The end-game for what was very briefly the nation’s biggest mortgage lender, IndyMac, seemed inevitable, although the signals even as a of a few days ago were that a takeover was not imminent. The timing, coming in the midst of Famnie and Freddie worries, is particularly bad. One can only conclude that this action could not be help off until next weekend or later, and the authorities decided to act on a summer Friday in the hope of minimizing adverse market reaction.
Note this is the largest bank failure since Continental Illinois which went under in 1984 with $40 billion of assets. While in real terms, that was a vastly larger collapse (IndyMac has $32 billion in assets), the rest of the banking system was on solid footing back then.
Note that the Journal reminds readers that IndyMac specialized in Alt-As. We have been told that while banks and securities firms have written down subprimes to realistic, perhaps even conservative levels, Alt-A and Option ARM writedowns are a completely different matter. A side effect of the IndyMac failure may be more aggressive Alt-A writedowns.
From the Wall Street Journal:
IndyMac Bancorp Inc., a prolific mortgage specialist that helped fuel the housing boom, was seized Friday by federal regulators in one of the largest bank failures in U.S. history……
IndyMac specialized in Alt-A loans, a type of mortgage that can often be offered to borrowers who don’t fully document their incomes or assets. The company sold most of the loans it originated but continued to hold some on its books. As defaults piled up, IndyMac’s finances deteriorated.
The bank will be run by the Federal Deposit Insurance Corp., a federal regulator, and will reopen Monday.
In a written statement, the Office of Thrift Supervision, which regulated IndyMac, said “the immediate cause” of the failure was statements made by New York Democratic Senator Charles Schumer. Mr. Schumer in late June publicly raised concerns about the bank’s solvency…..
An exodus of depositors added to IndyMac’s woes. Deposits are the lifeblood of banks, providing them with a stable, low-cost source of cash to fund their daily operations and lending activities. After Mr. Schumer raised questions about the bank, depositors withdrew $1.3 billion in 11 days.
It’s unclear how much the failure will cost the FDIC.
The Office of Thrift Supervision press release was even more pointed about Schumer’s role than the Journal quote suggests:
The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.
“This institution failed today due to a liquidity crisis,” OTS Director John Reich said. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”
Note that reader Steve had pointed out earlier this week that regulators were trying to shrink IndyMac prior to a regulatory seizure because it would would strain FDIC resources.
We need to be clear: IndyMac alone does not pose a problem to the FDIC. But the FDIC is gearing up for more bank closures, and this is a big call on its resources relatively early in the game. The assumption has been that bank failures will be concentrated among smaller banks, but even enough small banks in trouble add up to real money.
The problem comes from IndyMac having taken loans from the FHLB which were required to be overcollateralized.
Note there is a very real possibility, as Steve intimates, that some emergency measure will eventually need to be implemented, such as having the FDIC be able to somehow assign FHLB portfolios to the Fed, or more likely, go to the Treasury for emergency financing.
Evidently the regulators can’t find a buyer for Indymac, and are shrinking it as a prelude to nationalization….
The prohibition on opening or rolling brokered deposits is an obvious thing to do, but forcing Indymac out of the non-GSE mortgage business is not. The problem for FDIC is that non-GSE mortgages wind up getting pledged to FHLB, and as a secured creditor with an over-collateralized position, FHLB borrowings must be paid off by FDIC if the bank becomes insolvent. This is a large cash flow hit to the insurance fund (over $10B or 1/5 of the Fund in the case of Indymac), but the obligation of FDIC as Receiver to marshall the assets of the estate leaves no discretion for over-collateralized borrowings. The Board of the FDIC made some public comments about this problem a few months ago. FDIC has no access to the Fed to liquify and park a FHLB portfolio. In a bridge bank scenario, the FHLB borrowings remain in place, but FDIC is still obligated to provide a combination of capital and guarantees against loss sufficient to launch a new, well-capitalized institution (perhaps in partnership with private capital)–also a large figure, and the main driver behind Fed/FDIC’s push to modify the bank holding company regulations to allow in more unregulated capital….
The obvious danger to this stratagem is a deposit run requiring intervention….
When Northern Rock blew up, invidious comparisons were made in the British press between the US system of deposit insurance and the hodge-podge of miniscule deposit guarantees and vague regulatory responsibilities in the UK. We’ll see how the US system holds up in a systemic crisis that has reached large institutions that aren’t `too big to fail’, but have combined liabilities many times larger than the Insurance Fund. FDIC could fall back on Treasury for additional emergency funds, but that’s precisely what the current—and no doubt next—administrations want to avoid at all costs.