Fool Blog: Lessons From IndyMac

Last week, we learned that California-based IndyMac was seized by the FDIC. In the aftermath, customers made a run on the bank, pulling more than $1.3 billion from the vault. Alongside the fallout of Freddie Mac (NYSE: FRE  ) and Fannie Mae (NYSE: FNM  ) , this news has led to widespread media speculation about the next bank to fail.

Five Foolish analysts give their take on the affair, and what investors can learn from it.

Todd Wenning: I think Senator Schumer's tactless comments unfairly pulled the rug out from under IndyMac, which led to a full-out run on the bank. Based on the amount of insider buying (yes, buying) that occurred from March 2007 to May 2008, I can't imagine hope was completely lost within the company. Sure, some of it might have been blind optimism, but I have a hard time believing that 14 different insiders would have added nearly 700,000 shares to their personal holdings if they lacked conviction.

After Schumer made his comments, IndyMac didn't stand a chance of raising capital and getting its feet back on the ground. Now the media's turned this story into a modern-day witch hunt, wondering which bank will topple next. That's unfortunate, because not all banks should be held over the fire. We've seen some positive news recently, with Wells Fargo (NYSE: WFC  ) and US Bancorp (NYSE: USB  ) announcing dividend increases, and better-than-expected results at JPMorgan Chase (NYSE: JPM  ) .  

Dan Caplinger: To me, the most surprising thing about the whole IndyMac affair was hearing about the number of customers who could end up losing money because their accounts had more than the $100,000 FDIC deposit insurance limit. No matter how good IndyMac's rates were, and no matter how unlikely it may have seemed that a bank that large could go under, there's just no reason for savers to take the risk. All they had to do was open accounts at other banks. Also, I bet that many customers who will end up with losses could have prevented them even more easily, by doing things like naming different family members as joint accountholders or pay-on-death beneficiaries, which allows you to get several $100,000 bites at the FDIC apple.

Anand Chokkavelu: Bill Ackman, the Pershing Square Capital Management hedge fund manager, seems to be setting himself up for a sweetheart deal. He's shorting shares of Fannie Mae and Freddie Mac, and then proposing a plan to the government that would take those shares to zero. This is reminiscent of David Einhorn shorting Lehman (NYSE: LEH  ) , then talking bad about it in the cafeteria at lunchtime. 

What does this have to do with IndyMac? In this period of financial pessimism, bank runs and panic stock-selling can be triggered by mere words. Bear Stearns collapsed because whispers of liquidity concerns led to actual liquidity problems. IndyMac's fall got a big push from Senator Schumer's words. That means it's in the best interest of shorts like Ackman and Einhorn to publicly try their cases. To counter these words, you'll hear the government and company officials say anything they can to instill confidence in troubled entities. In banking as in high school, perception is reality.

Brian Orelli: Living in IndyMac country, I got a firsthand look at the long lines of people waiting to get their cash out of the bank. I had a hard time feeling sorry for those poor souls sweating in the hot sun. First, if they've got more than $100,000 FDIC insured sitting in a bank, they're either a lot richer than me, or they need a serious lesson in asset allocation. (More likely both -- this was in La Jolla, after all.) Second, how hard is it to spread your wealth around to more than one bank? If you want to keep your money in an ultra-safe place, make sure you play by the rules.

Alyce Lomax: IndyMac specialized in Alt-A loans, also known as "liar loans." Lots of banks got involved in those "exotic" loans, which often didn't require proof of income or assets, and now many are defaulting and at risk. And now there's a "crisis of confidence" that can easily bubble into a panic for companies like IndyMac? I'm shocked. Perhaps this whole mess gives an exotic new spin to the term "confidence game"?

And with the Wall Street Journal reporting that the FDIC is freezing foreclosures at IndyMac, I'm wondering what such moves say to those of us who didn't secure no-doc or exotic loans to buy real estate we couldn't afford? Just how badly will fiscally responsible Americans get shafted to soften the blow for the mind-boggling number of selfish scoundrels and short-sighted suckers who got us into this mess? So much for fiscal housecleaning.

What are your thoughts on the IndyMac affair? Is it an utter disaster? Will another bank fall? Chime in below with a comment.

Todd Wenning, Dan Caplinger, Anand Chokkavelu, Brian Orelli, and Alyce Lomax all contributed to this blog. None of them owns shares of any companies mentioned. US Bancorp and JPMorgan Chase are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 17, 2008, at 7:46 PM, DRMRJ wrote:

    I have done personal banking with IM. I never in my life felt the need to write to a bank CEO about how badly the bank was running . It was REALLY bad. I could not even begin to explain.

    I I did write and received a phone call from them explaining that they used my letter in their staff education. I was fortunate my CDs came due just before they crashed.

    If my experience with IM was typical, they surely earned the apt headline "IM crashes & burns".

  • Report this Comment On July 17, 2008, at 10:37 PM, landhoho wrote:

    I just re-newed a $64K CD...

  • Report this Comment On July 18, 2008, at 12:44 PM, SeeThroughtheLie wrote:

    It is hilarious that the foolish analysts all are dumping on Shumer and the american people. This personal responsibility high horse these commentators are on is a media induced blame game distraction spin tactic.

    Here are some facts:

    1- Indymac Bank supposedly had $18 billion in deposits. But a mere $1.3 billion dollar withdrawal took them out. Explain to us where the other $16.7 billion went?

    --Answer: they never had it. Oh yes they took that many deposits but using the biggest ponzi scheme strategy called fractional reserve banking they only had less than 10% actually in the vault. Blaming the bank's failure on the mortgage mess is only a Orwell type of distraction tactic to keep the american people in the dark about the truth. Banks don't have the money. They create money out of thin air by typing digits into a computer.

    2- The Indymac customers withdrawing their money from the FDIC controlled bank are not given cash, they are given checks. They take these Indymac bank checks to WAMU for example and have to wait 8 weeks to access it. Why? Because WAMU does not have the money either. They cannot handle people coming in cashing FDIC backed checks and withdrawing the money in a couple of days. Why--- they do not have the money either.

    3- The FDIC insures over 1.3 trillion dollars on deposit in banks throughout the USA. But they have less than $60 billion dollars in reserve for the 1.3 trillion. Indymac will probably use up 10 billion of that reserve. So, the FDIC insurance is just a smoke screen. They can only handle and pay on less than 1 percent of the money they insure Wow what a racket. So if you bank is one of the first ones to fail you good but what really happens when the FDIC run out of money? By their own standards all they require is 1.25 percent of the insured amount to be "in excellent" shape. That is a joke. Think about it.

    4- Instead of revealing the truth on how the banking system and money really works in this country, americans are conditioned and encourage to blame each other and chalk it up to "americans making dumb decisions and the good sensible bill payig americans picking up their slack". This is the divide on conquer/ slavery strategy being pushed on all americans so they can fight amongst themselves. This serves as a distraction to keep americans away form the truth.

    I leave you with this. There is only love or fear. Those who seek to keep in you enslaved will always want you to live in fear. Fear of your own actions and in fear of your fellow man. While you live in fear, they are free to continue to give you the shaft while you blame each other.

    Wake up.

  • Report this Comment On August 06, 2008, at 8:16 PM, Indymacloser wrote:

    I had more than $100K at Indymac and lost a lot of money. Are there other bank customers that are suing and what recourse do we have? How does the FDIC prioritize who it pays first?

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