Monday, July 14, 2008

Schumer Crushes IndyMac

Senator Charles Schumer's (D-NY) grandstanding triggered a bank run that forced the liquidation of $32 billion IndyMac last Friday. It was the biggest thrift failure in history and the second largest financial firm ever to be forced to close. And shareholders have Senator Schumer to blame.

In an extremely pointed press release the Office of Thrift Supervision said the following:

The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors’ demands in the normal course of business and is therefore in an unsafe and unsound condition. 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.”
As a result of an OTS examination that began in January 2008, the OTS deemed IndyMac to be in troubled condition. An overwhelming majority of problem institutions are able to successfully modify their operations and business plans, work closely with their regulator and eventually return to a healthy condition.

IndyMac had reacted to market conditions and OTS concerns in November 2007 by changing its operations and business plan to build a foundation for recovery. IndyMac was actively seeking to arrange a significant capital infusion or find a buyer. The recent release of the senator’s letter undermined the public confidence essential for a financial institution and took away the time IndyMac needed to pursue a recovery.

What a disgrace. Shareholders of IndyMac ought to sue the Senator for damages. Perhaps they should recruit Eliot Spitzer, who was good at this sort of thing and now has a bit of time on his hands.

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