Tuesday, July 15, 2008

Angst and anxiety at IndyMac Bank

I'm sure you've seen the pictures and horror story of people lined up outside IndyMac Bank in California, such as the story in the LA Times by Andrea Chang and Andrew Blankstein entitled "Police show up at IndyMac Branches in Encino, Northridge as waiting customers clash", but the truth is that none of that was necessary. It is misleading to refer to the lines as a "run" on the bank. Unlike the 1920's, there are specific rules and procedures in place, such that being in front of somebody else in a line outside the building does not give you any better chance of getting "your" money than the last person in line or even relative to people who never stand in line.

The most important "modernization" is that assets and accounts at "failed" banks will have already been moved to a new bank by the time there is any public notice that the bank has failed. Those people may be standing in line outside of their "old" bank", but it fact, organizationally, it is a "new" bank. The old bank did in fact "fail", but the accounts and assets are no longer part of that old bank from a financial or organizational perspective.

The "old" bank was "IndyMac Bank, F.S.B." The "new" bank is "IndyMac Federal Bank, F.S.B." To be clear, people were lined up outside "IndyMac Federal Bank" on Monday, not "IndyMac Bank", although the sign may still have said "IndyMac Bank." Minor ding on the FDIC for not putting up a banner and saying "Under new Owner and Management."

The key point to keep in mind is that although the old bank "failed", the successor bank is by definition in very sound condition. Your accounts under the FDIC insurance limits (typically $100K) are now there at the new bank at 100% of their value. Sure, your FDIC-excess accounts will have taken a haircut as part of the failure, but there is no additional haircut or risk by leaving your funds in the new bank.

In fact, your assets may be safer at the new IndyMac Bank than some other existing bank down the street whose financial condition your are unable to determine. No sense jumping out of the frying pan and into the fire.

As far as people anxious to get answers to questions, most of that information is already up on the bank and FDIC web sites, and was all weekend.

For FDIC-excess accounts, the FDIC has already published the fact that they have declared a 50% "advance" dividend, payable within 30 days, for the amounts in deposit accounts above the FDIC limits. This is before the FDIC sells off assets and distributes the proceeds, so depositors could get more that 50% for their FDIC-excess. The distribution of those proceeds is not based on where people were standing in line or whether you were in line at all.

So, when the article above tells us:

Worried customers with deposits in excess of insured limits flooded IndyMac Bank branches on Monday, demanding to withdraw as much money as they could or get answers about the fate of their funds.

It is not telling us or the customers of the bank the simple, obvious, known facts, such as the fact that the old bank was already completely "gone" come Monday morning, so there was absolutely no benefit to "running" to/at the bank in such a rush.

As far as the article telling us about one depositor:

Real estate appraiser Don Hinoj, 48, of Sherman Oaks, was vacationing with his wife in Salt Lake City when he heard about the takeover. The couple drove all day Monday to return to Southern California to check on their money.

"I don't know if I'll get in there today," Hinoj said outside the Encino branch. He said he had one money market account and two certificate of deposits at the bank. All told, they contained "over half a million dollars, money I worked all my life for," he said.

It would have been fairly easy for him to calculate how much of the half-million is 100% covered and how much is 50% covered. But at a minimum, he should know that $300,000 is "safe", and possibly even more. In fact, if he and his wife each had $100,000 and each had a $250,000 IRA, it could turn out that 100% of his money is protected, but that would be a best case.

Next, the article tells us:

Hinoj said he came to the branch Wednesday before leaving on his trip and was told by the manager that his money was safe.

"I regret that. Had I known that was going to happen, I would have taken my money out," he said. "My business is slow on top of everything else. . . . I'm missing work today and I'm going to miss work until I resolve this issue."

Ouch. Now, there are three questions: 1) did the manager know that the money was not 100% safe?, 2) even if the manager did know that the bank was about to fail, would he have the right or obligation to say so to the customer? and 3) since the manager did say that the money was safe, does that in some way leave managers and executives at the bank on the hook for any deliberate and malicious misrepresentation of the safety of the bank to customers? A separate question is whether the manager knew that the customer had FDIC-excess and failed to fully and properly disclose to the customer that not all of the money was FDIC-insured?

The media (not to mention my local U.S. Senator Chuck Schumer) helped to incite this panic by not giving people enough honest, obvious information in advance and during and after the failure of this bank. Personally, I knew that IndyMac Bank was shaky for over a year now (plenty of mentions in the financial media), but it was Shumer's outright and uncounscionable incitement of a run that precipitated the failure this past week. If not for Schumer jumping the gun and scaring people, more people would have more gradually withdrawn assets and fewer people would have had to take the 50% haircut.

Now, the real problem, one that Schumer, et al have refused to address is to get the FDIC limit bumped up to an even $1 million. That would cover the vast majority of middle-class Americans and small business owners would do in fact keep their money in their local bank rather than the offshore "havens" and schemes favored by the truly "wealthy."

So, if anything about the IndyMac Bank fiasco bothers you at all, please write a letter to your own congressional representatives as well as Chuck Schumer urging them to urge Chuck to work on getting the FDIC limit raised to $1 million rather than him scheming to find a next bank to incite a run on.

-- Jack Krupansky

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