WASHINGTON — Regulators took over $32 billion-asset IndyMac Bancorp late Friday, the largest thrift failure in history and the second largest collapse of any insured institution.
The Office of Thrift Supervision transferred control of the Pasadena, Calif., lender to the Federal Deposit Insurance Corp., which will run the company in conservatorship.
The FDIC said the failure would cost the Deposit Insurance Fund between $4 billion and $8 billion — one of the most expensive failures in history and a sum that will likely spur higher premiums across the banking industry.
In a press release, the OTS blamed the failure on June 26 letters from New York Sen. Charles Schumer, in which the Democrat raised the prospect of the thrift's failure. The agency said his warnings led to a bank run, in which depositors took out $1.3 billion in 11 business days.
"This institution failed today due to a liquidity crisis," OTS Director John Reich said. "Although this institution was already in distress, I am troubled by any interference in the regulatory process."
The takeover marks the end of IndyMac's rapid decline set in motion by its battering in the mortgage meltdown.
The thrift will be run by the FDIC, similar to the agency's management of failed institutions during the savings and loan crisis through the Resolution Trust Corp. In that period, regulators typically sold off institutions piece-by-piece while maintaining their daily operations.
The FDIC said in a statement that all of IndyMac's non-brokered insured deposits and substantially all of its assets would be transferred into a newly chartered institution, called IndyMac Federal Bank. The failed institution held $19.1 billion in total deposits at the time of its closure. It had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors, the FDIC said.
FDIC chief operating officer John Bovenzi will become the interim chief executive of the new bank. He will lead the institution in place of IndyMac chief executive officer Michael Perry, although other key bank managers will likely be retained.
The failure was far and away one of the costliest in recent memory. Observers had speculated earlier this week that IndyMac's balance sheet — which holds substantial amounts of low-value payment-option adjustable-rate mortgages and collateral that is pledged to the Federal Home Loan Bank of San Francisco — could make its cleanup expensive.
Speaking to reporters, FDIC Chairman Sheila Bair said premiums – now 5 to 7 basis points — would likely rise as a result of the resolution. She said no matter the final cost, the ratio of agency reserves to insured deposits will fall below a key trigger of 1.15% as a result of the failure. The reserve ratio is already 6 basis points below its target level of 1.25%.
"This will certainly be a costly failure. Whether it will be the costliest we don't know. We've only had a chance to do a preliminary analysis," she said.
"It certainly could impact deposit insurance premiums. Whether it's 4 billion or 8 billion — if it's within the range it will take us below the 1.15" threshold "where we are statutorily required to come up with a restoration plan to bring the reserves back up to 1.15. There are a lot of variables" but "my sense is this will have an impact on deposit insurance premiums."
Observers on Friday were already trying to gauge the impact of IndyMac's downfall in a banking environment that has not been this shaky in quite some time.
"There are major implications" of IndyMac's failure, "ranging from what its impact will be on other troubled institutions and their ability to recapitalize or be acquired, right through to the status of the Deposit Insurance Fund," said V. Gerard Comizio, a partner at Paul, Hastings, Janofsky & Walker LLP and a former OTS counsel.
Just this week, the thrift was still trying to right itself, announcing efforts to shrink its balance sheet by selling most of its retail mortgage branches, and to increase capital.
But the OTS said its recovery efforts were complicated by Sen. Schumer's comments about the condition of the thrift. In letters dated June 26 to the FDIC, OTS, the San Francisco Home Loan Bank, and Federal Housing Finance Board, the Democrat said IndyMac "could face a failure" if corrective measures are not implemented. OTS officials said after the letters' release, withdrawals averaged $100 million a day.
Before the letters were made public, IndyMac was also actively seeking new capital or an acquirer, the OTS said.
In a conference call with reporters, Mr. Reich said Sen. Schumer's letters scared off investors.
"Those efforts were cut short by the deposit run which caused interested parties to have a lack of interest," he said. "I equate this situation to a cancer patient on chemo therapy with an uncertain prognosis but instead dies of a heart attack. In this case I believe Sen. Schumer's actions precipitated the equivalent of a heart attack."
Sen. Schumer responded late Friday that IndyMac's problems were "caused by practices that began and persisted over the last several years, not by anything that happened in the last few days."
"If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today," he said in a statement. "Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs."
On the conference call, Mr. Reich responded that he was "willing to take the responsibility ... as the director for the good and bad things that happen here."
"I wish the senator would take responsibility for his actions," Mr. Reich said.
Ms. Bair was more muted in her assessment of the failure's cause, and declined to comment directly about Sen. Schumer.
"There had been some public comments and scrutiny of this institution, which did lead to accelerated deposit withdrawals," she said. "Obviously, this institution had some problems with credit quality. ... We are closely monitoring institutions that have made higher-risk mortgages in the area of the country where there is the most housing distress."
She added later: "Our policy is not to comment on open and operating institutions. One needs to be careful when they're talking about open institutions as a general matter, but I wouldn't say anything else on that issue."
Observers in recent days had forecasted that OTS might lay the blame at Sen. Schumer's doorstep, but they said other factors played a significant role in IndyMac's demise. Still, Mr. Reich said its possible IndyMac could have survived but for the letters.
"Would the institution have failed without the deposit run? We'll never know the answer to that question," Mr. Reich said. "It's clear IndyMac was already a troubled institution in precarious condition. The deposit run precluded the possibility of IndyMac recovering from this condition. In effect, the deposit run sparked by the senator's letter pushed the IndyMac over the edge."
A spokesman for Sen. Schumer later responded directly to the Mr. Reich's claims.
"Mr. Reich, a political appointee, should be spending less time playing politics and more time doing his job," said Brian Fallon, the spokesman, in a statement.
Mr. Reich said the situation was unique and did not signal problems for the thrift industry as a whole.
The OTS said IndyMac specialized in Alt-A mortgages to consumers without proper income documentation and assets necessary to qualify as prime borrowers.
Analysts began steadily downgrading IndyMac's stock over the past week, as the thrift company announced that regulators no longer considered it well capitalized. Several analysts lowered their price targets to zero on Tuesday, and by Thursday afternoon, the thrift parent's stock was trading at just over 30 cents a share, 20% below its price when the market opened.
Mr. Comizio said the coming days will likely bring questions over whether policymakers could have done more to save the thrift.
"With a failure of this size there's bound to be a lot of finger-pointing," he said.
The largest thrift failure before IndyMac was the 1988 collapse of American Savings and Loan, in Stockton, Calif., with $30 billion in assets. The largest failure of any depository institution was the 1984 collapse of Continental Illinois National Bank and Trust in Chicago, which failed with about $40 billion in assets.
IndyMac's fall is easily the biggest collapse of a regulated banking institution since a spike in subprime mortgage delinquencies and foreclosures last year spread to other lending sectors and sparked a credit crisis.
IndyMac's cleanup is also a key test for the FDIC, which has not faced a sizeable resolution workload since the 1990s. Failures to date this year have paled in comparison. The largest, $1.9 billion-asset ANB Financial Bentonville, Ark., failed May 9. The two others this year both held less than $60 million in assets.
Last September's failure of $2.5 billion-asset NetBank, a Georgia thrift, was the largest in 15 years.
