Saturday, July 12, 2008

Chucky Kills IndyMac

You don't have to look too hard to find adverse economic news these days, but yesterday was a particularly egregious day. Federal regulators took over IndyMac Bank, a thrift out of Pasadena that was one of the key mortgage lenders in the recent housing boom. IndyMac wasn't as high-profile an outfit as Countrywide, but they were also a big subprime lender and there are a lot of people in this country who have mortgages through IndyMac.

What's interesting is that the actions of one Senator probably were the primary cause of IndyMac's failure. That senator is Charles Schumer, the senior senator from New York, who might be the biggest attention whore in the Senate. And given the competition, that's saying something. Schumer went gunning for IndyMac late last month, sending a letter to federal regulators that questioned the bank's solvency. Word got out about Schumer's concerns and we saw an old fashioned bank run. Per the report in the Wall Street Journal:

The director of the Office of Thrift Supervision, John Reich, blamed IndyMac's failure on comments made in late June by Sen. Charles Schumer (D., N.Y.), who sent a letter to the regulator raising concerns about the bank's solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a "heart attack."

Schumer disputes this account, of course. The interesting question is this: why did Schumer make the contents of his letter public? Senators and other legislators certainly communicate with federal regulators all the time, but in most cases the content of these communications aren't made public, so what Schumer did was highly unusual. It's possible that Schumer was simply grandstanding - that's the Occam's Razor explanation. There is this, though - Schumer may have been doing the bidding of New York Attorney General Andrew Cuomo, who has been feuding with federal regulators over rules covering New York banks, and potentially ACORN, the self-styled housing advocacy organization that has also been active in voter registration drives that have sometimes skirted legality. This particular blog raises some interesting questions.

Back in my B of A days, we were looking for a partner that could assist some of our higher-risk relocation clients with mortgage financing. We took a hard look at IndyMac, since they had expertise in dealing with Alt-A financing (also known as "stated income" loans, or more cynically, "liar's loans.") The program we were contemplating never did materialize and after I left B of A, it ultimately ended up acquiring Countrywide. We're now three years removed from those days and a lot has changed. It's possible that IndyMac was going to fail anyway. But there's no question that Chuck Schumer greased the skids.


TwoPutt said...

IndyMac failed because they were crooks. Appraisers have been talking about IndyMac for a long time; there are IndyMac employees that should be charged under RICO laws.

But you rip Schumer.

No surprise there!

Mark Heuring said...

Thanks for stopping by, Two Putt.

No surprise there? So you know what I think all the time? Cool!

I don't think we know that the IndyMac people were crooks. As I said, when I was in the industry with B of A we took a long look at a joint venture with them. We didn't go through with it, but it wasn't because we had any reason to believe they were corrupt.

It's possible that you are correct (perhaps you are an appraiser yourself?), although it would be helpful if you'd provide more than an assertion to back up your claims.

What I do know is this - Schumer chose to make his concerns public and by doing so he caused a bank run. No one is disputing that. And the bank run guaranteed the demise of IndyMac. I rip Schumer because he foreclosed (pun intended) any other outcome.

John back pain Austin said...

Because of Shumer's reckless words people he allegedly champions will suffer.

Those with multiple accounts under $100,000 but combined are more that $100,000. are probably screwed. During the S & L mess I had a friend with three accounts each under $100,000 that totaled $230,000. She was reimbursed a total of $100,000. Those at the S & L assured her all the money was insured. There was another S & L across the street. She lobbied Congress to no avail.