WASHINGTON — IndyMac Bancorp Inc.'s disclosure that depositors had pulled $100 million in funds since Sen. Charles Schumer went public with doubts about its well-being rekindled concerns on Tuesday that the senator's letter to regulators would create a self-fulfilling prophecy.
The New York Democrat was unapologetic, saying in a statement that IndyMac's "problems were caused by IndyMac's management and no one else."
Bankers, former regulators, and other industry representatives saw it differently, as concerns expressed over the lawmaker's review of troubled banks and thrifts that have significant Home Loan bank advances and brokered deposits grew in number and intensity.
"If Schumer continues to go public with letters raising questions about the condition of individual institutions, he will cause havoc in the banking system," said John D. Hawke, the comptroller of the currency during the Clinton administration and now a partner in Arnold & Porter LLP. "Leaking his IndyMac letter to the press was reckless and grossly irresponsible. I don't see how he can be trusted with confidential information in the future."
Sen. Schumer sent letters to the Federal Deposit Insurance Corp., the Office of Thrift Supervision, the Federal Housing Finance Board, and the Federal Home Loan Bank of San Francisco last week saying he was concerned that regulators are unprepared to deal with a possible IndyMac failure.
The chairman of the Joint Economic Committee and member of the Senate Banking Committee wrote that the thrift company held unusually high levels of brokered deposits and Home Loan bank advances.
The company "may have serious problems with its current loan holdings and could face a failure if prescriptive measures are not taken quickly," he wrote on June 26. "I am concerned that IndyMac's financial deterioration poses significant risk to both taxpayers and borrowers and that the regulatory community may not be prepared to take measures that would help prevent the collapse of IndyMac or minimize the damage should such a failure occur."
In a statement filed with the Securities and Exchange Commission late Monday, the Pasadena, Calif., thrift said that Sen. Schumer's concerns were unfounded and had scared its depositors.
"Despite the fact that over 96% of our approximate total of $19 billion in deposits are fully insured by the FDIC," the company wrote, "as a result of Sen. Schumer making his letters public and the resulting press coverage, we did experience elevated customer inquiries and withdrawals in our branch network last Friday and on Saturday of roughly $100 million, about half of 1% of total deposits."
The company said branch traffic remained higher than normal Monday morning but had declined from Saturday's level. "We are hopeful that this issue appropriately abates soon," it said.
Sen. Schumer declined to take the blame Tuesday, however, and said he had raised concerns about the thrift with FDIC Chairman Sheila Bair and Treasury Secretary Henry Paulson.
"The Home Loan Bank System has an obligation to lend more responsibly and better police its members, particularly those that engaged in unsound lending practices," he said. "After speaking with both Secretary Paulson and Chairman Bair, I am reassured that they are on top of the situation."
The senator is continuing to examine other institutions that rely heavily on Home Loan bank advances and brokered deposits, though it was unclear whether he would make more concerns public.
The New York Democrat went public last year with his concerns over Countrywide Financial Corp., criticizing the Federal Home Loan Bank of Atlanta for making billions in advances to the company.
He also has sent a letter to the FDIC warning of the potential harm from overreliance on brokered deposits, arguing that the agency should charge higher premiums to institutions with significant levels of such liabilities.
"Many banks have been using brokered deposits to finance rapid and risky expansion to take advantage of troubled credit markets," he wrote in a June 4 letter to Ms. Bair, who has also raised concerns about brokered deposits. "It is these situations that seem to be especially risky, as many of the recent bank failures fit this profile."
In a response dated Monday, Ms. Bair said the FDIC is reviewing whether heavy reliance on brokered deposits "creates risks to the [deposit insurance] fund that risk-based premium rates should reflect."
But she declined to comment specifically on IndyMac's status, saying the agency would not comment on open and operating institutions.
Just which institutions Sen. Schumer may look at is unclear. He cited IndyMac because 37% of its overall deposits were brokered. The industry average, at March 31, was 4.5%.
Other institutions in that range or above it include $933 million-asset Omni National Bank in Atlanta, with 52.7% of its deposits brokered, and Silver State Bancorp in Las Vegas, where 37% of its deposits were brokered at March 31, according to FDIC data.
Industry observers said that, if Sen. Schumer continues to target individual banks, risks would be posed to those institutions.
"If you say publicly that an insured financial institution is likely to fail, you are driving depositors to withdraw funds from that institution," said L. Richard Fischer, a partner in the Morrison & Foerster law firm and a former Federal Reserve official. "Frankly it's like going into a crowded theater and yelling 'fire.' It's every bit as irresponsible."
Joseph T. Lynyak, a partner at Venable LLP, agreed that if "the letter is misconstrued and it results in massive withdrawals in deposits, you can place the institution where it could fail."
In its filing with the SEC, IndyMac said regulators are aware of its situation.
"Our regulators have been actively involved and are up-to-date on our business and financial position, which has deteriorated since last quarter," IndyMac wrote. "We are currently working on a plan with their feedback and involvement, to further improve the safety and soundness of IndyMac, and we will provide more information as that plan becomes more fully developed."
In its statement, the company defended its use of Home Loan bank advances and brokered deposits, arguing that the San Francisco bank has been diligent in protecting its position and that brokered deposits have reduced IndyMac's risk and improved its safety and soundness.
Observers also questioned why Sen. Schumer publicly aired his concerns about IndyMac rather than communicating privately with regulators.
"What this incredibly stupid conduct does is put at risk the willingness of regulators to share any information with the oversight committees," Mr. Hawke said. "After this, you'd be crazy to share information with Schumer."
