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Is IndyMac Failure a Harbinger of Doom?

15 July 2008 - Markets - Editor

Although there are a number of factors that led to IndyMac’s failure on Friday 11 July, some regulators are laying the blame squarely at the feet of Senator Chuck Schumer. In late June, the New York Democrat released a letter which set out reasons why IndyMac might fail. This sparked panic among IndyMac customers who rushed to withdraw their money from the bank. Over the following eleven days the withdrawals mounted up to $1.3 billion, forcing IndyMac’s closure. The Federal Deposit Insurance Corp (FDIC) stepped in and re-opened the bank on Monday 14 July, as IndyMac Federal Bank.

A significant contributing factor in the IndyMac failure is the drop in home prices, along with the inability of mortgage holders to make their monthly repayments. This inability to make repayments supports Senator Schumer’s opinion that IndyMac has extended loans too freely. He also blames regulators for not being alert to the deteriorating situation.

In light of the current unstable economic climate and the fact that the failure of the Californian-based bank is the largest US bank failure in almost two decades and the second largest ever, it is not surprising that depositors took action to protect their money. However, the majority of IndyMac depositors have little to worry about, as the FDIC guarantees traditional bank accounts up to the amount of $100,000. Moreover, individual retirement accounts are guaranteed up to $250,000 by the FDIC. Amounts that exceed these limits may be covered by 50 cents to the dollar, but this remains to be confirmed.

The federal takeover of IndyMac should have reassured depositors – but it didn’t. Long queues formed outside the various IndyMac branches on Monday, with people that had traveled for miles prepared to wait for hours until they got what they came for. It is believed that most depositors understand the principle of deposit insurance, so the run on the bank is seen as an indication that Americans have lost faith in the country’s banking system.

The IndyMac saga is partly to blame for the plunge in regional banks and thrifts shares on Monday’s stock markets. However, investors are waiting in trepidation for bank earnings which are due to be released over the next few weeks, and fears that results will be worse that previously expected, have also had a significant effect on share prices. Some analysts are predicting that IndyMac was just the beginning of what could be a domino-effect in banking circles. Certainly, tensions will be running high in the coming weeks, as investors have been reminded of how a rumor can spark a run which could do damage to even the most solid institution.

 


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