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IndyMac Insurance Tab Could Hit $8B

The federal insurance fund set up to protect money deposited at failed banks will have to shell out up to $8 billion to depositors of shuttered IndyMac Bancorp (IMB).

The Federal Deposit Insurance Corp. estimated its insurance fund would have to pay out between $4 billion and $8 billion to cover some $18 billion in insured deposits at IndyMac Bank, which the Office of Thrift Supervision closed down on Friday after a run on the bank left it illiquid and its stock in ruins.

IndyMac is not likely to be the last bank to go under amid the current crisis. BankUnited (BKUNA) and Downey Financial (DSL) are both on very thin ice, as TheStreet.com pointed out last week, and while it is not in immediate danger, Washington Mutual (WM - Get Report), which raised $7 billion from a group of investors led by private equity firm TPG during the second quarter, will be watched very closely when it reports results on July 22.

Unwinding IndyMac

When a depository institution is shut down, insured funds in retail deposit accounts are made available almost immediately by the FDIC. While the FDIC usually starts selling off assets immediately when regulators close a bank or thrift, IndyMac was so big that the agency established a successor institution, IndyMac Federal Bank FSB, which will temporarily operate to "maximize the value of the institution for a future sale."

The FDIC said uninsured deposits totaled approximately $1 billion, and were held by about 10,000 depositors.

Depositors with uninsured deposits in a failed institution become creditors to the receivership or conservatorship, and receive "dividends" out of proceeds from asset sales. In the case of IndyMac, these creditors have received an advance dividend of 50 cents on the dollar. They may receive more, but that seems doubtful at this stage. IndyMac's mortgage loans are very difficult so sell in this environment, and most are pledged as collateral to the Federal Home Loan Bank of San Francisco, which had $10.1 billion in advances (loans) outstanding to IndyMac when the thrift was shut down.


After the failure of IndyMac Bancorp (IMB) and the government's pledge to backstop mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), what will be the next financial company to require federal help?

Lehman Brothers (LEH)
Washington Mutual (WM)
National City (NCC)
Downey Financial (DSL)
Let the market sort all this out.

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