Inside the FDIC
Since the early 1980s, over 3,400 banks have failed. These failures weren't steady, regular, and easily predictable events; periods of tranquility were followed by turmoil, booms led to busts, and peaceful complacency often turned to sudden devastation. Inside the FDIC chronicles it all, from the perspective of a first hand witness inside the agency responsible for calming the storm.
Inside the FDIC
I flew into Burbank, California, Thursday evening, July 10, 2008; drove a rental car the short distance to Pasadena; and checked into the Hilton Pasadena on South Los Robles Avenue. Dozens of my colleagues from the Federal Deposit Insurance Corporation (FDIC) were also checking into hotels throughout the city. We used our personal credit cards rather than our government cards. Why? Because if anyone learned that the FDIC had descended on Pasadena, they might conclude (correctly) that a bank was about to be closed.
Bank closings are carefully planned events, and they are usually handled quietly, smoothly, and uneventfully. The bank's depositors hardly know that anything has happened. For the vast majority, their money is safely protected by the FDIC's deposit insurance system. A bank is typically closed on a Friday afternoon and reopened under new ownership the following Saturday or Monday morning. Customers generally see the same bank employees at the same branch offices; only the name of the bank has changed. This well-rehearsed pattern is designed to maintain public confidence in the U.S. financial system and to prevent banks' depositors from trying to withdraw all of their funds at the same time.
But IndyMac was no ordinary bank, and this would be no ordinary closing.
IndyMac was a poster child for how home mortgage lending had spiraled out of control during the preceding boom years. The bank had been launched in 1985 as a division of Countrywide, a California mortgage lender that encountered its own troubles in 2007. IndyMac became independent of Countrywide in 1997, and it gradually came to specialize in something called Alt-A mortgages, which were typically offered to borrowers whose credit profiles were better than subprime but not strong enough to qualify for prime loans. In the case of IndyMac, borrowers could obtain home mortgage loans without going through a formal credit review process-they simply stated to loan officers their income, asset, and debt levels. After the crash, these arrangements became known as "liar loans" or "ninja loans" (no income, no job, and no assets).
IndyMac did not keep most of the mortgages it originated. They were packaged together, sold, and used as collateral for mortgage-backed securities. This originate-to-sell model also was not unique to IndyMac. Many banks found that they could increase their profits by selling mortgage loans soon after they made them. The sales proceeds could then be used to make new loans, which could create a steady stream of income. As long as there was an appetite in the market for mortgage-backed securities, there would be a need to create new home mortgages. This would create additional pressure to further weaken lending standards in order to find new customers.
With housing prices rising throughout the United States, IndyMac found many willing borrowers. The bank's profits tripled from 2001 to 2006, according to the New York Times . During 2006 alone, IndyMac originated $90 billion in new mortgages, and racked up $342.9 million in profits. The bank had established 182 loan production offices around the country to help it find new customers, and at its peak it was the nation's 10th-largest mortgage lender.
To help finance its mortgage lending, IndyMac had raised $20 billion in deposits through the Internet, deposits placed at its 33 branches in Southern California, and from the brokered-deposit market. The bank offered higher interest rates than anyone else so it was easily able to attract rate-chasing deposits. The bank had also borrowed $10 billion in high-cost money from the Federal Home Loan Bank of San Francisco (FHLB-SF).
This toxic cocktail of high-cost funding, weak lending standards, and a constant churning of new loan originations left IndyMac highly vulnerable in the event of a downturn in the housing market. Predictably, pr