Federal Regulators Take Over IndyMac After a Run on the Bank

Reuters
Regulators to run IndyMac until buyer found
By John Poirier and Rachelle Younglai
Friday July 11, 8:10 pm ET

WASHINGTON (Reuters) - Banking regulators on Friday swooped in to take over mortgage lender IndyMac Bancorp Inc, the second-largest bank failure in U.S. history and the fifth bank to close this year.

The Federal Deposit Insurance Corp estimated the cost of the California-based bank's failure to its $53-billion insurance fund at between $4 billion and $8 billion and will run the bank while it looks for a buyer.

The takeover of IndyMac capped a tumultuous day for U.S. financial markets that saw stocks slide on a surging oil price and renewed fears about the stability of the top two home financing providers, Fannie Mae and Freddie Mac.

IndyMac's primary regulator, the Office of Thrift Supervision, blamed comments by New York Democratic Sen. Charles Schumer for causing a run on the deposits at the largest independent publicly traded U.S. mortgage lender.

Schumer responded quickly on Friday, blaming the OTS for not doing its job and for letting IndyMac's loose lending practices continue.

The OTS said depositors have been withdrawing cash at an elevated pace since late June, when Schumer questioned IndyMac's ability to survive the housing crisis.

In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts, the OTS said.

"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," he said.

The successor bank run by the FDIC will open for business on Monday. Over the weekend, depositors will have access to their funds by ATM, other debit card transactions, or by writing checks. They will have no access via online banking and phone services until Monday.

Earlier in the week, IndyMac said it was unable to raise new capital, would slash staff by 60 percent and had stopped making home loans. Its stock slid precipitously in the past week and last traded at 28 cents on the New York Stock Exchange, down 95 percent from the beginning of the year.

The FDIC insures up to $100,000 per deposit and up to $250,000 per retirement account at insured banks.

At the time of closing, IndyMac had about $1 billion of potentially uninsured deposits held by about 10,000 depositors. The FDIC said it would pay those depositors an advance dividend equal to 50 percent of the uninsured amount.

OTS told a conference call with reporters that it did not expect significant market impact from IndyMac's closure as the firm is not a systemic institution and does not have numerous counterparties. Reich also said he did not expect a larger thrift to fail.

Former FDIC official Ann Graham said it was not unprecedented for the FDIC to start running a bank after it fails. "It happens when they need to move more swiftly with the closing than they can move with a potential sale," said Graham, a law professor at Texas Tech University.

"They don't have to sell the institution over the weekend," she said. "They have the time to shop around." (Put it on Craigslist - Jesse)

Graham said the FDIC has the authority to operate an institution for two years but expected the agency will dispose of it much sooner than that.

(Reporting by John Poirier, Karey Wutkowski, Rachelle Younglai; Editing by Toni Reinhold and Braden Reddall)