 13-month CD is 4.40%)?
    Thanks for your opinion.

  41. Stop blaming Schumer . It is the Indymac’s risky loans coming home to roost.

    What Schumer’s comments did was just hasten the inevitable. I have known for a few months now about Indymac’s troubles and was ok because my deposits are well under FDIC limits.

    If a bank is so fragile that a letter from a senator is enough to doom it, it has no business going on with its operations. If what Schumer said was wrong, Bank management could have come out strongly against his letter and maybe threatened to sue him.

    But it bigger scheme of things, the money being withdrawn from indymac bank will end up being deposited in other banks.

    Losers will be people who bet on the indymac stock ( for them it is cost of investing in stock markets), people who work there ( they may or may not be employed by whoever takes over the bank), and people who had deposited over FDIC limits ( How could they not know about Indymac’s troubles ? Maybe they are too rich to care about loss of few millions ? )

  42. You know it could have been that the senator meant to alert the public so that they wouldn’t be caught with un-insured account balances.

    And, I thought it was per bank account, anyway. That means you could have multiple accounts in the same bank, and as long as each balance was kept under 100,000, you would be fine. Of course, it would be smarter to have it in different banks, but “your account is FDIC insured”, would make me believe that each an every one of them would be covered.

  43. Chuck Schumer clearly hates America. He must have known the events that would unfold once he made his comments.

    The only way to put a stop to the credit cruch will be to put Chuck Schumer infront of a federal grand jury, and have him prosecuted for treason. That will deter these liberals who hate America from prolonging the credit-cruch any further.

  44. Now that IndyMac is the first of many banks to fail, I think we’re going to see a lot more banks, not only close for the weekend, but close for good and go bankrupt. Rumors talk about 90+ banks, I think that’s a little exaggerated, but very well possible. I would guesstimate around 30+ banks will close shop.

    I’m an investor in the stock market and have started to build a position in Bank of America. One of the few 500 lb. gorillas left in the room. Every dip, I pick up more shares. I don’t think there going anywhere, but you never know. Investments are all risky.

    I never thought I would see this happen here in the USA, but here we are….let’s all cross our fingers.

  45. IndyMac is not the first to fail, though they’re the biggest (for this go-around). Please see the FDIC’s failed banks list:

    http://www.fdic.gov/bank/individual/failed/banklist.html

    And, I can’t tell if John is serious or writing satire (or if it’s the same John, even).

  46. inkycat says:

    Schumer caused a run on the bank. The run caused the FDIC to step in. Those who say wasn’t a cause of the failure on Friday are overlooking the cause and effect. But that doesn’t mean he was wrong to speak up. If I had uninsured monies in that institution, I’d be glad he said something.

    This institution had terrible lending practices. I saw some of the outrageous “no doc” (translation “feel free to lie”) loans in the course of my business, and it was frightening. They were in trouble, and they’d have folded eventually I’m sure. The Schumer thing is kind of like the guy who shoots and kills someone as he’s falling out of a 30th story window.

  47. Jonathan,

    I’m curious… has the 1) news of IndyMac folding and 2) speculation rampant that WaMu (and National City Bank) could possibly be next in line to go down, in any way affected your confidence in your bank account setup?

    I remember you wrote how you had WaMu as your “main base.” Even though, as I recall, you don’t have over $100k in your accounts… have this week’s news prompted you to rethink your account setup?

    -Angelo

  48. Everyone should now look at it this way… IndyMac Federal Bank is now the SAFEST bank in the United States to put your money in.

  49. Different Mike says:

    Fred – It is hilarious satire, unlike the New Yorkers sad attempt at satire…

  50. As one of those stupid people who actually had more than $100,000 in Indymac across several accounts ($111,000), I must add that the FDIC is of no help whatsoever. We were requested to call an 800 number to make an appointment with an FDIC agent. The agent would then call back. She called back yesterday. She provided no information that was not included in the news releases and when I asked as to the tax losses and how these could be reported, she stated she could not provide any information and that I should contact whoever prepares my taxes, suggesting an accountant. Talk about adding insult to injury. She also mentioned that several of her fellow agents had heard from depositors who had their life savings in the bank. I’ve learned a hard lesson and hopefully others will learn from my mistake.

  51. yes, always do due diligence. I saw BankRate.com still listing IndyMac for CDs *after* the news had said they were under regulatory constraints for certain types of new deposits

  52. heather says:

    “Some estimates of the total bad loans made by this somewhere in the neighborhood of $30 billion dollars — and the Office of Thrift Supervision blames a senator who is investigating how much of the FDIC’s $53 Billion this is going to eat up, with Wall Street estimates ranging from 15% to 30%. The towering incompetence of OTS is incomprehendable, but it is their colossal gall that is truly stupefying.” – Barry Ritholtz, bigpicture.typepad.com

  53. Quantumphysics@xboxlive says:

    Chuck Schumer didn’t undersign those bad loans. How do you blame him?

    That’s like someone blaming a kid for finding out that the Easter Bunny isn’t real.

    You wanna blame someone, blame THE FEDERAL RESERVE. After 9/11 they thought the market would tank so they poured out more money (by printing it) into the system. They gave credit to every tom dick & harry. Giving credit cards to school children…giving home loans to homeless people. They got stupid with $ and greedy mortgage broker impersonators took advantage of it to make their millions.

    Chuck Schumer didn’t let people acquire NINJA loans without stating they actually had a job. If you wanna place blame, DO IT RIGHT.

  54. If you have money in IndyMac Federal Bank =/< 100k leave it there. To pull out money early from a CD is being ignorant. And, yes, business accounts are FDIC insured. Remember: Investments (risk ventures) are basically the only accounts that are not FDIC insured! Come on people; do your homework!

  55. Ahhh….do we now go back to “mattress money”!!

  56. sth_txs says:

    The US needs to return to a gold backed monetary system.

    The Constitution implicitly requires silver and gold as money. The Federal Reserve should be abolished and let the free market decide what should be money along with real private banking. Anyone who believes the FDIC can insure scores of banks failing are naive.

    Scroll down and read the series about honest money:
    http://www.financialsense.com/fsu/editorials/gnazzo/archive.html

    Also read Murray Rothbards “What has the Government Done to Our Money” and “The Case Against the Fed”.

  57. I can’t believe those of you who think that Schumer is blameless. Even if it is true that the bank would have probably failed, which I think is not so sure, he created the bank run that ensured that it failed. If we revealed any all and banks in similar shape, we could ensure that they would all fail, instead of just a few of them.

    And remember, this failure did not just cost those who exceeded the 100,000 limit. It cost all taxpayers, since FDIC is funded by the federal government.

    Every single bank in the country could fail, given a large enough bank run. They all loan out more money than they have and are required to keep only a percentage of their loans.

    The government has no responsibility to warn anyone that a certain bank may fail, since this can and will cause more bank failures. They insure us all up to $100,000. I think that perhaps for additional transparency all banks should be required to post a very brief blurb about the limit of $100,000/bank. Then, the banks can explain how and when you can actually put in more, with a legal responsibility not to mislead you in doing so.

  58. any chance of a tax writeoff for the losses of unsecured deposits????

  59. wieslaw wrobel says:

    Please ! when pay unisured deposit,i have over 90 000k
    ira plan unisured.

Trackbacks

  1. What Happens if Your Bank Fails? says:

    [...] IndyMac was the 5th banking instution to fail this year. But not all of those have been big enough to make national headlines. The article notes that 2,808 banks failed in the decade between 1982 and 1992. That sounds like 280/year which seems pretty high to me. But even if our country got past 28/year average failure, then this doesn’t look quite so bad. [...]

  2. Fannie Mae/Freddy Mac crisis fillips interest in gold/silver | Start learning how to make money says:

    [...] losing about 85% in twelve months. Meanwhile, a large California mortgage lender, IndyMac Bank, was taken over by the FDIC, further spreading concerns about the banking [...]

  3. [...] other bloggers have tackled this issue in the past, particularly when discussing the demise of IndyMac Bank, a [...]

  4. [...] and financial institutions. In recent months, several US banks crashed, including IndyMac. Several other US banks or major players in the US financial industry have announced massive losses [...]

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