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

| About: IndyMac Bancorp, (IDMCQ)

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 26th, 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 10th.

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.