IndyMac Collapse Prompts Warning On Other Banks

The long lines continue in Southern California at IndyMac Bank branches. There has been a run on the failed bank since federal regulators took over Friday. The takeover raises questions about the health of other financial institutions.

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When bank customers lined up at California's Indymac Bank this week, we were reminded that bank failure is on the rise this year - five so far, and more are expected. Analysts warn other banks are also struggling because of unpaid home loans and a sluggish economy. But the bank losses are a much bigger problem for investors than depositors whose money is typically insured by the federal government.

NPR's Scott Horsley reports.

SCOTT HORSLEY: Having your money insured isn't the same as having your money in hand, as frustrated Indymac customers have been learning this week. Customers lined up outside Indymac branches in Southern California yesterday for a second straight day after the federal government took over the bank late Friday. As tempers grew short outside a branch in the San Fernando Valley, police arrived to keep order.

And some of the customers spoke to KTLA television about the delay in getting their money out.

(Soundbite of KTLA News Broadcast)

Unidentified Woman #1: That's nonsense. There are people here who need money to pay their bills. I mean, there's one guy that's been here since 11:30 last night. I've been here since 5:30 this morning. This is badly managed.

Unidentified Woman #2: We were standing here yesterday for five hours, and he said go home. You're not going to get in. I was standing - I was in five hours, and I was almost right here on the line.

HORSLEY: The lines outside Indymac are the exception, though. Depositors elsewhere have been leaving their money alone for the most part. And Morningstar analyst Jaime Peters says that's a good thing, since a sudden rush to withdraw money can rattle even the soundest financial institution.

Ms. JAIME PETERS (Analyst, Morningstar): Right now banking is all about the confidence factor. And if you start creating rumors that aren't necessarily true, they can become true at this point if you have enough people who believe them.

HORSLEY: It was the sudden exodus of depositors that help sink Indymac last week, the third biggest bank failure in U.S. history. Frederick Cannon, who follows the industry for Keefe, Bruyette and Woods, says Indymac had a couple of strikes against it. Not only did the bank make a lot of risky home loans to people who couldn't document their income and now can't pay, but Indymac also had a fairly fickle base of depositors, since it offered few branches or other services to build loyalty.

That made the company less attractive as a takeover target once it got in trouble. And Cannon says it makes Indymac's multi-billion-dollar collapse something of a special case.

Mr. FREDERICK CANNON (Keefe, Bruyette and Woods): That doesn't mean we don't think there'll be a significant number of bank failures on an ongoing basis. But it's important for people to recognize there's 8,000 banks in the U.S., and most people haven't heard of 7,950 of those banks.

HORSLEY: Cannon says future failures are likely to occur at smaller banks, especially in those parts of the country where home prices are falling or jobs are drying up.

Mr. CANNON: It'll be in the regions that are hard hit by this downturn. I mean, as opposed to the 1980s, when we saw a massive number of failures in Texas, we think Texas will actually do pretty well this time, partly because of high oil prices. But we do expect some pain here in California, Arizona, Nevada, Florida, and then in some areas in the Midwest, such as Michigan, that are just facing tough economic times.

HORSLEY: Regulators say they're keeping a close eye on dozens of troubled banks, but they stress the scope of the problem is much smaller than during the savings and loan crisis two decades ago, and that depositors will be protected. Not so investors, who've seen the price of bank stocks tumble sharply. Morningstar's Peters says banks have begun setting aside more money as a cushion against bad loans, and that's cutting into their bottom lines.

Ms. PETERS: Banks tend to have emotions very much like the market, where they tend to overshoot in good times and overshoot in bad times. And so right now, I think that we are getting necessary provisions for loan offices that will probably be used.

HORSLEY: Some of the battered bank stocks rebounded yesterday after Federal Reserve Chairman Ben Bernanke offered some reassuring testimony during a Senate hearing.

Mr. BEN BERNANKE (Chairman, Federal Reserve): Of course, all banks are being challenged by credit conditions now. The good news is that the banking system did come into this episode extremely well capitalized, extremely profitable. We are watching the situation very carefully. My concerns have turned less on the solvency of these institutions and more on their ability to extend the credit that our economy needs to keep growing.

HORSLEY: Banks may be less willing to extend that credit now that they're worried about keeping their own business afloat.

Scott Horsley, NPR News.

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Banking On The Safety Of Deposits

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The collapse of IndyMac, the fifth FDIC-insured bank to fail this year, has heightened fears that more bank failures may be on the way.

IndyMac, which reopened on Monday as IndyMac Federal Bank, went under last week because of the excessive number of risky mortgage loans that it held.

Customers lined up early Monday morning to withdraw cash, but for some that meant taking home something less than what they had originally deposited. Here, a look at some of the questions raised by IndyMac's failure, including what deposits the federal government insures, and what other banks may be at risk.

Does IndyMac's failure mean my bank is at risk?

Probably not. IndyMac was in an unusual situation because it had an "extremely risky" exposure to assets, says Stuart Plesser, a banking analyst for Standard and Poor's. "Their specialty was no document or low-document loans," he says — meaning borrowers didn't need much proof of income to get approved. Most banks hold a more diversified portfolio of loans, he adds.

And although five banks have failed this year, that number is tiny compared to the height of the savings and loan crisis, when 534 banks closed in 1987, according to FDIC Chairwoman Sheila Bair.

Still, Standard & Poor's has a negative outlook for banking stocks, which have not performed well: Various bank indexes are down more than 50 percent from a year ago, Plesser says.

"The chance that your bank is going to fail is very remote. The overwhelming majority of banks are quite healthy in this country," Bair told NPR. "Even if your bank does fail, your insured deposits will be there for you."

The American Bankers Association says that banks are well positioned to handle the economic downturn with a buffer of $1.48 trillion, including reserves and cash, to hold as operating capital.

Have there been mass withdrawals from other banks?

Not in the United States. But the credit crisis has prompted some banks to issue statements about their capitalization levels — in other words, how much cash they have on hand to fund operations — in an attempt to calm both depositors and investors.

How many more banks are at risk of failure?

The FDIC has identified 90 banks as "problem institutions" that are at risk of failure for the first quarter of 2008. "That number will go up," but historically, only about 13 percent of banks on this list typically fail, says the FDIC's Bair.

What deposits are insured by the FDIC?

A depositor with any type of account at an FDIC-insured bank or savings and loan is fully insured for up to $100,000 per bank. It's possible that a depositor could have more than $100,000 insured if he or she has a joint account or one of seven other legal ownership arrangements. (Get details on insured accounts.) All types of individual retirement accounts are also insured for up to $250,000.

Are money market funds insured?

Not by the FDIC. However, many money market funds invest in Treasury notes and government agency bonds, which are backed by the full faith and credit of the U.S. government. This means that investors are guaranteed that they will be paid back in full.

This category typically also includes bonds issued by Fannie Mae and Freddie Mac, the two housing finance giants that are the subject of a rescue plan announced by the Treasury Department earlier this week. Money market funds may also invest in municipal bonds backed by state governments, short-term notes issued by corporations or in CDs.

Since 1983, when the SEC revised its rules governing money market funds, there has been only one instance of a money market fund paying investors less than the principal they invested, according to the Investment Company Institute (ICI), a trade association for U.S. investment companies. That instance involved institutional — not individual — investors.

How have IndyMac customers fared?

More than 200,000 customers had a complete guarantee and have had virtually uninterrupted access to their money since the failure of the bank, says Bair.

The FDIC says IndyMac had close to $1 billion of "potentially uninsured deposits," held by 10,000 customers. The agency said that as it sorts things out, it will pay customers with such deposits an advance of 50 percent of the uninsured amount and ultimately, customers may lose between 10 to 20 percent of their uninsured money.

With additional reporting by Michele Norris.

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