Last Friday the Office of Thrift Supervision (OTS) – which regulates some U.S. banks – stepped in and closed IndyMac Bank, putting the FDIC in charge of operations. Regulators estimate the move will cost taxpayers $4-8 billion.
IndyMac is the second-largest U.S. bank to collapse (it had $32.01 billion in assets as of March 31). The largest was Continental Illinois National Bank, which had nearly $40 billion in assets when it failed in 1984.
According to an ABC News article, IndyMac customers began a run on their deposits following a June 26 letter from Senator Charles Schumer, D-NY, urging banking regulators to take steps to prevent IndyMac’s collapse.
Between June 26 and July 11, IndyMac depositors withdrew more than $1.3 billion, prompting concerns from the OTS about the bank’s ability to satisfy its deposit, most of which are insured by the FDIC.
The run on IndyMac, prompted by suggestions from Senator Schumer that the bank was in trouble, is akin to what happened last week after former Federal Reserve Bank President Bill Poole suggested that the government shouldn’t bail out Fannie Mae and Freddie Mac.
In a Bloomberg interview, Poole said “Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer.” Shares of Fannie and Freddie, both public companies, dropped to 17-year lows after Poole’s concern swept through the markets.
The companies were already on the rocks after Fannie Mae paid a record yield relative to Treasuries on the sale of $3 billion in two-year notes last Wednesday. The record-high yield reflects an increasing concern among investors that the company might have trouble repaying its debts.
In response, the Bush Administration this weekend announced their plans – which would have to pass Congress – to save the mortgage giants. When questioned at a Senate hearing, Treasury Secretary Paulson finally acknowledged who would end up footing the bill: the taxpayers.
From the New York Times account of the exchange between Paulson and Senator Bunning, R-KY:
“You want an unlimited amount and some of us at this table don’t like an unlimited amount of federal dollars,” Mr. Bunning said in a particularly testy exchange. “Do you really think we can believe exactly what you are saying, Secretary Paulson?”
“I believe everything I say,” Mr. Paulson replied. “I’ve been around markets for a long time.”
“So have I,” Mr. Bunning angrily responded. “Where will the money come from if, in fact, we have to use the backstop?”
After Mr. Paulson replied that he did not think any money would be needed, Mr. Bunning said, “That doesn’t answer my question. Where is the money going to come from?”
“From the government,” Mr. Paulson said.
“And who is the government?” Mr. Bunning asked.
“The taxpayer,” Mr. Paulson said.
What do you think?
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