Academic

While Fannie and Freddie flounder, another Big Mac has flamed out.  On Friday, the FDIC seized control of IndyMac Bank, the mortgage lender founded by Angelo Mozilo and other Countrywide executives back in 1985.  This marks the first major commercial bank failure associated with the mortgage meltdown and the third largest bank failure in history.  With $32 billion in assets, the size of IndyMac's collapse is exceeded only by those of Continental Illinois in 1984 and American Savings and Loan in 1988 during the height of the S&L crisis.

IndyMac specialized in jumbo loans to folks with less than perfect credit histories.  Last year, it was the ninth largest US mortgage lender.  Its collapse will cost FDIC somewhere between $4 billion and $8 billion.  Ouch.  Note this represents a non-trivial portion of the FDIC's $53 billion deposit insurance fund.  Speaking of deposit insurance, of IndyMac's $19 billion in deposits, almost $1 billion of it is not covered by deposit insurance, which is capped at $100,000 per depositor.  Ouch again. 

One interesting twist:  regulators singled out Senator Charles Schumer for special blame in triggering IndyMac's collapse.  Said John Reich, head of of OTS:  "The senator made comments . . . questioning the viability of the institution.  When a member of the United States Senate makes such a statement, it frightens depositors."  Over the next 11 days following the senator's remarks, depositors withdrew $1.3 billion--over $100 million a day!

Personally, I can't ever remember a government official openly questioning the solvency of a specific financial institution. Certainly IndyMac's downward arc began long before Schumer's comment. OTOH, deposit taking is really a big confidence game.  We like to think of our bank as having a big steel drawer with our name on it, and if we just pull out the drawer, there's our money sitting safely inside the drawer.  But of course there is no such drawer.  The bank is just intermediating between savers and borrowers, and hopefully, payments by borrowers keep pace with withdrawal demands from savers.  Else the jig is up.  When a public official announces that the jig may be up, that surely improves the likelihood that the jig is indeed up.  Here, to the tune of several billion dollars.