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

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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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