The collapse is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC’s $53 billion deposit-insurance fund.
The Pasadena, Calif., thrift was one of the largest savings and loans in the country, with about $32 billion in assets. It now joins an infamous list of collapsed banks, topped by Continental Illinois National Bank & Trust Co., which failed in 1984 with $40 billion of assets. The second-largest failure was American Savings & Loan Association of Stockton, Calif., in 1988.
I didn’t know anyone listened to senators.
The director of the Office of Thrift Supervision, John Reich, blamed IndyMac’s failure on comments made in late June by Sen. Charles Schumer (D., N.Y.), who sent a letter to the regulator raising concerns about the bank’s solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a “heart attack.”
Well, I suppose they did spell his name right.
ADDED: Sen. Shumer responds.
I still think the run on Indymac may have created the run on Fannie and Freddie.
8 responses so far ↓
1 ks // Jul 12, 2008 at 11:27 pm
The current narrative on bank failures is that some person starts a run on the bank with rumors. Had the rumors not been present, then the bank would be perfectly fine.
This scenario might sound plausible to some. However, when applied to IndyMac the scenario is incorrect. IndyMac was very close to zombie status when Schumer’s letters were released. IndyMac would most definitely NOT be perfectly fine had the letter’s not been released. IndyMac was doomed by mismanagement. Very simple. It just does not fit in with the narrative that the press feels like giving.
This reminds me of the Bear Stearns debacle. The narrative was similar: Rumor -> run on Bear Stearns -> destruction of the investment bank. The media hardly mentioned that in July of 2007 Bear Stearns had two very large hedge funds implode. Bear Stearns dug a grave and took a nap.
Mismanagement killed Bear Stearns.
We now have the narrative that Fannie Mae and Freddie Mac are perfectly fine except for some nasty rumors. However, the media NEVER talks about the accounting scandals and general mismanagement. Or about the insane amount of leverage that is deployed by these institutions.
Watch for a repeat of this narrative when Washington Mutual and Wachovia go zombie and then get taken over by the federal government.
The state of our media would be laughable if it were not so sad.
2 John Wake - Real Estate // Jul 13, 2008 at 10:04 am
Yeah, when I was reading the stories on Fannie and Freddie, I wondered why they didn’t include the financial mismanagement. Didn’t some guy get convicted?
From Wikipedia. “In 2003, the company revealed that it had understated earnings by almost $5 billion, one of the largest corporate restatements in U.S. history. As a result, in November, it was fined $125 million–an amount called “peanuts” by Forbes. [3]
A 200-page report issued by Office of Federal Housing Enterprise Oversight indicated that the company’s records were manipulated to meet Wall Street earnings expectations. The firm signed a consent order promising to improve internal controls and corporate governance. [4]
On April 18, 2006 home loan giant Freddie Mac agreed to pay a record $3.8 million fine to settle allegations it made illegal campaign contributions. [5]”
It seems that should be part of the story.
3 John Wake - Real Estate // Jul 13, 2008 at 10:06 am
Here’s the Fannie Mae scandal from Wikipedia.
“In late 2004, Fannie Mae was under investigation for its accounting practices. The Office of Federal Housing Enterprise Oversight released a report [4] on September 20, 2004, alleging widespread accounting errors, including shifting of losses so senior executives could earn bonuses.
Fannie Mae was expected to spend more than $1 billion in 2006 alone to complete its internal audit and bring it closer to compliance. The anticipated restatement was estimated at $10.8 billion, however, after review resulted in $6.3 billion in restated earnings as listed in Fannie Mae’s Annual Report on Form 10-K.
Concerns with business and accounting practices at Fannie Mae predate the scandal itself. On June 15, 2000, the House Banking Subcommittee On Capital Markets, Securities And Government Sponsored Enterprises held hearings on Fannie Mae[5].
On December 18, 2006, U.S. regulators filed 101 civil charges against chief executive Franklin Raines; chief financial officer J. Timothy Howard; and the former controller Leanne G. Spencer. The three are accused of manipulating Fannie Mae earnings to maximize their bonuses. The lawsuit sought to recoup more than $115 million in bonus payments, collectively accrued by the trio from 1998–2004, and about $100 million in penalties for their involvement in the accounting scandal.”
4 John Wake - Real Estate // Jul 13, 2008 at 10:17 am
Sure, it was IndyMac that walked themselves to the cliff’s edge and would have likely gone over in a short amount of time, but Shumer releasing the letter to the public may have nudged them over the edge.
I’m sure IndyMac wished they had a few more weeks or months to try to put a buyout together… but Shumer moved the clock forward and the game ended sooner than IndyMac expected.
Some buyouts have been put together in a very short amount of time. BofA and Countrywide. Chase and Bear Stearns (?).
Did Shumer’s letter cascade to IndyMac which cascaded to Fannie and Freddie?
5 Brian McMorris // Jul 13, 2008 at 6:48 pm
Freddie and Fannie managers should have shifted some real money into a big slush fund, rather than just paper profits to “window dress” later earnings reports for bonus reasons. Had they had a true slush fund hiding somewhere, they could be using it now to prop up their capitalizations.
6 ks // Jul 14, 2008 at 12:57 am
BofA and Countrywide were not put together in a short amount of time. BofA slowly found itself in a position it did not want to be in. BofA had to make a decision to either cut its loses or double down. BofA decided to double down. The president of BofA acts like this was a great aquisition. Time will tell.
JP Morgan Chase got a screamin good deal on Bear at the expense of the US tax payer backstopping the deal. The Fed would probably be wary of doing something similar in the future. In addition to taking heat from congress for the Fed power grab, the agreed upon $2 a share ended up being $10 a share. This just illistrated that the Fed was far from being a savvy wall streat deal maker. Heck, the Fed -and by extension, the US tax payers- were taken as bush league fools. Had the Fed pushed harder, they could have gotten the $2 per share transfer that was agreed upon with a smaller amount for the non-recourse loan.
The vast majority of bank failures will be due to a bank run. Once the account holders of a bank determine that their bank is too sketchy, the bank run starts. For those that have 100k+ parked at the bank, it is important to get that money out before the bank is taken over. In fact, it would be flat out stupid for a 100k+ account holder to NOT bolt after the first hint of trouble.
Once the bank starts doing desperation plays for capital it is in the best interest of the tax payers to take over the bank. For example, a few days before IndyMac was taken over, Indy was offering short term CDs that had a spread over US Treasuries larger than any other bank in the nation. Since the tax payer was insuring the CDs, it became important for Indy Mac to get shut down as soon as possible.
Banks are all about trust. Once that trust is shaken, the bank is in for a world of hurt. Indy Mac lost the trust of its account holders. Because of this lost of trust, Indy Mac was taken over. Indy should have known for quite some time that it was getting in trouble. That time did not produce an outcome that allowed for a take over.
This is how it works. The banks are fully aware that this is how it works. Indy Mac did not manage itself in a manner that maintained the trust of its account holders.
There will be more examples of bank failures this year and next. Most will have fully justified bank runs.
7 Heather Barr // Jul 16, 2008 at 8:00 pm
“For those that have 100k+ parked at the bank, it is important to get that money out before the bank is taken over.”
True. And ks, I have no doubt you’re right - there will be more bank failures this year. I’m not savvy enough to know whether they’ll be caused by bank runs or just worsened by them. Given everything, I agree with John Wake, that Sen Schumer’s comments made a bad situation worse, quickly. Methinks he should have known to keep his big trap shut.
Mostly though, I’m baffled by the stories of people who HAD more than $100k parked at IndyMac. Isn’t the $100k FDIC insurance limit common knowledge? More baffling are the people who closed their under-$100k accounts AFTER the FDIC took over. Huh?
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