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Senator's Warning May Have Doomed IndyMac

David McNew
Getty Images
People enter an IndyMac Bank branch in Pasadena, Calif., after waiting in line with hundreds of other customers, July 14.

Customers who waited hours in line to withdraw money from the failed IndyMac Bank are now finding they may have to wait even longer to gain access to their cash. Some other banks are requiring lengthy holds on IndyMac cashier's checks. Federal regulators say they're looking into the situation.

IndyMac was taken over by regulators last Friday after a run on the troubled bank. Depositors withdrew more than $1 billion from IndyMac in the two weeks before its doors were closed.

Leon Rousso of Ventura, Calif., grew worried about the bank's condition after a steep drop in IndyMac's stock price.


"A young fellow in my office told me there was a 40 cent drop in the stock market on IndyMac," Rousso said. "When I went back to review everything, because I hadn't been watching that closely, it didn't look good."

A 'Lucky' Withdrawal

Rousso oversees the finances for a local nonprofit group that had about $250,000 in its IndyMac account. Rousso strongly encouraged his fellow directors to withdraw the funds last week.

"They were kind of wishy-washy, back and forth," he said. But Rousso insisted, and the organization took its money out.

"Fortuitously, that was Thursday, they day before they seized the bank," Rousso said. "So it worked out really well. They think I'm a big hero and a genius. But I'm not really a genius. Just got lucky."


A Loss Of Confidence

Other nervous depositors were also pulling money out of IndyMac, and that loss of confidence created a vicious cycle. Early last week, IndyMac warned the Securities and Exchange Commission that it was suffering from "elevated levels of withdrawals." That warning triggered the stock drop that wound up spooking Rousso.

Twelve days earlier, Sen. Charles Schumer (D-NY), a member of the Senate Banking Committee, had written to bank regulators warning that "a significant move by IndyMac's depositors to redeem their deposits could leave the firm in a disastrous financial situation." Once those letters became public, Schumer's worst fears were realized.

"The irony in this whole situation is that Sen. Schumer was trying to warn about a run on the bank, when that very warning helped cause a run on the bank," said bank analyst Jaret Seiberg of the Stanford Group in Washington.

A Run On Deposits

In the two weeks after Schumer's warning, anxious IndyMac depositors withdrew $1.3 billion. Regulators suggested the senator was partly to blame for the bank's collapse.

"In effect, the deposit run sparked by the senator's letter pushed IndyMac over the edge," said Office of Thrift Supervision Director John Reich after the bank was seized. "Would the institution have failed without the deposit run? We'll never know the answer to that question. It's true that IndyMac was already a troubled institution in precarious condition. The deposit run precluded the possibility of IndyMac recovering from this condition."

Schumer, who chairs the powerful Joint Economic Committee, was quick to defend his role, saying IndyMac wouldn't have been in jeopardy had regulators gotten tough on the bank years earlier.

"They're doing what the Bush administration always does: Blame the fire on the person who calls 911," Schumer said.

'Hot Money'

Critics suggest that Schumer effectively poured gasoline on the fire. But it's also clear that IndyMac was tinder-dry and ready to burn. The bank had aggressively courted depositors with above-average interest rates in order to fund its mortgage business after Wall Street money dried up. Depositors who turn to a bank just for high interest rates are quick to run at the first sign of trouble.

"What you're referring to is what in the banking world is called 'hot money,'" said bank analyst Jamie Peters of Morningstar. "If you compare an IndyMac depositor to somebody, say at Wells Fargo, who has an average of eight different products with the company, IndyMac's were much more prone to leave."

Federal regulators say they're paying close attention to banks that rely too heavily on any one source of funds. And they're encouraging banks to respond quickly to any rumors of big withdrawals.

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