IndyMac Collapses Under Financial Woes Customers of IndyMac faced closed doors Friday after federal regulators took over the California bank. Risky lending practices and a $1.3 billion bank run were part of IndyMac's demise. Banking consultant Burt Ely talks about how the failure happened and what it signals for the broader economy.
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IndyMac Collapses Under Financial Woes

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IndyMac Collapses Under Financial Woes

IndyMac Collapses Under Financial Woes

IndyMac Collapses Under Financial Woes

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Customers of IndyMac faced closed doors Friday after federal regulators took over the California bank. Risky lending practices and a $1.3 billion bank run were part of IndyMac's demise. Banking consultant Burt Ely talks about how the failure happened and what it signals for the broader economy.

This is ALL THINGS CONSIDERED from NPR News. I'm Andrea Seabrook.

It was a scene from another era: customers crowding up against the windows of their bank, peering in as federal regulators took control. This happened, though, yesterday in Pasadena, California, a genuine run on the bank that ended with a government takeover of IndyMac. It's one of the biggest bank failures in American history and it caps a week of dismal financial news with rumors swirling around the country's mortgage tightens Fannie Mae and Freddie Mac. The takeover of IndyMac Bank was not a direct result of those rumors but it is part of the bigger mortgage mess.

On the line now to help us sort through this is Burt Ely. He's a consultant for the banking industry. Thanks for joining us, Burt Ely.

Mr. BURT ELY (Banking Consultant): Glad to be here.

SEABROOK: What happened to cause a run on this bank?

Mr. ELY: The run on IndyMac started on June 27 with the public release of a letter that Senator Charles Schumer sent to IndyMac's regulators expressing concerns about its soundness.

SEABROOK: So, depositors see this letter and start withdrawing money.

Mr. ELY: That is correct. They withdrew about $1.3 billion, or about 7 percent, of IndyMac's deposits.

SEABROOK: And suddenly IndyMac goes insolvent.

Mr. ELY: Well, IndyMac had been very weak financial condition and almost certainly was going to be closed. The run on IndyMac in the last couple of weeks probably accelerated the closure date.

SEABROOK: But, now, the regulators are blaming Senator Schumer's letter for these problems.

Mr. ELY: Well, IndyMac's problems are not the fault of Senator Schumer and they long predate the letter. I think that what Senator Schumer's letter is probably forced the regulators' hands a little earlier than they wanted. The closure took place in a more hurried manner than they wanted. But IndyMac was clearly destined to fail, and that was well-known to those of us who followed the banking industry.

SEABROOK: Why was it destined to fail?

Mr. ELY: Because IndyMac had been a high-risk mortgage lender. It had made a lot of what are called alt-A mortgages, where there isn't as much documentation than there is for regular mortgages. It started running into problems last year in selling these mortgages. It was having to record a lot of losses. And it was clear months ago that this was a very troubled bank and highly likely to fail.

And that was evidenced as much as anything else by a sharp decline in the stock price of its parent company.

SEABROOK: Burt Ely, is this just the start of a chain of dominoes?

Mr. ELY: I don't think so. While we will see some other bank failures over the next couple of years, I don't think that this is the beginning of a wave of them. Because, again, IndyMac is not typical of today's banks and thrifts.

SEABROOK: Banking consultant Burt Ely. He joined us from Alexandria, Virginia. Thanks very much, Burt Ely.

Mr. ELY: Okay.

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IndyMac Bank Falls In Housing Crisis

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."