IndyMac Wreck Could Lead to S&L Pile-Up

Updated from 10:18 a.m. EDT

IndyMac Bancorp's ( IMB) precipitous fall Monday is a bad sign for other savings and loans on the brink of financial disaster.

After the last session, IndyMac posted a "stakeholder letter" on the company's blog, announcing that it was no longer considered well-capitalized by its regulator, the Office of Thrift Supervision.

Unless it quickly raises capital or finds a way to sell major portions of its business, IndyMac can't survive for the next several quarters unless overall housing prices show some signs of life. A rebound in housing would make the mortgage-backed securities market much more liquid, supporting prices and curtailing writedowns. It would also help to stabilize IndyMac's loan quality and enable it to pare down its quarterly provisions for loan loss reserves.

Unless any of those things happen, however, IndyMac and other troubled S&Ls like Washington Mutual ( WM) and Downey Financial ( DSL) are in trouble, putting the OTS is in a very difficult position.

The regulator of the nation's approximately 815 federally chartered S&Ls has already seen the second-largest institution it supervised, Countrywide, acquired under duress by Bank of America ( BAC). And WaMu and Downey are both prime candidates for actions similar to IndyMac's.

Close to Throwing in the Towel

In order to be considered well-capitalized under regulatory guidelines, a bank or S&L needs to maintain a leverage ratio of at least 5% and a risk-based capital ratio of at least 10%. IndyMac's risk-based capital ratio, which takes loan quality into account, had fallen to 10.26% as of March 31.

IndyMac stated it was too early to announce just what its capital ratios were as of June 30, but the company did say that its second-quarter net loss was expected to exceed its first-quarter loss of $184 million. Shares fell more than 50% Tuesday, to 34 cents at their lowest point.

Shares of IndyMac, which traded as high as $31.32 in the past 52 weeks, were losing nearly half of their remaining value, falling 31 cents, or 44%, to 40 cents.

Following the lender's announcement, Fitch Ratings cut its long-term issuer default ratings for IndyMac further into junk territory. Research firms Friedman Billings Ramsey and RBC Capital Markets lowered their price targets on the stock all the way to $0.

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