Our video for this posting can be found at: http://www.youtube.com/watch?v=NqBhR1kkWHY.
Indymac was a large savings and loan that had split off from Countrywide, the largest mortgage provider in the United States, in 1997. Both were heavily involved in granting mortgages in the real estate bubble markets of the southwestern United States. Countrywide itself experienced a run on the bank in August 2007 in the earliest phase of the subprime crisis. Only an emergency cash infusion from Bank America, arranged by the Federal Reserve, kept it afloat. This was only a stopgap measure however and Bank America agreed to take over Countrywide in early 2008. This deal was also apparently secretly arranged by the Fed, although Bank America vehemently denied it despite the fact that it seemed to have the unusual term that Bank America wasn't responsible for Countrywide's debts (so who was?).
Although Indymac may not have been too big to fail like Countrywide, it was quite possible that the Fed would have arranged a bailout for it too, if it had had enough warning. Even though the chairman of the Senate banking committee had written a letter in late June to Indymac about its possible insolvency and the information in this letter inadvertently wound up in public hands, the FDIC seemed to be unaware of the precarious state of the bank. The FDIC is in charge of monitoring the health of the U.S. banking system and keeps a list of troubled banks. Indymac was not on that list at the time of its disastrous failure. This forced the FDIC to back peddle and claim that Indymac had really been on the list, but had only been put on it shortly 'before' its failure and that is why no one else seems to have known about it. This after the fact claim was inevitable since missing a bank failure that required the second biggest bailout in U.S. history would indicate that the FDIC hadn't the slightest idea of what was going on in the American banking system. .
The death blow to Indymac was a run on the bank which included long lines of suffering elderly and angry account holders who got so out of control that the police had to be called in. The similarities to bank runs in 1930s Depression U.S. were quite obvious. Banks failed then just as Indymac did in 2008 because they were insolvent. Contrary to popular belief, a run does not mean a bank will go under. U.S. banking history has numerous cases of banks surviving runs because their finances were in good shape. Insolvency is what destroys a bank, not the visible run that frequently gets the blame. Indymac management tried to take advantage of this mistaken belief to deflect blame for the banks failure by citing the letter from the chairman of the senate banking committee as the cause. Certainly they weren't going to say it was management incompetence that granted huge numbers of mortgages to people who were unlikely to ever pay them back that destroyed Indymac's finances..
One of the first things the FDIC did when it took over Indymac was stop foreclosures on its bad housing loans. Putting more of them on the books would make Indymac's finances look even worse. How this action was going to be paid for wasn't clear. It was already estimated that the Indymac failure would use up between 10% and 18% of the FDIC's $53 billion deposit insurance fund. One bigger bank failure, such as Wachovia or Washington Mutual, or a number of smaller ones, would wipe this fund out completely. Considering that financial rot permeated the U.S. banking system, nothing was more inevitable than the FDIC itself would require a future government bailout because of its own insolvency.
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