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IndyMac Bancorp’s (IMB) $32B takeover by the FDIC is the largest since the $40B takeover of Continental Illinois in 1984. The FDIC will operate the bank as IndyMac Federal Bank until a buyer can be found. I took a small stake in IMB recently at very low prices. I gambled that they would survive if they could retain a large part of their deposit base, while shrinking their balance sheet.

Readers know by now that I lost my bet. Why I lost is now an active debate between Senator Schumer and John Reich, director of the Office of Thrift Supervision (OTS). IMB had been losing uninsured deposits at a slow steady pace for months, but an accelerated “run on the bank” started after Schumer publicized a letter to FDIC’s Chairwomen Bair written on June 26, 2008. Schumer requested that regulator watch IMB closely to minimize taxpayer loses.

Schumer’s letter served no purpose because the FDIC and OTS were already closely monitoring IMB. The letter was only for public consumption, to create publicity for Schumer. The New York Times “Regulators Seize Mortgage Lender” reports Reich saying IMB’s deposits were actually increasing before the letter was published, after which withdraws averaging $100M a day started ($1.3B total).

Reich complained that Schumer contributed to an already distressed situation. Reich said he was “troubled by any interference in the regulatory process." This is not the first time Schumer shouted 'fire' in a crowded theater. Schumer tried unsuccessfully to break up the Countrywide (CFC) – Bank of America (NYSE:BAC) merger. I cannot know whether IMB would have held on without Schumer’s incitement, but it sure did not help.

Friday Schumer took the opposite stance, trying to promote confidence in Fannie Mae (FNM) and Freddie Mac (FRE). But it was not confidence in the companies themselves, it was confidence that the government would step in as savior (if necessary). Unfortunately, nothing Schumer is doing adds confidence in the US financial system. Perhaps he should stop trying to promote his “brand” and just keep quiet.

(Additional source was Dow Jones Newswires, Tom Barkley, July 11, 2008 18:54 ET)

Notices: “FDIC Information for IndyMac Bank, F.S.B., Pasadena, CA”, “Failed Bank Information”

Disclosures: Author is long BAC, FNM, FRE and IMB.

Source: IndyMac Bancorp Failure: Sen. Schumer vs. OTS