Kent Bush: More banks may go the way of IndyMac
Sometimes a safety net turns into a snare.
The Federal Deposit Insurance Corporation has protected the life savings of thousands of Americans since it was enacted 75 years ago.
However, knowing that the first $100,000 of every account is insured has allowed banks to play fast and loose with common banking practices. The ultimate responsibility to the customer is borne by the FDIC, thus pushing a bank to the point of failure is not as catastrophic as it would be otherwise.
Some similar state laws were in place before, but President Franklin D. Roosevelt drove the FDIC into being in 1933 on the heels of the Great Depression.
Banks are forced to close when they no longer have enough capital to back their assets.
Late Friday, IndyMac Bancorp became the second largest financial institution to ever fall into the hands of the FDIC. A tough economy, coupled with mortgage defaults and a falling stock price, led to the collapse of IndyMac.
Their collapse may have been inevitable, but it was certainly accelerated when Sen. Charles Schumer (D-New York) released some sensitive information from a letter he received from the Office of Thrift Supervision to the FDIC. The letter indicated IndyMac was struggling with liquidity.
When Schumer announced this to the public, customers took part in an old-fashioned run on the bank. In a mere 11 days, IndyMac lost $1.3 billion from their accounts. That drove them to a negative liquidity, forcing the FDIC to take over operations of the institution.
Schumer defends himself by saying the OTS was asleep at the wheel - allowing IndyMac and many other institutions to engage in risky lending practices.
"The administration is doing what they always do, blaming the fire on the person who called 9-1-1," Schumer said. The administration and regulators do bear their portion of the blame. However, soon after "calling 9-1-1," Schumer poured a barrel of $4 a gallon gasoline on the fire.
IndyMac was the fifth bank to fail this year.
It may be at the front of a very long parade.
As the mortgage crisis gets broader and deeper and the economy continues to struggle under high energy prices and other market forces, more and more banks will face these issues.
From small banks that made millions of dollars worth of risky mortgage loans to major players like Washington Mutual who are on the borderline of being in trouble, many more banks may go the way of IndyMac.
Until financial institutions stop seeing their federal insurance policy as a green light to make poor decisions and start making responsible loans and investments, the list of closures will only grow longer.
You can take that to the bank.