An Indian Civilizational Perspective

Biggest Bank failure in US! IndyMac – $20 billion – goes under..

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Today a USD 20 billion IndyMac bank went down. Got an email from a friend who gave an account of how it affects at the personal level..

Indy Mac bank based in California was taken over by FDIC on 7/11/2008 at 3:00 PM PDT and is the largest Bank Failure ever. It is strongly suggest that you review all bank accounts and keep the limits below $100,000 for bank accounts and below $500,000 for Brokerage.

My friend’s Dad had an account with > $30,000 at Indy Mac bank and he tried to get his money out last week and they said that they could not find his signature card, and refused his withdrawal. He then asked if they could wire the funds out, and they said that he would need to submit a notarized document requesting the wire. UNBELIEVABLE!!!

His dad’s account is fully insured, but most likely he will lose 1 months of Interest since his interest would have posted on 7/15/2008 and the bank went under on 7/11/2008.

There has been a lot of news around WAMU (Washington Mutual) and Lehmann Brothers, and they are also very large and could possibly go under. It is highly advisable to reduce all accounts EVERYWHERE below the insurance limits. Especially vunerable are all business accounts, which often have balances greater than the FDIC limits.

Also read:  Shunning Advertising while becoming a household name!

Please feel free to forward to others that you feel could benefit from such knowledge.

So, guys keep tabs on your banker and brokers, as many of them are moving to the fly-by-night operation style. You should check out the notice posted on the bank’s website – its amazing how a $20 billion dollar instution “closes” down overnight, and is opened the following business day taken over by the FDIC!!! The FDIC anticipates that $19 Billion of the $20 billion on deposit was insured. The FDIC expects that the $1 Billion in uninsured depositors will recover approximately 50% of their “investment” above the FDIC insurance limits.

How the failure happened?

IndyMac grew rapidly during the real estate and home building boom. Its specialty was so-called Alt-A loans, those for which home buyers were asked to produce little or no evidence of income or assets other than the house they were buying.

While home prices climbed, Alt-A loans posed few problems for IndyMac. If a buyer wasn’t able to afford his payments, the bank got title to a home worth more than the amount owed. The bank was also able to find investors eager to buy pools of those mortgages that had been pulled together into securities backed by the future payments.

But when the housing bubble burst and prices began to fall, losses at IndyMac began to rise. Investors ran away from the mortgage-backed securities, leaving the bank to suffer the loan losses itself and without the funding it needed to make new, safer loans.


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12 Comments
  1. Anonymous says

    I do not understand what the fret is all about. You can still write checks against your account and get all your money out. FDIC statement on Indimac is clear and unambiguous – they will honor all checks, ATM withdrwals etc will be permitted up to the insured amount.

    As far as the 30K cash withdrawal is concerned, any bank would want to verify the signatures for a large cash withdrawal. Signature cards are not frequently used for checks used to deposit to another institution, so it is not uncommon to not easly find a signature card.

    Likewise with the wire instructions – I would not want my bank to ever allow outgoing wires to be set up without absolute proof it is indeed me who is setting it up. Due diligence 101.

    If my bank ever made it too easy to withdraw without the safeguards that you have considered excessive, I would close my account there.

    Banks can and will fail, but to post a panic post to withdraw is hardly a responsible thing to do.

  2. Anonymous says

    I do not understand what the fret is all about. You can still write checks against your account and get all your money out. FDIC statement on Indimac is clear and unambiguous – they will honor all checks, ATM withdrwals etc will be permitted up to the insured amount.

    As far as the 30K cash withdrawal is concerned, any bank would want to verify the signatures for a large cash withdrawal. Signature cards are not frequently used for checks used to deposit to another institution, so it is not uncommon to not easly find a signature card.

    Likewise with the wire instructions – I would not want my bank to ever allow outgoing wires to be set up without absolute proof it is indeed me who is setting it up. Due diligence 101.

    If my bank ever made it too easy to withdraw without the safeguards that you have considered excessive, I would close my account there.

    Banks can and will fail, but to post a panic post to withdraw is hardly a responsible thing to do.

  3. Desh says

    Thanks, sir! Your point is very well taken….

    ….But the post merely says that one should reduce the deposited money below the FDIC insured limit so one is sure that his/her money would not go away.. specifically in the banks which are in danger of going under. I think that is a very sane advice and not a panic post.

    The post does not say that we should take all the money out… just that to be safe.. make sure you are covered by the federal insurance in place!

    Finally, if the processes in place when a bank goes bankrupt are more than before just to take the money out.. then that is a hit on the liquidity… and it should entail payment of interest. I guess my friend’s concern is that that payment for delay is not going to make it to his Dad’s account.

  4. Desh says

    Thanks, sir! Your point is very well taken….

    ….But the post merely says that one should reduce the deposited money below the FDIC insured limit so one is sure that his/her money would not go away.. specifically in the banks which are in danger of going under. I think that is a very sane advice and not a panic post.

    The post does not say that we should take all the money out… just that to be safe.. make sure you are covered by the federal insurance in place!

    Finally, if the processes in place when a bank goes bankrupt are more than before just to take the money out.. then that is a hit on the liquidity… and it should entail payment of interest. I guess my friend’s concern is that that payment for delay is not going to make it to his Dad’s account.

  5. sri says

    Indy is one of the few private mortgage lender whose loans were not backed by Fannie and Freddie the government backed institutes.

    Indy made loans (most of them were subprime loans) without following any of the lending standards at the height of real estate boom.
    They also invested heavily in mortage backed securities whose value drastically reduced now.

    Depositors: Normal checking and debit account holders should be really worried in the light of recent developments. Almost all of the banks use deposited cash for investments and earn money. That is how they pay us interest. Since Indy lost chunks of that deposited money in subprime mortgage mess and investments in mortgage backed securities, depositors may not get all of their money back. Even if you are entitles for money insured by FDIC, there may be considerable delay in processing and may take months or even over an year.

    So most of the account holders rushed to the bank and took their money (Run on a bank) last week. This further aggravated the grim situation at Indy causing the government agency to take over.

    Forget about Indy and subprime mess, even Prime lenders started to default as their homes are worth much much less than what they owe. Families are just walking away from homes dropping the keys in their mail boxes or leaving it in the bank.

    Fannie and Freddie are also close to bankruptcy because of non-payment of loans. China is one of the biggest investor in Fannie and Freddie and could have a cascading global effect if these two government sponsored institutes fail. There could be domestic and global implications next week w.r.t these institutions. As i right, serious negotiations are on the way helping these institutes.

    Thanks
    Sri

  6. sri says

    Indy is one of the few private mortgage lender whose loans were not backed by Fannie and Freddie the government backed institutes.

    Indy made loans (most of them were subprime loans) without following any of the lending standards at the height of real estate boom.
    They also invested heavily in mortage backed securities whose value drastically reduced now.

    Depositors: Normal checking and debit account holders should be really worried in the light of recent developments. Almost all of the banks use deposited cash for investments and earn money. That is how they pay us interest. Since Indy lost chunks of that deposited money in subprime mortgage mess and investments in mortgage backed securities, depositors may not get all of their money back. Even if you are entitles for money insured by FDIC, there may be considerable delay in processing and may take months or even over an year.

    So most of the account holders rushed to the bank and took their money (Run on a bank) last week. This further aggravated the grim situation at Indy causing the government agency to take over.

    Forget about Indy and subprime mess, even Prime lenders started to default as their homes are worth much much less than what they owe. Families are just walking away from homes dropping the keys in their mail boxes or leaving it in the bank.

    Fannie and Freddie are also close to bankruptcy because of non-payment of loans. China is one of the biggest investor in Fannie and Freddie and could have a cascading global effect if these two government sponsored institutes fail. There could be domestic and global implications next week w.r.t these institutions. As i right, serious negotiations are on the way helping these institutes.

    Thanks
    Sri

  7. Desh says

    Sri.. thanks so much! Indeed a pretty grim picture of things out there. If these two institutions go under that will affect a lot of other downstream institutions! Worst, it will be a blow to the poor families out there who get the boost from low income housing.

    And its not the just because a bank is FDIC insured people will be insured.. even upto the FDIC limit. As the CNN article says that thousands will lose half their money since IndyMac was insured only upto $19 billion out of its $20 bn. So the One billion is not insured… and that translates into thousands of people!

    According to the agency, 10,000 IndyMac customers could lose as much as half of that amount, or $500 million. The agency says the failure will cost the Deposit Insurance Fund between $4 billion and $8 billion, based on preliminary estimates.

  8. Anonymous says

    This post was not a panic post, and those that have intrepreted as such are missing the point.

    Actually any depositor that had less than $100,000 will get all of their money back on Monday. The FDIC has made this unambigious and it is the normal process at all FDIC institutions that go under.

    What is interesting is that the FDIC considers you an investor in the bank, if you have deposits greater than $100,000. Why? When the institution fails, they pay out “dividends” so you can recover amounts above the $100,000.

    In the case of Indy Mac the FDIC has announced a 50% dividend, which means that if you had $500,000 in an account. On Monday, you would be able to have your $100,000 FDIC insured amount plus a 50% dividend on your investment in a failed institution of $200,000.

    +$500,000 Deposit as of 7/11/2008 @ 3:00 PM PDT
    -$100,000 Insured Amount
    ———————————————–
    +$400,000 Considered Investment in the Bank
    -$200,000 FDIC Dividend Announced (Available on 7/14/2008 @ Opening)
    ———————————————–
    +$200,000 Unrecovered Which may or may not be paid out

    The reason this post was written was for each of you to think about your parents, people that have businesses (which often carry much more than $100,000 in their accounts) and other people that may have greater than $100,000 in an account or greater than $500,000 in a brokerage account. All of us are professional, we don’t have time to track what our bankers and brokers are really doing. So reduce your accounts below $100,000 at banks and $500,000 at brokers, and don’t fall into the bucket where the FDIC or the SIPC will consider you an investor.

    If you have less than $100,000, you are perfectly safe and you can go back to sleep, the Fed is watching your money!

    Guys…Bear Sterns went under and was sold in a panic to JP Morgan/Chase. Bear Sterns was an institution dating back probably 100 years or more, and they are GONE!!! So for this year we have had 2 fly-by-night operations…Bear Sterns (disappeared in about 3 days) and Indy Mac (disappeard in about 13 days when the run on the bank started)…

    Also as a clarification when an institution goes under, the FDIC gaurantees your money; however, technically, your money was already long gone and was wasted in the Sub-Prime debacle. It is just Banking Regulation and Law and GAAP accounting that says that the bank must continue to let you know what your “hypothetical” balance is. When and if the institution fails, The FDIC uses the insurance premiums that are paid by each and every FDIC insured bank, to “replenish” your lost funds. If this doesn’t make any sense, you will have to enroll in a finance or accounting class to get the gist. Up until the failure, the FDIC figures that the bank will eventually revive itself.

    We each waste so much time in sending around useless e-mails about how Bill Gates and Microsoft are going to send each of us $10.00 for each person I forward an e-mail to; however, when it comes to a simple warning about the financial sector people want to beat the author down. Personally you should bitch out your bankers and brokers for making stupid loans, you ended up paying for it anyways…as eventually the $4 – $8 billion that was lost in Indy Mac was your Tax Money that bailed out the depositors! So go forward this post to 10 people, as it will actually save you tax money in the long run!!!

  9. sri says

    If Freddie and Fannie goes down, it will only affect the would-be borrowers. This will directly affect the housing market and wrosens the already bad market.
    If these institutes clsoe down, lending activity will drastically be reduced as there won’t be anybody guranteeing hte loans under $400K (recently this limit was rasied).

    So, pending home sales and foreclosures will be pending for long time and home prices may come down further as there will be no buyers.
    Only your local banks will be daring to give out loans and only to those customers with exceptionally high credit ratings.

    We could see another bout of bad news from Lehman and citi bank further pushing the credit crunch and global economy into a tailspin.

    Oil prices and Gold may spike too.
    Thanks
    Sri

  10. Desh says

    Sri.. thanks so much! Indeed a pretty grim picture of things out there. If these two institutions go under that will affect a lot of other downstream institutions! Worst, it will be a blow to the poor families out there who get the boost from low income housing.

    And its not the just because a bank is FDIC insured people will be insured.. even upto the FDIC limit. As the CNN article says that thousands will lose half their money since IndyMac was insured only upto $19 billion out of its $20 bn. So the One billion is not insured… and that translates into thousands of people!

    According to the agency, 10,000 IndyMac customers could lose as much as half of that amount, or $500 million. The agency says the failure will cost the Deposit Insurance Fund between $4 billion and $8 billion, based on preliminary estimates.

  11. Anonymous says

    This post was not a panic post, and those that have intrepreted as such are missing the point.

    Actually any depositor that had less than $100,000 will get all of their money back on Monday. The FDIC has made this unambigious and it is the normal process at all FDIC institutions that go under.

    What is interesting is that the FDIC considers you an investor in the bank, if you have deposits greater than $100,000. Why? When the institution fails, they pay out “dividends” so you can recover amounts above the $100,000.

    In the case of Indy Mac the FDIC has announced a 50% dividend, which means that if you had $500,000 in an account. On Monday, you would be able to have your $100,000 FDIC insured amount plus a 50% dividend on your investment in a failed institution of $200,000.

    +$500,000 Deposit as of 7/11/2008 @ 3:00 PM PDT
    -$100,000 Insured Amount
    ———————————————–
    +$400,000 Considered Investment in the Bank
    -$200,000 FDIC Dividend Announced (Available on 7/14/2008 @ Opening)
    ———————————————–
    +$200,000 Unrecovered Which may or may not be paid out

    The reason this post was written was for each of you to think about your parents, people that have businesses (which often carry much more than $100,000 in their accounts) and other people that may have greater than $100,000 in an account or greater than $500,000 in a brokerage account. All of us are professional, we don’t have time to track what our bankers and brokers are really doing. So reduce your accounts below $100,000 at banks and $500,000 at brokers, and don’t fall into the bucket where the FDIC or the SIPC will consider you an investor.

    If you have less than $100,000, you are perfectly safe and you can go back to sleep, the Fed is watching your money!

    Guys…Bear Sterns went under and was sold in a panic to JP Morgan/Chase. Bear Sterns was an institution dating back probably 100 years or more, and they are GONE!!! So for this year we have had 2 fly-by-night operations…Bear Sterns (disappeared in about 3 days) and Indy Mac (disappeard in about 13 days when the run on the bank started)…

    Also as a clarification when an institution goes under, the FDIC gaurantees your money; however, technically, your money was already long gone and was wasted in the Sub-Prime debacle. It is just Banking Regulation and Law and GAAP accounting that says that the bank must continue to let you know what your “hypothetical” balance is. When and if the institution fails, The FDIC uses the insurance premiums that are paid by each and every FDIC insured bank, to “replenish” your lost funds. If this doesn’t make any sense, you will have to enroll in a finance or accounting class to get the gist. Up until the failure, the FDIC figures that the bank will eventually revive itself.

    We each waste so much time in sending around useless e-mails about how Bill Gates and Microsoft are going to send each of us $10.00 for each person I forward an e-mail to; however, when it comes to a simple warning about the financial sector people want to beat the author down. Personally you should bitch out your bankers and brokers for making stupid loans, you ended up paying for it anyways…as eventually the $4 – $8 billion that was lost in Indy Mac was your Tax Money that bailed out the depositors! So go forward this post to 10 people, as it will actually save you tax money in the long run!!!

  12. sri says

    If Freddie and Fannie goes down, it will only affect the would-be borrowers. This will directly affect the housing market and wrosens the already bad market.
    If these institutes clsoe down, lending activity will drastically be reduced as there won’t be anybody guranteeing hte loans under $400K (recently this limit was rasied).

    So, pending home sales and foreclosures will be pending for long time and home prices may come down further as there will be no buyers.
    Only your local banks will be daring to give out loans and only to those customers with exceptionally high credit ratings.

    We could see another bout of bad news from Lehman and citi bank further pushing the credit crunch and global economy into a tailspin.

    Oil prices and Gold may spike too.
    Thanks
    Sri

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