Who's to Blame for IndyMac's Failure?

Jul.12.08 | About: IndyMac Bancorp, (IDMCQ)

The $32 billion failure of U.S. mortgage lender IndyMac demonstrates just how differently the United States is governed than Canada. This from today’s Wall Street Journal:

 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.”

 “Would the institution have failed without the deposit run?” Mr. Reich asked reporters. “We’ll never know the answer to that question.”

 Mr. Schumer quickly fired back.

 “If OTS had done its job as regulator and not let IndyMac’s poor and loose lending practices continue, we wouldn’t be where we are today,” Sen. Schumer said. “Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.”

You might be asking yourself, why is a New York Senator asking a regulator to look into a California bank’s “solvency”? Sen. Shumer is a member of multiple committees, each of which gives him a call on the financial markets and banking sector: Banking, Housing and Urban Affairs & Finance are two of his key Senate committees. He also Chairs the Senate Subcommittees on Economic Policy (Banking).

Having established that he has an oversight interest in the banking world, just what is he doing writing letters that could be seen to encourage panic on the part of depositors? When his staff sat around and discussed what to do before the letter was issued, they would have discussed the obvious risks to IndyMac’s solvency if a key U.S. Senator was raising concerns about solvency. At the same time, others would have advocated that “he has to be ahead of the issue” and “on the record” before Indymac hits the wall.

It’s not like Americans haven’t lived through a year of warnings (see prior post “US subprime borrowers sink deeper into trouble” June 15-07) about the financial health of small to mid-sized U.S. financial institutions. Many Californians lined up last summer to get their savings out of Countrywide Financial (CFC), for example (see prior post “Has the run started at Countrywide?” August 18-07). Moreover, Sen. Shumer’s anger appeared to be directed at the Office for Thrift Supervision, as much as it was at IndyMac’s management. I’m not sure that five votes in New York State tilt on whether or not Sen. Shumer was “out in front” on this issue or not. His profile is so high, and his power to get projects passed for N.Y. so clear, that his Senate seat is likely in the bag for several terms to come.

Which makes it all the more interesting that he got into the details of this specific situation. It appears to me that he was just doing his job. Which is probably more than you can say, as an outsider, for the Office of Thrift Supervision [OTS].

If the SEC continues to be AWOL on most of its mandate, and the OTS can’t help its charges avoid insolvency, huge corners of the U.S. capital markets fall to those members of Congress who are prepared to take the baton.

Disclosure: None