S&L Redux: Men in Black at IndyMac?
New York Senator Chuck Schumer caught some flack last week for leaking his concerns about IndyMac to the press. Perhaps imprudent, but probably prescient. The FDIC is certainly looking very closely at the bank’s books after a mini bank-run last week. [Update: IndyMac announcing that certain operations will shut down in e-mail to employees.]
At $16.5 billion, IndyMac’s insured deposit base is far larger than the combined total of other failed banks rescued by the FDIC so far this year.
And the FDIC’s total liquid assets were only $51 billion at year end, of which only $4.2 billion was cash. (for details, see the balance sheet on page 63 of their 2007 annual report).
As banks drop like flies this year and next, its likely the FDIC will quickly run out of funds to pay depositor losses. The RTC may get an encore…
IndyMac’s insured deposits grew 91%(!) in the year ending March 31st. As their equity has been hit by massive losses, and as “other” sources of financing have dried up, IndyMac has plugged the holes with new consumer deposits. They are attracting these deposits despite their questionable financial condition by offering interest rates among the highest in the nation. [Incidentally, much of the increase in IndyMac's deposits are of the controversial "brokered" variety. These have more than tripled over the last year to $6.9 billion.]
Take a look at that list of banks offering the highest CD rates. Many are effectively insolvent, surviving only because they can sell risk-free U.S. government obligations. What is a federally insured deposit, after all, but an obligation of the U.S. government?
Taken together, the insured deposits of all distressed deposit-taking institutions dwarf the FDIC’s available capital. Taxpayers will have to pick up the slack. Other troubled banks besides IndyMac include Downey Financial, BankUnited, and Corus. These four have $37.4 billion of insured deposits between them. They do have assets that can be sold to pay back depositors, but most are adjustable rate mortgages ($28 billion between Downey, BankUnited and IndyMac) or loans to build condos ($7 billion at Corus). BusinessWeek last week reported that default rates on Option ARMs, a particular type of adjustable rate mortgage popular with the first three, may reach 50%. Loss rates on these will be very large, leaving little capital left to pay back depositors. Corus’s condo loans, most of which are in hard-hit states like California and Florida, will be worth even less (see page 22 of their latest 10-Q.)
Most threatening to the FDIC, and by extension to American taxpayers, would be the failure of Washington Mutual. WaMu has $144 billion of insured deposits alone. And $100 billion of adjustable rate mortgages.
It’s not a stretch to think WaMu, concentrated as it is in California and Florida, could fail. If the FDIC can’t find someone to rescue WaMu the way BofA rescued Countrywide—and in this environment who would?—taxpayers will have a hefty tab to pick up.
Twain was right: history rhymes. The S&L scandal snowballed into a far larger bailout than it ever had to be because failing institutions continued to accumulate federally insured deposits for years after regulators recognized they were insolvent. Most of the S&L’s investments failed utterly, providing no cash to pay depositors’ interest. Like any Ponzi scheme, the S&L’s often used funds raised from new deposits to pay the interest owed previous depositors. And, as author Martin Mayer pointed out in a 1982 NYT Op-Ed (which is republished in his book): “the weakest institutions offer[ed] the highest rates.”
The same is true today. [And here's proof]
- You too can look up IndyMac’s (or any other FDIC-insured bank’s) financials on the FDIC website. Go here, type “indymac” in the “name” field, then click “latest financial information” and finally the “generate report” button. I advise all my readers to research the financials of any bank from which they may be planning to buy a CD.
- By the way, another interesting fact from Mayer’s book (see page 140) is that the man most directly responsible for the current banking crisis, Alan Greenspan, wrote a letter on behalf of Charles Keating himself back in 1985. He was appealing to the Federal Home Loan Bank to allow Keating’s firm to lever up its balance sheet with more “direct investments.” This was in 1985, and Greenspan was paid $40,000 for his efforts. History rhymes to be sure, with subsequent verses written by the same poet.
- A final note, Zions Bank currently offers the second-best rate on CDs according to BankRate. Demonstrating plenty of chutzpah, under the “Member FDIC” link on their home page, they instruct potential customers how to dodge limits on deposit insurance.
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