IndyMac: An Egregious Storm

It may seem like yesterday's news: IndyMac being taken over by the Federal Deposit Insurance Corporation (FDIC), long lines as customers run to withdraw their money, finger pointing, stock prices falling... Now very common knowledge to just about everyone. When I first heard about this situation I really wanted to jump on my blog and go on about this issue, giving my 2 cents even if no one cared. However, I decided to wait it out. To keep my eyes open and my thoughts churning to figure out exactly what I feel about everything. Now that adequate time has passed, here I go.

All around this is a very sad incident. There have been people who have or will lose their jobs, funds that are only going to be covered at 50 cents to the dollar (all amounts over $100,000)fainting spells as people wait in line, and an overall effect on the market as consumers begin to worry about the financial institution they patron. Although, many experts are quick to point out that this incident does not compare to the run on banks during the Great Depression it has its similarities. Bank runs are the result of fear and mistrust of consumers. Speculation and even facts will cause customers to quickly withdraw their money out of banks which will result in the banks loss in liquidity and in turn results in the consequence that has befallen IndyMac.

Then there's the issue of Senator Schumer. On June 27 the senator's office released a letter to the public in which the senator called into question the well being of IndyMac. After the bank take-over many people have point a finger to the senator's comments as being the cause of a bank run that left IndyMac unable to function. In his defense, Sen. Schumer has stated that the reason people have blamed him for IndyMac's failure is because "They're doing what the Bush administration always does: Blame the fire on the person who calls 911"¹

I am sorry but the senator has gotten this all wrong on many accounts. 1st of all his invoking of the "Bush administration" at a time when it is completely unnecessary. This is not a party issue, or a time where shots have to be made when and where they can. We are not watching a basketball game, but rather the second biggest bank failure in American history. Now do not misunderstand me, I will be the first to say that there are many instances in which the Bush administration made horrible decisions and deflected the blame on those who called them on their horrible decision, but this is not the case in the given situation.

His 2nd mistake is in his choice of an analogy. In sending out a letter of concern to bank regulators, Senator Schumer did act as one calling 911. However, his release of the letter to the public does not follow his analogy. His actions are more equivalent to the premature revelation of an organized federal sting. By announcing his actions to the public he contributed to the federal government's inability to prevent the closing of this bank. Once investors heard of the possibility of bank closure they rushed to withdraw their funds. The result? A loss of more than $1 Billion in liquidity for the flailing bank. Now Senator Schumer gets to gleefully exclaim I told you so, when he contributed to the bank's takeover by exacerbating their existing problems. What a shame. (Lucky for the senator, he has 2 years left to his turn. That's a reasonable amount of time for voters to forget about his role in this incident....he should hope.)

On Monday, when the bank opened, lines of people wrapped around IndyMac trying to withdraw their funds. Although, many news outlets in various forms of media assured consumers that their money was safe and business could be conducted as usual their was no way to assuage their fears. Tempers ran high as waiting times grew, lists were lost, and the heat bore down on these drained fearful consumers. However, by Thursday most people found the answers they were looking for mostly via cashiers checks issued by the FDIC covering their account balance and the closure of said account.

Then another issue arose. With cashier checks in hand, many former IndyMac customers attempted to open accounts with other banks. These banks informed these potential new customers that their funds would be placed on hold for at least 8 business days. Already exasperated with banks in general this is not increasing the trust of consumers and in turn is contributing to the decline in bank stock. The irony comes in that according to the FDIC, should the customers continued with their accounts at IndyMac they would have full access to their funds as if the collapse never occurred. Instead, those who left the bank have become the ones with no access to their money.

As I have indicated before this is a very sad occurrence. No one triumphs in a situation like this. Jobs and money have been and will be lost by many, tax payers will have to pay the losses of the bank (estimated somewhere between $4-$8 billion dollars will have to be covered by tax payers²), consumers are leery of all financial institutions and an already unstable economy is taking another devastating blow. All we can do as a people is stay alert, and attempt to ride out this storm.

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¹http://www.npr.org/templates/story/story.php?storyId=92642046
²http://www.associatedcontent.com/article/878809/did_senator_chuck_schumer_cause_indymac.html?cat=3