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 - Get Report) 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.
It's actually quite surprising the FDIC made any advance dividend to uninsured depositors, considering the agency's insurance fund is on the hook for so much. For insured deposits made through brokers, which totaled $6.88 billion as of March 31, it will take longer for depositors to gain access to their money. As we discussed when ANB Financial failed, it can take several weeks for the FDIC to sort through a large institution's brokered deposits. The reason it takes so long is that when an institution like IndyMac gathers deposits through a broker, the accounts are maintained in the name of the broker. Only the broker has the records of individual deposit customers. The FDIC will be mailing packages to all the brokers, so they can obtain customer information which the regulator will then cross-reference with IndyMac's retail deposit records, to make sure each customer's total insured deposits are calculated correctly. It's very important that customers who took out CDs with IndyMac through their brokers contact the brokers to help move the process along.
After IndyMac was shut down, the OTS put out a statement bashing the senator for being the catalyst for the run on deposits. Schumer responded by saying the OTS was "asleep at the switch" and "If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today." That point was well-taken, considering that so many of the largest institutions with troubled portfolios of option-ARMs and low-documentation mortgages are OTS shops. BankUnited shares closed down 14.3%, to 66 cents on Monday, and Downey Financial's stock finished down 24.3%to $1.28. Washington Mutual, while better capitalized than those two banks, is supervised by the OTS, as well. Investors will be looking to see how much further WaMu's loan quality deteriorated in the second quarter, when it reports results on Thursday. The stock plummeted 34.8% on Monday, prompting the bank to issue a statement saying it was well-capitalized intended to soothe investors. Countrywide FSB, now held by Bank of America ( BAC - Get Report) is supervised by the OTS, as are two large Wachovia ( WB - Get Report) charters, which hold the option-ARMs acquired from the former GoldenWest Financial. Wachovia will release its second quarter earnings results on July 22. Before IndyMac's failure, the FDIC had roughly $53 billion in its deposit insurance fund. With the fund taking such a large hit from IndyMac's failure and the possibility of more large failures, the agency may have to increase the assessment rates charged to insured depository institutions.
Friday night, the Federal Home Loan Bank of San Francisco put out a statement saying the IndyMac advances were collateralized with approximately $21.6 billion in mortgages. That's a lot of collateral securing $10.1 billion in advances. The FHLB had prudently raised its haircuts on IndyMac's mortgage collateral and is quite unlikely to lose a dime. The most likely scenario is that the successor institution, IndyMac Federal Bank will continue paying interest on the advances for a while, and then start paying them off. To dispel misinformation flying around last week among the mainstream media, as well as misinformed blogs, Federal Home Loan Bank advances are not a "bailout." They are a normal funding source for most U.S. banks and thrifts. Contrary to another piece of misinformation, there are no tax dollars on the line when the FHLB lends money to banks. The Federal Home Loan Banks are a system of 12 regional wholesale banks that were chartered by Congress to help ensure liquidity sources for mortgage lenders. The FHLBs are cooperatively owned by their members -- banks, S&Ls, credit unions and some insurance companies -- who hold capital stock in the wholesale banks. The amount of capital stock held by members depends on their size and on their level of FHLB borrowings.