IndyMac's Failure: A Year Later

IndyMac died a year ago Saturday, the first major thrift to fail in the financial crisis. Its burial, marked by confusion, chaos, and a relatively sweet deal for a group of private equity titans, is unlikely to happen in the same manner today.

The aftermath of IndyMac, since renamed OneWest Bank, is telling, and provides a stark illustration of how much things have changed in the course of a year.

IndyMac Timeline

The Failure

The California thrift had been sinking into quicksand for at least 18 months before the Federal Deposit Insurance Corp. officially seized IndyMac on July 11, 2008. Several warning signs about its risk exposure and capital adequacy were missed by those in charge of catching them.

The FDIC and IndyMac management were preparing to handle the situation in a calmer fashion, with interested parties scanning its books in the weeks prior to its failure. But once Sen. Charles Schumer (D., N.Y.) questioned the bank's viability in an open letter to regulators, IndyMac's fate was sealed. Depositors raced to withdraw funds and investors sent the bank's share price down below $1.

Schumer was pilloried for airing his concerns, with some accusing him of accelerating the bank's failure to help investor acquaintances. Still, it doesn't seem that Schumer -- who denies those charges -- was trigger-happy or overly cautious. In fact, red flags were covered up by another regulator, the Office of Thrift Supervision, which allowed IndyMac to fudge its records to make it seem healthier than it actually was.

Eventually, IndyMac was acquired by well-heeled veterans of the private equity, banking and corporate world who smelled a bargain in the regulatory desperation. But as the FDIC began to evaluate IndyMac suitors, it soon became clear the regulator would have bigger fish to fry.

The Deal

After the collapse of Lehman Brothers in September, the credit and stock markets followed suit. The FDIC was left to grapple with the largest thrift failure in history, as Washington Mutual fell later that month. Wachovia was fast approaching the brink as well.

The agency was charged with negotiating deals for JPMorgan Chase (JPM) to acquire WaMu, and played King Solomon in choosing Wells Fargo (WFC) over Citigroup (C), as the two banks battled over Wachovia's fate. But Citi, as it turned out, had its own issues to take care of, as would Merrill Lynch, and its eventual owner, Bank of America (BAC).

Given the tumult of late 2008, it's unsurprising that the private equity consortium received the terms they did.

With no interest from banking behemoths, the FDIC could either run IndyMac itself until the market improved; split up IndyMac into several parts and sell each separately; or sell the entire bank through an auction, which was the course ultimately chosen.

The FDIC contacted 87 parties to participate in an auction that one source familiar with the deal describes as "very, very competitive." Nearly 80 of them showed interest in all or part of IndyMac, and 10 went as far as to perform due diligence.