IndyMac Attack

From the FDIC press release early this evening:

IndyMac Bank, F.S.B., Pasadena, CA, was closed today by the Office of Thrift Supervision. The Federal Deposit Insurance Corporation (FDIC) was named conservator. The FDIC will transfer insured deposits and substantially all the assets of IndyMac Bank, F.S.B., Pasadena, CA, to IndyMac Federal Bank, FSB. Brokered deposits will be held by the FDIC and those insured deposits will be paid off when the insurance determination is complete. IndyMac Bank, FSB had total assets of $32.01 billion and total deposits of $19.06 billion as of March 31, 2008. As conservator, the FDIC will operate IndyMac Federal Bank, FSB to maximize the value of the institution for a future sale and to maintain banking services in the communities formerly served by IndyMac Bank, F.S.B.

Insured depositors and borrowers will automatically become customers of IndyMac Federal, FSB and will continue to have uninterrupted customer service and access to their funds by ATM, debit cards and writing checks in the same manner as before. Depositors of IndyMac Federal Bank, FSB will have no access to on-line and phone banking services this weekend. These services will be operational again on Monday. Loan customers should continue making loan payments as usual.

At the time of closing, IndyMac Bank, F.S.B. had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors. The FDIC will begin contacting customers with uninsured deposits to arrange an appointment with an FDIC claims agent by Monday. Customers can contact the FDIC for an appointment using the toll-free number above. The FDIC will pay uninsured depositors an advance dividend equal to 50 percent of the uninsured amount.

(From another notice about IndyMac at the FDIC website: What is a dividend? When a financial institution is closed and the Federal Deposit Insurance Corporation ("FDIC") is appointed as receiver, one of FDIC's responsibilities is to sell the institution's assets to pay the depositors and its creditors. If there is any excess cash generated by the disposition of these assets less disposition cost and reserves met (cash it must hold to meet the obligations of the receivership), then a dividend may be declared and distributed to the proven claimants.)

Based on preliminary analysis, the estimated cost of the resolution to the Deposit Insurance Fund is between $4 and $8 billion. IndyMac Bank, F.S.B. is the fifth FDIC-insured failure of the year. The last FDIC-insured failure in California was the Southern Pacific Bank, Torrance, on February 7, 2003.

So the immediate question should be: If the cost of resolution of the IndyMac mess to the FDIC Deposit Insurance Fund is going to be between $4 billlion and $8 billion, why would uninsured depositors receive anything? And why would they qualify for a 50% advance dividend?

The FDIC Deposit Insurance Fund is funded by banks paying "insurance" premiums to the FDIC, which the banks fund by assessing charges to depositors (in the form of lower interest-bearing deposit yields) or by reducing their earnings. Either way, costs will escalate for banks to replenish the Deposit Insurance Fund so it's ready for the next big failure, and interest yields likely will decline further for depositors.

IndyMac's failure is the second largest since the FDIC was created in 1933, exceeded only by the failure of Continental Illinois in 1984.

And here's the most ludicrous item of the entire story: According to Bloomberg, "Lehman Brothers Holdings Inc. advised the regulator (FDIC) in the transaction." At a time when Lehman's own survival may be at stake, doesn't it seem odd they would be in a position to give advice on how to structure a bank failure?

Indeed, why would ANYONE have money on deposit in ANY financial institution, especially the "troubled" institutions, which exceeds the FDIC limits? Why risk any loss whatsoever?