On Friday, July 11, IndyMac Bank was shut down by federal regulators and its assets were turned over to the Federal Deposit Insurance Corp. The entity reopened on Monday as IndyMac Federal FSB under the control of the FDIC. The Office of Thrift Supervision took action because it did not think the bank could meet its depositors demands. It is estimated that bank customers could lose as much as $500 million in uninsured deposits and that the failure could cost the Deposit Insurance Fund between $4 and $8 billion. IndyMac, based in Pasadena, CA, is the nations’ largest regulated thrift to fail and the second largest financial institution to close in U.S. history. IndyMac is the fifth bank to close this year and FDIC officials are expecting an increase in bank failures.
The FDIC will attempt to sell IndyMac as a whole entity within the next 90 days, but if unsuccessful, the bank will be sold in pieces. Customers have been allowed access to some of their funds and were given receivership certificates for any money they couldn’t immediately withdraw. Some of this money may be obtained after the bank is sold.
IndyMac historically made loans to residential mortgage borrowers without requiring much income and asset documentation. IndyMac’s failure is a result of these high-risk mortgage practices, rising foreclosures and a crumbling housing market. A letter written by Sen. Charles Schumer, D-N.Y. asking banking regulators to take steps to prevent IndyMac’s collapse was released on June 26. In the 11 days following the release of this letter, regulators say that depositors withdrew more than $1.3 billion. Shares of IndyMac have dropped 95% in the last two years and closed Friday at 28 cents.
It has been disclosed this week that the FBI is investigating IndyMac for possible fraud with respect to its lending practices to at-risk borrowers, although it is unclear how long the investigation has been ongoing. In light of the crashing housing market, the FBI has opened a probe of companies ranging from the mortgage lenders themselves to investment banks that bundle and sell these mortgages as securities to individual investors. According to the Associated Press, Countrywide Financial Corp., the nations largest mortgage lender, is also under scrutiny. Robert Mueller, Director of the FBI, states the investigations are focusing on accounting fraud, insider trading and failure to disclose the value of mortgage-related securities and other investments.
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