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

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.

Who's to Blame for IndyMac's Failure?

IndyMac serves as a warning to uninsured depositors at all financial institutions. If you have uninsured deposits, you should review the creditworthiness of the bank to which you have lent money. Yes your deposit is a loan. Get your money back and put it with a sound institution. The extra few basis points of yield are not worth the risk. The credit risk is mispriced because you are receiving an interest rate that assumes FDIC insurance. Even if you have an insured deposit, look back to the Resolution Trust days. Insured depositors were paid in full but in many cases lost access to their money for a significant period of time (months). There is a reason a bank has to pay an extraordinary rate to attract deposits.

A few key indicators of a general lack of soundeness. 1) Common stock trading at a significant discount to book value, less than 80%. In general, a declining stock price is an indicator of default. See work by Moodys-KMV 2) NPAs non-performing assets greater than 5%. High levels of NPAs are a good indication that the bank is either a poor underwriter or has taken undue risk with your money 3) lack of cash earnings. Neg-am and the use of interest reserves in construction lending may overstate real earnings, as the loans typically don't default until the neg-am reaches its maximum and the loan recasts.

Schumer was not wrong. The regulators who have been applying traditional measures of solvency to non-traditional loan products are completely at fault and completely incompetent. I have no doubt there will be many more seizures to come out of the Alt-A, option ARM and construction lending crowd. Wall St. recognized this a year ago. Too bad Schumer is just waking up now and the cost to the taxpayer goes up every day these banks are allowed to stay in business throwing good money after bad in the hopes of some miraculous recovery in the housing market. And no the run on the bank didn't kill IndyMac just hastened the inevitable failure.