Updated from 10:18 a.m. EDTIndyMac 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.
On June 26, Sen. Charles Schumer (D., N.Y.) leaked to The Wall Street Journal copies of letters he sent to the OTS, the Federal Home Loan Bank of San Francisco and the Federal Housing Finance Board, the regulator of the Federal Home Loan Bank System, expressing concern about the condition of IndyMac. This leak set off a bit of a firestorm, with IndyMac acknowledging the following Monday that it had experienced over $100 million in deposit withdrawals following the Journal's article. IndyMac also stated that "96% of our approximate total of $19 billion in deposits" was fully insured by the FDIC. Still, Monday's announcement shows that pressure mounted for the OTS to take action. Since IndyMac is no longer considered well-capitalized, it faces a possible liquidity crisis, since under FDIC rules, it can't gather new deposits through brokers or renew brokered CDs. Brokered deposits comprised 37% of total deposits as of March 31. IndyMac is waiting on word from the FDIC on its application to have the brokered deposits rule waived.
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.