IndyMac Bancorp Failure: Sen. Schumer vs. OTS

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 (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.

Comments

[fatcat:]

Mr.Steinberg,looking at your position disclosure,you may have to make a trip or two to the Fed discount window!!

2008 Jul 12 12:41 PM

[bluelightning:]

Mr Steinberg.
I agree with you entirely. Schumer had no business publicizing his letter. While we can not be certain whether IndyMac would have survived eventually, Schumer's letter caused it death. The only purpose served by the letter seems to have been publicity for himself at the expense of others.

2008 Jul 12 01:37 PM

[sr9web:]

Schumer ought not to be releasing pressers of that type. He's not a stock picking pundit. He's a Senator and he has an obligation to use official channels - not the media - to achieve his aims. Schumer basically ssaid that he "had" to release that presser because regulators were not responsive enough to him. Sounds to me like Schumer is asserting that he's an ineffective Senator - if he can't make government agencies respond to him in a timely manner.

2008 Jul 12 01:40 PM

[Kay:]

As was just stated, Senator Schumer does not appear to care about the distress he causes from his unqualified soapbox. He has already caused the job loss at Indy with his lack of ability to allow OTS & FDIC to do their job and save a horrible loss for many innocent people. He has contributed to further damage to our present economy.

2008 Jul 12 01:58 PM

[chuck22b:]

Shareholders! Let's Sue Schumer!

2008 Jul 12 03:35 PM

[Loden1111:]

Senator Schumer certainly has responsibility for the general state of legislation concerning oversight and regulation of savings and loans. He very well could have sent a private and confidential letter to the Office of Thrift Supervision requesting comment on the status of a given bank or thrift. Instead, he publicized his letters.

I find it hard to believe that a sitting Senator would not realize the effect his public statements would have on any depository institution. The only reason I can imagine he would publicize such statements about an FDIC insured depository would be to embarass the sitting president and create a greater sense of doom and gloom. Given other public statements made in the past by Senator Schumer, it is well within the realm of possibility, in my opinion, that his political posturing has cost the FDIC a very substantial amount of money that the rest of us will wind up paying in the form of higher FDIC assessments over the next several years.

Even if he wanted to be out in front, he could have maintained the confidentiality of his concerns in communicating with the regulators. Then, if IndyMac failed, he could have released his letters as proof he was on task.

Shame on you Senator!

2008 Jul 12 03:53 PM

[warren99:]

Senator Schumer is doing his job as Senator for New York. He supported by the state of New York interests. The conditions in the banking industry and the operation of IndyMac are known to him. If he can discredit or destroy a competing financial institution in California that is a good job for the financial institutions in New York. The whole economy in the USA and maybe the world runs on the faith that the business community will keep the banks working. Senator Schumer is not interested in fixing anything but his interests. If as a US Senator he is not held accountable for his actions then that is my fault and your fault. Lets do all we can to
let Congress know we expect them to be accountable and use Senator Schumer as an example.

2008 Jul 12 04:24 PM

[User 225439:]

I find that Sen. Schumer's remarks concerning Indy Mac's potential insolvency as irresponsible. As someone else indicated a man in his position should not be making public announcements that a financial institution where thousands of people hold their deposits is insolvent thus causing a run on the bank and effectively causing the situation he warned of. He should be removed from his Chair positions since he cannot be trusted to properly use the information he has access to.

2008 Jul 12 04:32 PM

[Ex OCC and OTS:]

Chuck22b, I agree. Senator Scummer is a disgrace with only political motives for everything he does who believes that he and all the self deified elites are above the law.

2008 Jul 12 04:35 PM

[User 225439:]

I find that Sen. Schumer's remarks concerning Indy Mac's potential insolvency as irresponsible. As someone else indicated a man in his position should not be making public announcements that a financial institution where thousands of people hold their deposits is potentially insolvent and effectively causing the situation he warned of. He should be removed from his Chair positions since he cannot be trusted to properly use the information he has access to. I am pretty sure that Indy Mac was going to have a tough time, but it might have survived if it did not suffer the run on its deposits which given the timing was most certainly caused by Schumer's comments.

2008 Jul 12 04:36 PM

[User 61942:]

I am a Hardcore Democrat,always have been, but EX Fed Poole and Shcumer should keep there mouth shut. If you don't have something costructive to put forth,then they both should ZIP it.

2008 Jul 13 09:01 AM

[ArnoldCountry:]

Thank God Senator Schuemer is not part of the intellegence committee... he would be quite helpful to the cause of terrorism. "Loose lips sink ships." An old WWII saying... Indymac Bank is sitting on the bottom of the ocean.

I thought legislators were to legislate. If he did not like what the OTS and FDIC were doing, float a bill.

2008 Jul 13 10:04 AM

[PutMoneyDown:]

Well, how many of you complainers are New Yorkers who keep reelecting this moron? And then there's that Senate seat you gave as a "gift" to your junior Senator. Thank you sooooooooo much NY!!

2008 Jul 13 09:27 PM

[jackson hill:]

New York Times reported that hedge fund managers have a new champion in their effort to keep legally dodging the taxes the rest of us pay: none other than New York Senator Charles Schumer. Now you know who is Schumer's friend and why he caused the bank run on Indymac. He truly support hedge fund and private equity because they truly support him.

www.nytimes.com/2007/0...

"Large Investor decided to pay a few bucks to a Senator in New York to force the issue."(Prospect Mortgage Backed By Sterling Fund--Private Equity Acquired The Mortgage Branches from Indymac before FDIC takeover)
www.housingwire.com/20...

"And do remember that there are many investment bankers located in New York, making them pretty influential constituents of Sen. Schumer."
www.pasadenastarnews.c...

"In a Sunday news conference, he said everything in his letter was already known to the public."
If it was already known to the public, what is the reason for his public letter? It is contradict to what he said previouly :"I just bring private message to the public. Do not kill the messanger." What a great liar from time to time!
www.cnn.com/2008/POLIT...

2008 Jul 14 07:45 PM

[pdq:]

Oh, puhleeze! IMB's deep problems were apparent to everyone with a pulse. Do I have to point out that IMB's share price had dropped-steadily- 98+% in the two years _before_ Schumer's letter? And that Shumer's...ummm... on the Senate finance and Banking committees, and so might legitimately discuss such matters? It sounds like his concerns about taxpayers getting stuck with the tab were sure legitimate!

These financial institutions like IMB that went hog-wild for the big mortgage bucks when times were good are all a house of cards these days, and everybody knows it. Blaming Schumer for acknowledging the obvious is just shooting the messenger.

2008 Jul 16 10:22 AM

[mortbank:]

so you say that we should allow every Attention-hungry politician get loose on any company just because that company is not well capitalized. Give me a break.

There are many banks out there sitting on a portfolio of bad loans. There is no need to put out the fire with oil. The sudden collapse of IMB is a direct cause of Chuck’s loose tongue. And yes, it “is” all about politics. Should that Senator be a Republican, we would have had endless investigations called by Schumer himself and his other cronies on the hill.

2008 Jul 16 05:14 PM