More Bank Failures May Follow IndyMac

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Federal regulators seized IndyMac Bank Friday, one of the nation's largest lenders, because of questions about its viability. The bank is now being run by the Federal Deposit Insurance Corporation (FDIC). Karen Shaw Petrou, managing partner at Federal Financial Analytics, about what that means for the financial sector, speaks with NPR's Liane Hansen.

LIANE HANSEN, host:

This is Weekend Edition from NPR News. I'm Liane Hansen. This week, an already bad housing market got even worse. Markets tumbled on rumors that the Bush administration would bail out mortgage lenders Freddie Mac and Fannie Mae. Then on Friday, federal regulators seized IndyMac Bank, one of the nation's largest lenders, because of questions about its viability.

The failure of IndyMac is one of the biggest in U.S. history. The bank is now being run by the Federal Deposit Insurance Corporation, or FDIC. Joining us in the studio is Karen Shaw Petrou. She's a managing partner at Federal Financial Analytics, a Washington-based firm that assesses risk in the financial sector. Welcome to the program.

Ms. KAREN SHAW PETROU (Managing Partner, Federal Financial Analytics): Thank you.

HANSEN: Briefly, remind us what exactly is the FDIC, and what does it do. What's its role?

Ms. PETROU: The FDIC was set up in the early 1930s by the Roosevelt administration so that the nation would never have to go through the kind of bank runs that were a critical and awful part of the Great Depression. It's that sticker you see at every teller window on every bank in the United States, and it means that your insured deposit is covered by an agency of the federal government.

HANSEN: Insured deposit up to a certain point?

Ms. PETROU: Up to 100,000 dollars.

HANSEN: What does it mean then that the FDIC has taken over this bank?

Ms. PETROU: It means that it will now work through the bank, paying off the insured depositors, figuring out who are the uninsured depositors and the other creditors of the bank. And after it's paid off all the insured deposits, what's left and, you know, what's called the resolution, it will then parcel out the pieces of the bank, trying to make that as the least-cost-possible resolution to preserve the integrity of the FDIC and minimize potential cost to tax payers.

HANSEN: Are the uninsured depositors out of luck?

Ms. PETROU: That depends. In some bank failures, there was one in early 2000, 2001 where the FDIC was able to sell off a failed bank for enough money to pay all the uninsured depositors and the creditors and still make a couple of dollars for the FDIC. But that's unusual. Usually, an uninsured depositor and other creditors will take a hit.

HANSEN: As of March, IndyMac bank had 32 billion dollars in assets. How deep are the FDIC's pockets? I mean, can it get into trouble if banks keep faulting like this?

Ms. PETROU: The FDIC can. The amount of insured deposits at IndyMac is considerably less than the total amount of the assets at the bank. And the fund is ample, and if it, for any reason, encountered short-term funding problems, the federal government would stand behind it.

Banks fund the FDIC. All insured banks pay a premium into the FDIC for the coverage. And if at any point the coverage runs short, the treasury writes a check, and then the banks pay it back.

HANSEN: IndyMac is the fifth bank to close this year. Do you think the American public should be worried that this might be a trend?

Ms. PETROU: We'll have more bank failures, and there's no question in my mind that this is going to be a tough year. We've all been lulled into complacency. We've had a lot of good years. And boom brings that out in the banking system, and it makes us all lazy.

It means that uninsured depositors get too relaxed, then they don't take care. It means that regulators get lazy. We've been through a period of time in which we all sort of thought that, gee, regulation is always wrong, and the market is always right. And I think we got a little too careless.

HANSEN: Karen Shaw Petrou is a managing partner at Federal Financial Analytics, based here in Washington D.C. Thank you so much for coming in.

Ms. PETROU: Thank you.

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IndyMac Bank Falls In Housing Crisis

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On a day in which fear and turmoil swept through the financial markets, the biggest victim was a bank that specialized in risky mortgages. IndyMac Bank was seized by federal regulators late Friday. The bank is the largest mortgage lender to fail during the housing crisis and is one of the biggest banks to collapse in U.S. history.

"IndyMac was a high-flying mortgage lender specializing in exotic and risky loans sometimes called Alt-A loans," NPR's John Ydstie tells Weekend Edition guest host Linda Wertheimer. For some of those loans, IndyMac didn't require borrowers to provide documentation of income.

"It worked great during the housing boom. They made hundreds of millions of dollars in profits for a couple of years," Ydstie says. "But when home prices started falling and loans began to go sour, they fell very hard."

John Reich, director of the federal Office of Thrift Supervision, said Friday that IndyMac "failed due to a liquidity crisis," that is, it ran out of money. The OTS said it transferred IndyMac's operations to the Federal Deposit Insurance Corp. because it did not think IndyMac could meet its depositors' demands.

According to the FDIC, depositors will have access to their money this weekend through ATMs, debit cards and checks.

"IndyMac will open on Monday as a new entity under government control," Ydstie says.

Depositors who had $100,000 or less in the bank won't suffer any loss, but those who had deposits totaling $1 billion that were not insured are going to take a big hit: They'll get a payment equal to half the uninsured amount.

Reich suggested interference by a U.S. senator may have played a role in the collapse. Two weeks ago, New York Democrat Charles Schumer wrote a letter contending that lax lending standards and deposits purchased from third parties had left the bank on the brink of failure.

Within 11 business days of the letter, there was a run on the bank: Depositors withdrew more than $1.3 billion. Reich charged that Schumer "gave the bank a heart attack."

In an e-mail Friday, Schumer said, "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."

Ydstie anticipates there will be more bank failures as a result of the housing crisis.

"But IndyMac was really an outlier — a cowboy bank. It took big risks with jumbo loans; it had a lot of business in the hottest real estate markets in California. Other bank failures though aren't likely to be this large."

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