Senator's Warning May Have Doomed IndyMac Sen. Chuck Schumer's warning about a withdrawal of deposits from IndyMac may have led to the run on the California bank that brought about its failure last week, banking analysts say.
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Senator's Warning May Have Doomed IndyMac

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Senator's Warning May Have Doomed IndyMac

Senator's Warning May Have Doomed IndyMac

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MICHELE NORRIS, host:

This is ALL THINGS CONSIDERED from NPR News. I'm Michele Norris.

ROBERT SIEGEL, host:

And I'm Robert Siegel. More anxiety for some customers of IndyMac. First, they waited in line for hours to withdraw money from the failed bank. Now some will have to wait even longer to get their cash. That's because some other banks are requiring lengthy holds on IndyMac cashier's checks. Federal regulators say they're looking into the situation.

NORRIS: IndyMac was taken over by the FDIC last Friday. NPR's Scott Horsley reports on the frantic days leading up to that takeover.

SCOTT HORSLEY: Leon Rousso had a feeling a week ago that all was not well at IndyMac. Rousso is a financial planner in Ventura, California, where he oversees the treasury of a local nonprofit group.

Mr. LEON ROUSSO (Financial Planner): They had amassed about $250,000 into this one bank, IndyMac.

HORSLEY: Rousso says it's always nerve-wracking to have so much money in one place, since only the first $100,000 is insured. But what really alarmed him last week was the steep drop in IndyMac's stock price.

Mr. ROUSSO: A young fellow in my office told me that there was a 40-cent drop on the stock market on IndyMac, and when I went back to review everything, and because I hadn't been watching that closely, it didn't look good.

HORSLEY: It just so happened that the finance committee of Rousso's nonprofit group had a meeting the next day, and he urged them strongly to pull their money out.

Mr. ROUSSO: They were kind of wishy-washy, back and forth, you know, we'll call the bank and yada-yada. I said, no, you're not going to call the bank. You're going to go into the bank, you're going to have a cashier's check made, and that's that. It turned out, fortuitously, that was Thursday, the day before they seized the bank. So it worked out really well. They think I'm a big hero and a genius, but I'm not really a genius, just got lucky.

HORSLEY: Other nervous depositors were also pulling money out of IndyMac, and that loss of confidence created a vicious cycle. Early last week, IndyMac warned the Securities and Exchange Commission it was suffering from elevated levels of withdrawals. That warning triggered the stock drop that wound up spooking Rousso.

Twelve days earlier, New York Senator Charles Schumer had written to bank regulators warning that a significant move by IndyMac's depositors to redeem their deposits could leave the firm in a disastrous financial situation. Bank analyst Jaret Seiberg of the Stanford Group says once those letters became public, Schumer's worst fears were realized.

Mr. JARET SEIBERG (Analyst): The irony in this whole situation is that Senator Schumer was trying to warn about a run on the bank when that very warning helped cause a run on the bank.

HORSLEY: Anxious IndyMac depositors withdrew $1.3 billion in the two weeks between Schumer's alarm and the seizure of the bank last Friday. Frustrated regulator John Reich, who directs the Office of Thrift Supervision, complained on a conference call that while IndyMac was already in danger, the run on the bank made recovery impossible.

Mr. JOHN REICH (Office of Thrift Supervision): In effect, the deposit run sparked by the senator's letter pushed IndyMac over the edge.

HORSLEY: Schumer, who chairs the powerful Join Economic Committee, was quick to defend his role, saying IndyMac wouldn't have been in jeopardy had regulars gotten tough on the bank years earlier.

Senator CHUCK SCHUMER (Democrat, New York): They are doing what the Bush administration always does: blame the fire on the person who calls 911.

HORSLEY: Critics suggest Schumer effectively poured gasoline on the fire, but it's also clear that IndyMac was tinder-dry and ready to burn. The bank had aggressively courted depositors with above-average interest rates in order to fund its mortgage business after Wall Street money dried up. Bank analyst Jamie Peters of Morningstar says depositors who turn to a bank just for high interest rates are quick to run at the first sign of trouble.

Depositors who turn to a bank just for high interest rates are quick to run at the first sign of trouble.

Ms. JAMIE PETERS (Analyst): What you're referring to is what in the banking world is called hot money. If you compare an IndyMac depositor to somebody, say, at Wells Fargo, IndyMac's were much more prone to leave.

HORSLEY: Federal regulators say they're paying close attention to banks that rely too heavily on any one source of funds, and they're encouraging banks to respond quickly to any rumors of big withdrawals. Scott Horsley, NPR News.

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