Senator Schumer's Careless Remarks Result in IndyMac's Early Demise

By now we've all grown accustomed to the act of congressional "ambulance chasing"; members of Congress who regularly appear on the scene every time there is a problem, pointing fingers at the other party or involved government agency, proclaiming their own innocence to the situation and out of the blue presenting a miraculous solution to the problem. Narcissists by nature, members of Congress use these situations to garner TV time and press coverage, giving their constituents the impression they are not part of the problem and that instead they are working hard on their behalf to make everything right.

Over the years, NY Senator Charles Schumer has become known for just this type of activity. Whether it's the energy crisis, the banking crisis or anything else that is capturing national headlines at the moment, you can rely on Senator Schumer to pop up in the media to point fingers, separate himself from the situation and present a litany of bureaucratic solutions for resolving the issue.

Normally this activity can be dismissed as "politics as usual", however his latest act may end up costing IndyMac (IMB) deposit holders with combined account balances above $100K more than $500M.

It all began on June 26^th, when Schumer, a member of the Senate Banking Committee, wrote letters to bank regulatory agencies, urging they take steps to prevent IndyMac's collapse. Word of the story was spread quickly by the media and in the days that followed, depositors withdrew over $1.3B, resulting in the bank's failure on Friday July 10^th.

After the bank was seized, the Office of Thrift Supervision [OTS] released the following statement describing the situation:

The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors' demands in the normal course of business and is therefore in an unsafe and unsound condition. 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.

While I've never had any connection (shareholder, deposit holder or otherwise) to IndyMac Bank, I was outraged when I read about what transpired. How could a member of the Senate Banking Committee be so careless? It's bad enough when the financial press speculates on such things, but when the public hears a government official speak of a bank's collapse, it's taken as gospel.

Based on years of careless lending and bad management, IndyMac Bank was eventually likely to fail anyway, but Senator Schumer's letters immediately sealed it's fate. At a minimum, this situation is deserving of an investigation and a change of policy regarding how communications between Senate Banking Committee members and the OTS and FDIC should occur to prevent a similar situation from happening in the future.

I can tell you if I was one of the 10,000 unlucky deposit holders who were going to loose an estimated combined $500M, I would first be blaming myself for having more than $100K in a single bank and second, be readying a lawsuit against Senator Schumer for creating public panic that caused a run on the bank resulting in its immediate failure.

Disclosure: Author does not, nor has never had any equity or depository relationship with IndyMac Bank.

Comments

[Lil Davy:]

Oh, give me a break. IndyMac has been collapsing for months. "Creating a panic" "Causing a run". Schumer didn't create anything that wasn't already there. IndyMac management has been working hard to deflect attention from their incompetent and possibly illegal actions. You might think Schumer is a jerk; he's certainly a pol, but he didn't cause IndyMac's demise. Red Herring.

2008 Jul 13 04:07 PM

[Balanced:]

Red Herring - You must be a short seller, yes? IndyMac may have been a puddle of spilt gasoline, but Schumer threw the match.

2008 Jul 13 04:28 PM

[Hue Mann:]

Yet another example of how the two party system continues to drag us down.

As for Schumer, 99% of US voters didn't have a say about him getting into office, but now 100% of us suffer from his partisan politics.

2008 Jul 13 04:58 PM

[chipcollector:]

Although INDYMAC was no poster child for conservative
banking, it deserved a better funeral than the one
hastened by Sen. Schumer.
I know the good Senator and I am (somewhat) familiar
with IndyMac's operation.
Absent the "push" afforded by Sen. Schumer
IndyMac would not have failed on Friday.
The senator's actions cost me and every other taxpayer
unnecessary expense.
I only wish it was a Federal crime to incite a run on a federally-chartered bank. It is not.
My message to Sen. Schumer: Knock it off before somebody
REALLY gets hurt. You, of all people, should know better.

2008 Jul 13 05:03 PM

[sozomuse:]

That IndyMac was on the precipice is clearly established. What stinks, red herring or otherwise, is irresponsible hot air by a member of the senate banking committee; enough to cause problems for any bank, let alone blow $500M of taxpayer dollars off the cliff. Machiavelli is smiling.

2008 Jul 13 06:33 PM

[daniel2008:]

Senator Schumer, You can kiss your immunity against arrest goodbye!

2008 Jul 13 08:49 PM

[RPK:]

You seem to be blaming the messenger in this situation. The focus of any inquiry should be on why the bank was allowed to operate with "...years of careless lending and bad management, IndyMac Bank was eventually likely to fail anyway...", as you contend.

2008 Jul 13 10:51 PM

[viewfromnyc:]

There is a very simple test to see if Senator Schumer caused the demise rather than just hastened it. When the portfolio of (bad) loans is run off, if the government loses money after the uninsured depositors already took a 50% loss then Schumer had nothing to do with the underlying economics just the timing. The regulators should have shut this pile of crap down long before it cost the American taxpayer any money. If the government makes money and returns some to shareholders then Schumer caused the demise.

2008 Jul 14 09:17 AM

[jimmyp42:]

Years ago I was a State Bank Examiner in California. At that time it was against the Financial Code to do anything to incite a run on a bank. I am not aware that that code has been changed. In the Senator's position he has the right to point out negitive things to regulators, but to make his comments public for self political gain should be a crime.

2008 Jul 14 10:36 AM

[Emerald:]

Schumer's public comments aside, RPK is right. Why wasn't this institution shut down a few years ago? If this bank was in NYC, Schumer would not have gone public. All the members of the house and senate from New York are "paid" by the money center banks and Wall Street firms. Who do you think funds their campaigns? We always vote and we, the taxpayers, always pick up the check. Nothing new here.

2008 Jul 14 11:34 AM

[edit5410:]

the ONLY issue here is how many "friends" did Shumer notify before his letter went out.

2008 Jul 14 05:40 PM

[Urbane Gori...:]

Schumer was not the cause of the failure..If the bank had been properly collateralized, it wouldn't have shut its doors.... However, having said that, could someone have Schumer kick me a quick email the day before he sends a memo to the banking comission in future... Sure would appreciate being able to make some short calls before it hits the fan.... Thanks in advance!!!

jegan ;-)

2008 Jul 14 06:06 PM

[buflochp:]

There is a reason to push for term limits. Schumer just confirmed the justification

2008 Jul 14 07:36 PM