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IndyMac bank, the second largest mortgage originator in 2007, (and latest victim of the market implosion) announced that there had been a run on investor deposits caused by Senator Schumer’s suggestion that the bank was on the brink of failure. Most of the deposits are FDIC insured, but since the announcement that the bank was ceasing mortgage lending activity and laying off half of its staff, investors have hurried to withdraw funds in an attempt to protect their money.
This is how it goes - capital dries up, the company recognizes it can’t get out of the hole, cuts staff and operations, and it creates a panic. It’s a self-fulfilling prophecy once the bank realizes there’s no end in sight to the loan losses and instability. We’ve seen it time and time again in this mess. New Century, Fremont, Countrywide, IndyMac. They’re all victims to the same vicious cycle. (Although I should be slapped for calling any of these greedstitutions victims.)
From Bloomberg:
IndyMac Bancorp Inc., the California- based lender that is firing half its employees, is facing “elevated levels of deposit withdrawals” after U.S. Senator Charles Schumer said the bank may be on the brink of failure.
Schumer’s comments about IndyMac’s reliance on deposits purchased from third parties are causing depositors to pull their money and causing added restrictions on the lender’s borrowings, IndyMac said in a filing today.
IndyMac dropped 32 cents to 39 cents at 10 a.m. in New York Stock Exchange composite trading. The firm, which had a market value of $3.4 billion in mid-2006, lost more than 95 percent in the past year. Schumer, the New York Democrat, last month sent letters to the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Federal Housing Finance Board and the Federal Home Loan Bank of San Francisco, warning of a potential collapse of the lender.
“IndyMac was one of the banks that was using relatively weak underwriting standards on the basis that housing prices would continue to rise in value,” said Jason Arnold, an analyst at RBC Capital Markets in San Francisco, in an interview yesterday. “With prices coming down, that became the bottom card in the house of cards built by these lenders.”
The demise of IndyMac would be the biggest collapse of a U.S. mortgage lender since the bankruptcies of Fremont General Corp. and New Century Financial Corp. The company’s key asset is its Southern California retail bank network with 33 branches and $18 billion in deposits, mostly insured by the FDIC, Arnold said. IndyMac’s inability to find a buyer or attract capital, despite pressure from regulators, reflects continued concern over the declining value of its loans, he said.
