IndyMac & The Apocalypse of Banks (for the Banking-Challenged)

by Damozel | Federal regulators seized IndyMac bank, a major player in the housing boom, on Friday (WSJ).  Banking regulators are bracing themselves for 'a slew' of such failures (WSJ), which means that ordinary borrowers had better brace themselves as well.

'The collapse is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC's $53 billion deposit-insurance fund.' (WSJ) 

Yikes.

Was all this the fault of Democratic Senator Charles Schumer of New York?  According to The Wall Street Journal, the Director of the Office of Thrift Supervision says it’s partly due to a letter Schumer sent to the regulator raising issues of the bank’s solvency.’ (WSJ)   

Really?  I’d have thought — in my innocence — that if there was a problem, it was due to the issues regarding solvency, as opposed to the letter about it.  That sounds to me a bit like shooting the messenger or maybe the paramedic. 

But of course, I am a simple citizeness, not an economist.   I am just trying to understand what’s happening.  If you want to debate the underlying factors that brought us here…feel free. I just want to understand what happened to this one bank. 

I didn’t even know the government had an Office of Thrift Supervision. But sure enough — here it is, part of the Treasury Department.  And the Wikipedia entry is fraught with interest.  I know Wikipedia is considered unreliable but I have decided to have a childlike trust in its description of this office.  Which currently says:

The Office of Thrift Supervision (OTS), an agency of the United States Department of the Treasury, is the primary regulator of federal savings associations (sometimes referred to as federal thrifts). Federal savings associations include both federal savings banks and federal savings and loans. The OTS is also responsible for supervising savings and loan holding companies (SLHCs) and some state-chartered institutions.

The OTS was established by Congress as a bureau of the Department of the Treasury on August 9, 1989 as part of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. OTS does not receive appropriations from the U.S. Congress to fund its operations; instead, the entire budget of the agency is paid by assessments on the institutions it regulates.(Wikipedia)

So now you know about the department in charge of supervising thrifts.

But even though the Thriftmeister, as I shall call him  — his name is John Reich — blamed Senator Schumer, it seems that IndyMac has been in trouble for quite awhile.   

It seems that IndyMac pioneered ‘the issuance of so-called Alt-A mortgages.’ Yes, that sounds rather risky.  Here’s an explanation of that sort of loan.

An Alt-A loan, also called an alternative documentation loan, is a loan that holds borrowers with good credit to different approval standards than traditional loans. Those applying for an Alt-A loan need not provide income verification or documentation of assets. Instead, the approval for an Alt-A loan is based primarily on an individual’s credit score…..

Another point about Alt-A loans is that their interest rates are usually slightly higher than traditionally documented loan. This amount is usually less than one percentage point higher than a conventionally documented loan. That being said, many individuals applying for an Alt-A may not qualify for conventional loans because of their unique situations. (Mortgage Loan Place Lending Guide; emphasis added)

So that’s an Alt-A loan. As explained above, it doesn’t sound all that unreasonable, but the WSJ says ‘[t]he loans have gained notoriety as an example of the type of lax lending that came to characterize much of the mortgage industry.’(WSJ)  So even though it’s better than subprime mortgages, it’s still a risk for the lender.   

The Real Estate Bloggers tell me that ‘the later the subprime and Alt-A loan the greater the default rate.’  Hmm again.

Is it because there is no equity in these homes or were the borrowers at the bottom of the barrel in terms of qualifying?

My guess is both are correct.

So…not much Thrift happening there, it seems like.  But Bridget Magnus’s piece explains why it seemed like a good idea at the time (while the value of homes was rising).

And now that there’s an  ailing economy, I presume that these borrowers don’t have much of a buffer. 

As one of those few Americans who does not aspire to own a home, I don’t have any recent experience with lenders. I am therefore grateful to commenter StockboySF (see his note below immediately after the post) for an explanation of how IndyMac might have reached this pass. He suggests that these loans need not have been only, or even mostly, to people ‘with blemished credit histories’ (see article).   This sort of loan would be attractive to purchasers who wanted a more expensive home than some banks would have been willing to help them finance. They would have chosen IndyMac and the Alt-A loan because it didn’t require the documentation to lend them the money. When the economy started to tank — with all this implies (job loss; greater drain on resources in general, etc.) — they couldn’t make the payments. Meanwhile, the collateral would also have lost value. Hence the company’s predicament.

Indymac was apparently set up by Countrywide — we know all about Countrywide, right? — though the WSJ says IndyMac severed ties in 1997 and became a Countrywide competitor. Whatever factors contributed to its collapse, IndyMac initially grew rapidly.  When the defaults rolled in, ‘its finances deteriorated.’  (WSJ)     It seems to have been pretty hard on the borrowers as well. 

IndyMac, in a last-ditch effort to fend off collapse after it failed to raise fresh capital, said this past week it was firing more than half its work force and closing most of its lending operations. While its shares had been tumbling since early 2007, the move was nonetheless jarring for a company that ranked as the ninth-largest U.S. mortgage lender last year in terms of loan volume, according to trade publication Inside Mortgage Finance…..

But the combination of the frozen credit markets and mounting defaults on IndyMac loans steadily sapped investor confidence in the company. In February, IndyMac reported the first annual loss in its 23-year history. By this week, its shares, which ended last year at less than $7 each, were trading for 28 cents apiece.

The company was desperate for more capital but couldn’t find investors willing to put fresh funds into what looked like a crippled institution. (WSJ; emphasis added)

I bolded the text above to prove that it is not all, maybe not even mostly, the fault of Schumer’s letter that this bank is in its current predicament.

Apparently the Thriftmeister considers Schumer’s letter to the regulators to be one of the ‘unique features’ in IndyMac’s decline and fall.(WSJ) He said that ‘we’ll never know’ if it would have failed if it’s depositor hadn’t found out that Schumer was fretting about it. In fact, he accuses Sen. Schumer of giving the bank a ‘heart attack.’ (WSJ)  The L.A. Times also addresses this wrinkle in the story of one bank’s downfall.

Schumer sharply riposted with ‘the false fingers of blame’ defense.

"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….  Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs." (WSJ)

That sounds right to me.  Others may draw their own conclusions.

So [::pushes glasses down nose in order to look over them; clears throat::]what, finally, is the application of all of this?

On reading Ian Welsh’s Firedoglake piece, the iron entered my soul.  His piece evoked Yeats — ‘the blood-dimmed tide is loose’ — but also Jim Morrison and the Doors (’blood in the streets; it’s up to my ankles…’). [Go here for excellent, newly relevant apocalyptic hippie music.] 

Add this to the news about Freddie and Fannie being essentially bankrupt…. what I predicted in March—that the federal government was going to effectively wind up as the largest owner of mortgages in America is right on track.

Seriously folks, the stuff that people like me have been writing about for years is coming true….And I’m really not happy about being right. Get your financial houses in order…because the bad times are only beginning.

The blood tide is just starting to wash in, and this corpse will soon be joined by many others. (FDL)

Bu-but what about what Bush was saying — that the economy wasn’t ‘growing’ ‘as robustly’ as we’d all like, but it’s all going to be different next quarter?  What about Phil Gramm saying it’s just an imaginary recession and that America’s economically as strong as ever and we just need to pull up our socks and stop whining?

According to the WSJ article, we haven’t hit bottom yet.

Digby says:

It’s become quite clear over the past few years that our financial system is based upon the understanding that nobody ever knows exactly what the f**k is going on. Somehow, I don’t think that lends itself to economic stability, do you?

For other sources in addition to this excellent and informative piece in WSJ, On Deadline points to these for those who understand these things better than I:  AP, MarketWatch, the Financial Times, Bloomberg and The New York Times.

Memeorandum has more.

Related Postings

Mortgage Crisis: Govt. to Bail Out Fannie and Freddie?

 The Economy:  There's Really Nothing Anyone Can Say

Pearlstein at WaPo: This Recession is a Mean One, and It's Not Going Away

Hundreds Indicted for Mortgage Fraud

Market Musings

FBI to Investigate Mortgage Fraud

Senators Question Bear Stearns Bail Out

 J.P Morgan to Buy Bear Stearns, Government to Help

CEOs Laugh All the Way to Bank Despite Subprime Crisis

This Year's Enron: Countrywide (Might be) Investigated re: Subprime Crisis

Housing Crisis:Prices are Dropping and Should Drop

Housing Bubble Keeps Deflating

How the Housing Market Crisis & Subprime Loans Affect the Stock Market

Comments

[Warren Bonesteel]

Good. You've gotten a clue. Now, just keep in mind that no matter who is in the White House, it is Congress that controls the purse strings and the legislation, not the Prez. Democrat or Republican, the Prez gets his own, and very separate, list of blames. With that in mind, a brief Google search will reveal two things: Democrats have controlled the House and Senate for sixty of the last seventy years, thus, they've controlled the actual implementation of most policies and legal matters as well as spending...and a look at FEC campaign finance reports will offer additional clues as to who got what from whom and when. Both sides of the aisle are dirty. It is no longer a matter of left vs right. It is a matter of Americans vs the government. The governmental and ideological meme of dividing and 'conquering' of American citizens must end...or else America will.

[damozel]

Be more patronizing, will you? Good; thanks. Nothing makes me more receptive to an argument than 'Good, you've gotten a clue.'

I have a rather different view than you do.

The dire state of the economy is due to a number of factors, some of which we could have controlled or obviated. But first the Gingriches then the neocons held the wheel and blocked needed reforms, and Bush and the Republican Congress from 2000-06 have been drunk-driving us toward the edge of the abyss. Privatization of functions that the government itself is charged with performing means that tax dollars have gone into the maws of private contractors whose only motive was profit and who have bilked us at of billions (see: war profiteering). Etc. Etc.

My colleague, over time, has tracked factors that have helped lead us to our current state. One thing is insane faith that a lack of controls and a free market will solve our problems and a deranged faith in private industry. We need to step back and look at all the pieces in the picture.

It's not us vs. the government --- or it shouldn't be. The government IS us. But when voters are apathetic and campaign finance allows those with a great deal of money to buy influence --- which is where I agree with you about both sides being dirty --- then the government only represents those with money. And those have been taught that 'enlightened self-interest,' i.e., greed and the will to plunder whatever resources are available, is a virtue.

The system is broken. No argument from me there. But the founders designed it so that it should be able to repair itself.

I don't expect to persuade you, by the way

[Anonymous]

Wondering if

These bad loans were made worse by lenders trying their best to make loans to illegal aliens? Even now the banks advertise taking a loan to give your fifteen year old daughter a coming out (quinsineta) party!? How ironic. What a stupid thing to borrow money for... and it is still going on. The legal citizens get stuck with the bill while the lenders who made fat cash get bailed out and the illegal goes back to Mexico with a truck load of furniture that we will pay for!

Where is the journalist who will investigate where the money went? Who will uncover and expose the enormous influence these corporate monsters have exerted over OUR government?