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Originally published Monday, July 14, 2008 at 12:00 AM

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IndyMac bank crisis signals new takeover era

A new era for the U.S. government's takeover of failed banks is about to begin. IndyMac Bancorp became the biggest casualty of the subprime...

McClatchy News Service

SAN FRANCISCO — A new era for the U.S. government's takeover of failed banks is about to begin.

IndyMac Bancorp became the biggest casualty of the subprime mortgage crisis over the weekend, as federal regulators shut down the troubled Pasadena, Calif.-based savings bank in one of the largest U.S. bank failures ever.

The Federal Deposit Insurance Corp. (FDIC) said in a statement that it will take over operations of IndyMac, which will open for business today as IndyMac Federal Bank. The thrift — the fifth U.S. bank to fail so far this year — had total assets of $32 billion as of March 31.

In a televised statement Sunday afternoon, FDIC Chief Operating Officer John Bovenzi said that "come Monday morning, it will be business as usual," and urged customers to "view this as a change in ownership."

Bovenzi described the FDIC takeover as "orderly."

Much of IndyMac's business was built on so-called Alt-A single-family mortgages, which were often made to borrowers with poor credit. As the secondary market for these loans collapsed, IndyMac's financial condition turned precarious.

IndyMac is the third-largest financial institution to fail in U.S. history, according to the Office of Thrift Supervision (OTS), which had regulated IndyMac.

Regulators said the "immediate cause" of IndyMac's failure was a deposit run in recent days that began after a June 26 letter to the OTS and the FDIC from New York Sen. Charles Schumer was made public. The letter voiced concerns about IndyMac's soundness.

By July 10, depositors had pulled more than $1.3 billion from their accounts, the OTS said in a statement.

"The institution failed today due to a liquidity crisis," said OTS Director John Reich. "Although this institution was already in distress, I am troubled by any interference in the regulatory process."

But Schumer wasn't having it; he told The Wall Street Journal that if OTS "had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today."

Instead of "pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs," he said.

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The company had agreed to a new business plan with regulators that included halting new mortgages to shrink its balance sheet and improve capital ratios, while announcing it would cut more than half of its workforce.

Bert Ely, a banking consultant in Alexandria, Va., said that while Schumer's letter did have an effect, IndyMac's collapse was only a matter of time.

"What Schumer did was wrong and irresponsible, and I'm not sure what he was trying to accomplish," Ely said. "But IndyMac was already well-known to be a forthcoming failure."

For the bank's patrons, their principal and interest on insured accounts are covered by the FDIC up to at least $100,000 with some entitlements and accounts covered for more. IRA funds are insured up to $250,000.

The failure of IndyMac is going to blow a big hole in the FDIC's cash reserves, costing between $4 billion and $8 billion — or potentially more than a tenth of its deposit-insurance fund.

Copyright © 2008 The Seattle Times Company

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