IndyMac Wreck Could Lead to S&L Pile-Up

As it exits most of its lending businesses, the company will lay off 3,800 out of its total 7,200 employees, expecting to reduce operating expenses "roughly 60%."

So the big question is, can these moves preserve IndyMac as a viable savings and loan?

IndyMac has been forced to cut back on its traditionally generous severance packages, but it will provide lead times of at least 30 days for departing employees, plus minimum pay of $20,000 for the notice period for employees with at least five years of service.

So the savings on operating expenses won't begin until the fourth quarter. Here's a quick look at the company's consolidated first quarter 2008 income statement:

Clearly, it is too early to tell if IndyMac can survive for several more quarters after its cost savings kick in. With quarterly operating expenses reduced to $126 million, the company would have still lost money in the first quarter. Of course, the quarterly provision for loan losses was greatly elevated, at $132 million, not to mention the $160 million loss on mortgage-backed securities writedowns.

Regulatory Fallout

IndyMac's fall heightens concerns for other S&Ls on the precipice.

Lehman Brothers downgraded Downey on Tuesday from overweight to equal weight, a hold equivalent. As we discussed in our look at California banks and thrifts, Downey's loan quality has been declining sharply each month.

BankUnited Financial(BKUNA Quote) is another thrift selling for less than a dollar a share, thanks to the lender's troubled option-payment adjustable-rate mortgage portfolio.

Last but not least, WaMu has been at the forefront of the entire mortgage crisis. We were skewered for saying so last August.

WaMu's two thrift charters had $354 billion in total assets as of March 31. This was 25% of total assets under the OTS' supervision, if we exclude Countrywide.

All eyes will be on WaMu on July 22, when it announces second-quarter earnings results.