FDIC Closes IndyMac Bank

[saluki9]

I wonder how many depositors were ever warned by the bank that they had excess funds deposited that may not ever be replaced by the FDIC if the bank went belly up. I'll bet IndyMac never turned away anyone's deposits.

Today's typical computer savvy 15 year old could probably program the bank's computer to red-flag deposits exceeding FDIC limits. The kid probably wouldn't even have to go to the bank to do it, just hack-in from the outside.

That's not the job of a bank to turn away deposits.

 

[samclem]

I wonder how many depositors were ever warned by the bank that they had excess funds deposited that may not ever be replaced by the FDIC if the bank went belly up. I'll bet IndyMac never turned away anyone's deposits.

I'm sure the bank's leaders thought they could squeak by and didn't want to frighten the flock. Still, a well-written notification to depositors ("We don't believe this will become an issue, but given the volatility in the market . . . we would like to help you register your accounts in such a way that you derive the full benefit of the protection offered by the FDIC. This will take just a few minutes of your time . . .). They could have offered some small loyalty incentives to these folks (toaster? $25 gas card?) and generated some goodwill and also had the opportunity to sell some other services while engaged in these meetings. Too bad--a lot of careless depositors are going to get burned.

 

[OhSoClose]

That's not the job of a bank to turn away deposits.

Exactly right. It is not the job of the bank to turn away deposits, and the bank needs deposits to operate. Every teller window at an FDIC-insured bank has a sign that states the FDIC (general) insurance limit of $100,000. The bank's website also displays this sign. If you are not literate or choose not to heed the sign, too bad. Individuals need to take some responsibility for their choices.

 

[OhSoClose]

I'm sure the bank's leaders thought they could squeak by and didn't want to frighten the flock. Still, a well-written notification to depositors ("We don't believe this will become an issue, but given the volatility in the market . . . we would like to help you register your accounts in such a way that you derive the full benefit of the protection offered by the FDIC. This will take just a few minutes of your time . . .). They could have offered some small loyalty incentives to these folks (toaster? $25 gas card?) and generated some goodwill and also had the opportunity to sell some other services while engaged in these meetings. Too bad--a lot of careless depositors are going to get burned.

An interesting idea, but not practicable. Some folks would not be able to restructure their deposits to get them all insured, and so would have to withdraw their deposits. Also, this approach would signal "trouble!!" no matter how you tried to couch the language, and could cause a run on the bank. Just like Mr. Reich accused Mr. Schumer of doing with his inquiry. What a bunch of crock. It was lax FDIC/OTS oversight of IndyMac, not some Senator's letter, that caused the big losses at IndyMac. More OTS-regulated thrift failures to come. Mark my words.

 

[UncleHoney]

Exactly right. It is not the job of the bank to turn away deposits, and the bank needs deposits to operate. Every teller window at an FDIC-insured bank has a sign that states the FDIC (general) insurance limit of $100,000. The bank's website also displays this sign. If you are not literate or choose not to heed the sign, too bad. Individuals need to take some responsibility for their choices.

Oh, I see my error now. It's just like it wasn't the banks responsibility to turn away mortgage business when the borrower had a $30K income and they gave him a 0% down, 3 year adjustable rate deal on a $500K house. I see now.

 

[Slarty]

What's the chances of seeing other banks experience a "run" next week? Also, have you checked how much your investments are insured for if your brokerage goes under?

 

[cyclone6]

What's the chances of seeing other banks experience a "run" next week? Also, have you checked how much your investments are insured for if your brokerage goes under?

Its likely that we will see some other banks put under pressure following the IndyMac collapse. The fear is palpable. Check out Bank United (BKUNA)- they appear likely to be the next.

When you're sitting on as much cash as I am, its a royal pain-in-the-ass to stay under FDIC limits. I haven't always been too diligent about staying insured, but in the last several months have been moving money around to stay covered.

Everyone always assumes that the FDIC only insures to 100k. Thats true, but only for individual accounts. Joint accounts are insured to 200k (100k for each owner) - on top of the individual limits. Thus, for a couple, you could have 400k insured. There is also a third account type - trusts - that could give another 200k of insurance, for a total of 600k for a couple. But I haven't looked into the trust accounts to know much about them.

In my case, being single, I have multiple accounts opened in several banks - individual, and joint with my sister. Thus I am FDIC insured up to 300k per bank.

There are a couple of caveats with the joint accounts. First, your money won't be available as quickly as an individual account. You have to file paperwork with the FDIC to claim your deposits. (Check out the IndyMac FDIC notice..) Second, you must make sure that the bank has a signature card on file with signatures of the account owners. This last point is important - your claim may be denied without it.

You can also check out bank/credit union ratings at bankrate.com. One of the reasons I started moving money around was because the credit union I belong to, and where I was over the limit (the same basic rules as FDIC), had its rating downgraded from "sound" to "underperforming". Yeah, it probably won't fail, but it would be a particularly bad day to wake up one morning to find that the bank/credit union was seized and you were over the limit.

Hopefully all this worry is for nothing. But the financial system seems to be teetering on the brink of collapse. That said, I'm doing what I can to stay within FDIC/NCUA limits.

And has been discussed here before, if the FDIC or NCUA fail to pay depositors due to a catastrophe never before witnessed in this country, then we are all on our own anyway...

 

[Texas Proud]

Some of what people here think is wrong at times.... Banks usually will tell someone if they are at risk of being over the $100,000 limit....

Second, back before branch banking in Texas.... our bank was able to insure $2 million because we had a number of banks under the Bancorp... we just spread the deposit to all the various banks.... easy...

Third... not all banks fail from a 'run'.... our bank was turning away deposits when it went under... we had a LOT of cash... just not a lot of equity... well, in truth... the FDIC DID have a $1 billion gain when it was done... so sometimes they make a mistake...

 

[OAG]

This, I believe, is exactly how 1929-ish started. Fear feeding on its self. Oh and I did check on my pot of 55 CD's to ensure I am FDIC and NCUA covered (fear). Also warned DD who, in the past, has had OVER 100K in one of her checking accounts.

The way I understand the individual problem for Banks is the RESERVE requirement to retain membership in FDIC et. al. Believe the reserve is about 12% and once near the reserve "floor" they have to get more deposits. So a "run" can ultimately put them down

In any event tomorrow morning, and all day I suspect, there will be some good entertainment for those among us that have the time to watch it - CNBC, FOX, etc.,

 

[UncleHoney]

For some reason I think it might be wise for the FDIC to honor the deposits at IndyMac that are above the limits. It only takes one little mistake and .......

YouTube - Touchstone-Mousetraps

 

[OAG]

For some reason I think it might be wise for the FDIC to honor the deposits at IndyMac that are above the limits. It only takes one little mistake and .......

YouTube - Touchstone-Mousetraps

That would really be the fair thing to do and would alleviate much of the concern some may be feeling.

 

[OhSoClose]

Oh, I see my error now. It's just like it wasn't the banks responsibility to turn away mortgage business when the borrower had a $30K income and they gave him a 0% down, 3 year adjustable rate deal on a $500K house. I see now.

I don't agree with your analogy. When a borrower cannot reasonable be expected to repay a loan, it is the bank's responsibility (both for the borrower and the bank's financial stablility) not to make the loan. Also, for uneducated folks and folks with little money or income, they need additional protections from the complicated terms and fine print of exotic mortgages. But literate folks who have hundreds of thousands of dollars to deposit?? They can and should be given additional latitude to make financial decisions, including poor decisions. Again, the FDIC insurance sign is everywhere. If you asked these depositors, they would all probably admit, sheepishly, that they knew the FDIC has deposit limits.

If we wanted to make bank depositors diversify, it would be better just to pass a law or regulation forbidding them to make deposits above the limits in the first place, rather than expecting banks to write them after the fact suggesting they change their deposit structure.

 

[ziggy29]

That would really be the fair thing to do and would alleviate much of the concern some may be feeling.

It might be the *right* thing to do to alleviate additional panic, but I don't know that I would classify putting taxpayers on the hook for depositors who exceeded deposit insurance limits is really the "fairest" thing to do, either.

That would make it similar to all the other bailouts: maybe not particularly fair to the taxpayers who subsidize irresponsible lending and borrowing, but all things considered probably the best of several bad options.

 

[OhSoClose]

That would really be the fair thing to do and would alleviate much of the concern some may be feeling.

But that would take a change in the law, because Congress has mandated the deposit insurance limits by statute. Over the years, both the FDIC and NCUA have promulgated regulations to expand those limits as much as possible within the scope of the statute, but the FDIC must comply with the current statute and its implementing regulations.

There are public policy reasons for federal insurance limits. One reason is to make it difficult for large deposits to chase hot rates, which itself could destabilize the banking system. If the FDIC or NCUA failed to honor the Congressionally-mandated deposit limits, that could encourage folks to make such large deposits.

 

[OAG]

But that would take a change in the law, because Congress has mandated the deposit insurance limits by statute. Over the years, both the FDIC and NCUA have promulgated regulations to expand those limits as much as possible within the scope of the statute, but the FDIC must comply with the current statute and its implementing regulations.

There are public policy reasons for federal insurance limits. One reason is to make it difficult for large deposits to chase hot rates, which itself could destabilize the banking system. If the FDIC or NCUA failed to honor the Congressionally-mandated deposit limits, that could encourage folks to make such large deposits.

It was my understanding that when they made the last change (250K on IRA) it was also considered to increase "regular deposits insurance" to either 250K or 400K (can't remember which) but they decided to keep that limit to 100K (which BTW was increased from 10K (I think) the last time). So we cut principal amounts and reduce agreed interest rates for "stupid" people who "did not know what they were doing" when putting signatures on ARM's but penalize people that put actual money out of their pockets so the bank could make those loans. Somehow this just reflects the overall stupidity of the entire financial industry as it is now IMHO.

 

[OAG]

Of course the FED could increase the FDIC/NCUA limits on Monday to some new level that people would be insured to. That would go further to alleviate the "fear problem". After all the "tax payer" is on the hook for all the money the FED has been pumping out to prop up Wall Street and the Banks thus far.

 

[OhSoClose]

So we cut principal amounts and reduce agreed interest rates for "stupid" people who "did not know what they were doing" when putting signatures on ARM's but penalize people that put actual money out of their pockets so the bank could make those loans. Somehow this just reflects the overall stupidity of the entire financial industry as it is now IMHO.

I am no apologist for Congress. We all know that what they do is rarely consistent. But I do see a distinction between how hard it is to understand the risks of exotic, complicated mortgage loans and how hard it is to understand "if I deposit more than $100,000, the government may not be insuring it." People deserve more protection from exotic loan products than from uninsured deposits.

Taken to its extreme, would you prohibit folks from making any investment, such as purchasing corporate bonds or stocks or mutual funds, because the investment is not 100% insured by the federal government and the principal is at risk? Many credit unions also have private, not federal, deposit insurance - but disclose this fact prominently. Would you forbid privately insured credit unions from accepting any deposits whatsoever?

 

[OhSoClose]

Of course the FED could increase the FDIC/NCUA limits on Monday to some new level that people would be insured to. That would go further to alleviate the "fear problem". After all the "tax payer" is on the hook for all the money the FED has been pumping out to prop up Wall Street and the Banks thus far.

The Fed can't increase the federal deposit insurance limits. I guess the Fed could, though, let all the IndyMac depositors belly up to the discount window. Wouldn't that be a riot.

 

[OAG]

I think we are comparing Apples to Oranges. BTW I just looked at my "backup" HELOC Mortgage Agreement 4 Pages in English. Not too difficult to understand and I am a HS dropout. But getting back to the FDIC 1950 the limit was $10K, 1960 it was raised to $15K, 1969 to $20K, 1975 to $40K and 1980 to $100K, the powers to be revised it in 2006 to separate out IRA accounts (250K) and left the "other accounts" at 100K. Based on the past it should have been raised to approximately $400K, for a single account, but I guess people should have had enough sense to head to IRA accounts if they wanted to protect more than $100K in a single account. BTW for two people the limit actually is $400K if you do it right (Acct 1=His, Acct 2=Hers, Acct 3=His & Hers and Acct 4=Hers & His; total 400K). Of course the Bank does not inform you how to do this. I have asked, in the past, and was given some BS about "check with your personal FA". Must be something about not wanting to raise their FDIC Insurance Premiums on insured monies.

This is interesting also (quoted, in part):

"The Federal Deposit Insurance Reform Act was a federal law passed in 2005. It contained a number of changes to the (FDIC).

• It raised the limit on deposit insurance for retirement accounts from $100,000 to $250,000.
• It provided credits to banks that had paid into the deposit insurance funds in the early 1990s in the aftermath of the S&L Crisis.
• It requires that the FDIC issue rebates to the banking industry should the level of the deposit insurance fund rise above 1.50% of total insured deposits."

I edited out some posting above. Seems like even the Banks got "credits" and "rebates" ("paybacks" or "kickbacks would be my terms) for insurance premiums they paid into the FDIC - bet the FDIC would like to have those funds today.

 

[samclem]

Taken to its extreme, would you prohibit folks from making any investment, such as purchasing corporate bonds or stocks or mutual funds, because the investment is not 100% insured by the federal government and the principal is at risk?

Not at all the same. This is a bank! Granny has been going to this bank for 50 years. She deliberately avoided all those other risky things because she doesn't want to take a chance with her money. She might be doing just as her husband and she have always done--nothing different, except that over time the account grew beyond the insurance limits. She doesn't even GO to the bank (I went 15 years between physical visits to a bank), so she can't see the sticker at the teller's window. She's got her money there because it is insured by the government, it is safe. This is miles away from a couple making $30K buying a $200K house and lying about their income. Or those of us who lose money in the market.

As a condition of providing this insurance, the FDIC requires that banks meet certain criteria. None of that is true with the other investments you mentioned.

I am not in favor of government funds to bail out mortgage lenders or borrowers. I have much less concern with raising the insurance coverage for individual depositors to at least $500K. Any mildly competent investor can easily get unlimited insurance coverage just by splitting up money between banks, so the only people being put at risk are those wthout enough awareness to do this simple thing. Surely there should be someplace where the financially ignorant can stash funds without worry?

 

[OhSoClose]

Not at all the same. This is a bank! Granny has been going to this bank for 50 years. She deliberately avoided all those other risky things because she doesn't want to take a chance with her money. She might be doing just as her husband and she have always done--nothing different, except that over time the account grew beyond the insurance limits. She doesn't even GO to the bank (I went 15 years between physical visits to a bank), so she can't see the sticker at the teller's window. She's got her money there because it is insured by the government, it is safe. This is miles away from a couple making $30K buying a $200K house and lying about their income. Or those of us who lose money in the market.

As a condition of providing this insurance, the FDIC requires that banks meet certain criteria. None of that is true with the other investments you mentioned.

I am not in favor of government funds to bail out mortgage lenders or borrowers. I have much less concern with raising the insurance coverage for individual depositors to at least $500K. Any mildly competent investor can easily get unlimited insurance coverage just by splitting up money between banks, so the only people being put at risk are those wthout enough awareness to do this simple thing. Surely there should be someplace where the financially ignorant can stash funds without worry?

I am an NCUA employee who advises consumers about federal deposit insurance coverage, and let me assure you that, of all people, Granny understands that there is a limit to federal deposit insurance at banks and credit unions! As you noted, Granny has been around for many years. She has lived through the depression and the S&L crisis, and she knows that banks do fail. Ninety five percent of the telephone calls I get on insurance coverage are from elderly women who mention the $100,000 insurance limit and want to structure their accounts around that limit. I think you will find that very few of the uninsured deposits at IndyMac are owned by Granny.

I agree with you and OAG that Congress could, and should, raise the current deposit insurance limit, maybe to $500,000. Prospectively, though, and not to bail out those with uninsured deposits at IndyMac. But that still leaves the funds above $500,000 uninsured, doesn't it? So there are potentially some funds at the bank that are not safe no matter what the limits are, right?

One thing that has been stated before deserves repeating. In almost all bank failures, the uninsured depositors eventually get more than 85 percent of their uninsured deposit back when the FDIC liquidates the assets of the failed bank. So it is not a great loss for the uninsured depositors. Generally, the only time that 85 percent figure doesn't happen is when there is a massive fraud at the bank. I have seen no word about fraud at Indymac, so the uninsured depositors there will likely get a great percentage of their money back.

 

[CitricAcid]

We should restructure the FDIC-insurance limits on the backs of the taxpayers (maybe not significant but still tangible) for the simple fact that some people aren't competent or responsible enough to take care of their own finances, while those who DO spread out their deposit risk across many banks get no such luck?

 

[FinanceDude]

I am an NCUA employee who advises consumers about federal deposit insurance coverage, and let me assure you that, of all people, Granny understands that there is a limit to federal deposit insurance at banks and credit unions! As you noted, Granny has been around for many years. She has lived through the depression and the S&L crisis, and she knows that banks do fail. Ninety five percent of the telephone calls I get on insurance coverage are from elderly women who mention the $100,000 insurance limit and want to structure their accounts around that limit. I think you will find that very few of the uninsured deposits at IndyMac are owned by Granny.

I agree with you and OAG that Congress could, and should, raise the current deposit insurance limit, maybe to $500,000. Prospectively, though, and not to bail out those with uninsured deposits at IndyMac. But that still leaves the funds above $500,000 uninsured, doesn't it? So there are potentially some funds at the bank that are not safe no matter what the limits are, right?

One thing that has been stated before deserves repeating. In almost all bank failures, the uninsured depositors eventually get more than 85 percent of their uninsured deposit back when the FDIC liquidates the assets of the failed bank. So it is not a great loss for the uninsured depositors. Generally, the only time that 85 percent figure doesn't happen is when there is a massive fraud at the bank. I have seen no word about fraud at Indymac, so the uninsured depositors there will likely get a great percentage of their money back.

isn't all of this a moot point if another bank buys Indymac out of receivership and umbrellas their FDIC coverage overthe accounts of their now "new" depositors??

 

[OhSoClose]

isn't all of this a moot point if another bank buys Indymac out of receivership and umbrellas their FDIC coverage overthe accounts of their now "new" depositors??

Good question. Typically, I believe, the FDIC transfers to a purchasing bank the assets and liabilities of the failed bank, but, on the liability side, the FDIC transfers ONLY the insured portion of the failed bank's deposit base. The FDIC keeps the uninsured deposit liability, and depositors with uninsured deposits receive certificates from the FDIC representing their pro rata interest in the FDIC's recovery (which includes whatever the purchasing bank pays the FDIC for the transferred assets and liabilities). Because the FDIC has been talking about issuing uninsured deposit certificates to IndyMacs depositors and talking about paying an immediate 50% dividend on those certificates, I don't think the FDIC plans to transfer IndyMac's uninsured deposits to any purchasing bank, assuming the FDIC can even find a purchasing bank.

Just a reminder, I am not affiliated with FDIC in any way!!!!

 

[FinanceDude]

Good question. Typically, I believe, the FDIC transfers to a purchasing bank the assets and liabilities of the failed bank, but, on the liability side, the FDIC transfers ONLY the insured portion of the failed bank's deposit base. The FDIC keeps the uninsured deposit liability, and depositors with uninsured deposits receive certificates from the FDIC representing their pro rata interest in the FDIC's recovery (which includes whatever the purchasing bank pays the FDIC for the transferred assets and liabilities). Because the FDIC has been talking about issuing uninsured deposit certificates to IndyMacs depositors and talking about paying an immediate 50% dividend on those certificates, I don't think the FDIC plans to transfer IndyMac's uninsured deposits to any purchasing bank, assuming the FDIC can even find a purchasing bank.

Just a reminder, I am not affiliated with FDIC in any way!!!!

Maybe there's no bank that WANTS IndyMac's customers. Usually another bank will step in and get a bunch of new customers for little or no cost, but there's probably nothing a takeover bank would want, so FDIC just dissolves it, makes the depositors whole as best they can, and moves on..........