Saturday, July 12, 2008

Anatomy Of A Bank Failure

In the age of the Internet, financial markets and businesses can rise and fall quickly based on rumors, true or untrue. The massive bank failure of IndyMac Bancorp yesterday can be traced backed to reckless statements made by Sen. Chuck Schumer, who chairs a subcommitee which oversees the Federal Reserve. Here is what Schumer had to say in letters dated June 26 to various federal banking regulators which were made public:

The letters reportedly said Schumer is concerned IndyMac "may have serious problems with its current loan holdings, and could face a failure if prescriptive measures are not taken quickly . . . "

Schumer, who serves on the Senate Committee on Banking, Housing and Urban Affairs and is chairman of its Economic Policy Subcommittee, cited concerns that the bank's condition is a risk to taxpayers and borrowers.

After Schumer's comments were made public, the banks depositors began withdrawing their funds. By Friday when federal regulators seized control of the bank, more than $1.3 billion had been pulled by the bank's depositors. The OTS specifically blamed Schumer's reckless statement for the run on the bank's deposits. The OTS released a statement, which read in part:

The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.

“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.”

IndyMac is the largest OTS-regulated thrift ever to fail and, according to FDIC data, the second largest financial institution to close in U.S. history.

The government's displeasure with Schumer's action is entirely understandable. “When a member of the United States Senate makes such a statement, it frightens depositors,” said John Reich, Director of the OTS. Not surprisingly, Sen. Schumer reacted by blaming the OTS. “IndyMac’s troubles, like Countrywide’s were caused by practices that began and persisted over the last several years,” he said. “If O.T.S. 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.” Schumer's point on the OTS' failure to more closely monitor banks like IndyMac is well taken, but it simply doesn't excuse his irresponsible actions. He should know that such statement would frighten depositors. Is this yet a new campaign strategy for Democrats to win big in this year's election? Create as much financial turmoil as possible to make the Bush Administration look bad and improve Democrats' chances in November? Who cares if they destroy America in the process? There's enough troubling financial news as it is. We don't need elected officials piling on to speed up our own demise.

2 comments:

dokkaq said...
This comment has been removed by a blog administrator.
Advance Indiana said...

In the future dokkaq, you will have to use your real name. I know who you are, and I will be more than happy to expose you. You have repeatedly attempted to post personal attacks on me on this blog. Well, you aren't going to do it. And if you want to press your luck, I will name you and let you suffer the consequential damage to your professional career.