July 14, 2008

And the Finger-Pointing Begins

In the wake of the failure of Pasadena-based IndyMac Bancorp last week comes this extraordinary press release from the Office of Thrift Supervision (OTS), whose job is to oversee banks:

The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors’ demands in the normal course of business and is therefore in an unsafe and unsound condition. The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.

“This institution failed today due to a liquidity crisis,” OTS Director John Reich said. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”

So the government agency charged with regulating banks is blaming a U.S. senator for a bank’s demise. Gee, OTS, don’t you think IndyMac’s penchant for writing Alt-A mortgages (a.k.a. ”liar loans”), which don’t require income documentation, had a little something to do with it?

Schumer apparently is a bit of a media whore; a poster on L.A. Land called him “the Gloria Allred of Congress.” But that doesn’t change the fact that IndyMac was in trouble.  And Schumer might have done consumers a favor by giving them a heads-up.

OTM is “troubled by any interference in the regulatory process?” Maybe OTM is troubled that it was caught with its pants down.  From a Bloomberg News story:

“Given their focus on Alt-A and a heavy concentration in California, they would have suffered meaningful losses in almost any scenario,” Brian Horey, president of Aurelian Management LLC in New York, said before the seizure was announced. Aurelian is short-selling IndyMac shares to gain from declines.

Had IndyMac “applied some common sense and changed their approach to underwriting as the housing market peaked, they might have lived to see the next cycle,” Horey said.

Sen. Schumer promptly turned the finger of blame back at OTS.

“If OTS had done its job as regulator and not let IndyMac’s poor and loose lending practices continue, we wouldn’t be where we are today,” Schumer, a New York Democrat, said in an e-mail today. “Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.”

It’s not like IndyMac’s problems should come as a surprise to anyone. IndyMac was brought to us by the fine folks at Countrywide, according to this Wall Street Journal article.

IndyMac was set up by Countrywide in 1985, but the two companies severed ties in 1997 and became direct competitors. The company’s name stands for Independent National Mortgage. It was created to specialize in jumbo mortgages — those that are too big to be sold to government-backed Fannie Mae and Freddie Mac. In 1997, under the direction of Chief Executive Michael Perry, a protege of Countrywide chief Angelo Mozilo [left], IndyMac set off on its own.

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