Regulators to Schumer on IndyMac: Please shut up

Sen. Charles E. Schumer publicly taunted bank regulators last week about IndyMac Bancorp's financial condition, which helped trigger a sudden outflow of deposits from the Pasadena thrift. Now the New York Democrat is getting some harsh blowback from one current and one former regulator.

Their message, distilled: Zip it, Chuck.

As noted here on Monday, Schumer sent letters to the Office of Thrift Supervision, the Federal Deposit Insurance Corp. and the Federal Home Loan Bank of San Francisco, saying he was "concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers."

IndyMac, which has suffered huge losses on defaulted mortgage loans, "could face a failure if prescriptive measures are not taken quickly," Schumer wrote.

Uh, wait a minute -- how could Schumer know that? And since when are regulators supposed to tell the public in advance that a particular institution has been earmarked for possible failure? All that would do is guarantee a collapse. If depositors are within FDIC insurance limits they have nothing to worry about, anyway.

That pretty much sums up the content of a letter to Schumer today from John M. Reich, director of the Office of Thrift Supervision.

"As a regulator of insured depository institutions, we do not publicly comment on the financial condition or supervisory activities related to open and operating institutions," Reich wrote. "We believe it is critically important to maintain the confidentiality of examination and supervision information."

He went on: "Dissemination of incomplete or erroneous information can erode public confidence, mislead depositors and investors, and cause unintended consequences, including depositor runs and panic stock trades. Rumors and innuendo cause damage to financial institutions that might not occur otherwise and these concerns drive our strict policy of privacy."

John D. Hawke, the U.S. comptroller of the currency (regulator of national banks) from 1998 to 2004, had more pointed words for Schumer in a story in the American Banker newspaper today.

"If Schumer continues to go public with letters raising questions about the condition of individual institutions, he will cause havoc in the banking system," Hawke said.

"Leaking his IndyMac letter to the press was reckless and grossly irresponsible. I don't see how he can be trusted with confidential information in the future. What this incredibly stupid conduct does is put at risk the willingness of regulators to share any information with the [congressional] oversight committees. After this, you'd be crazy to share information with Schumer."

The senator's office didn't respond to a request for comment today. On Monday, Schumer aide Brian Fallon offered this explanation for Schumer's action: "The home loan bank system has an obligation to lend responsibly and police its members. But it has not been doing its job. We have found the only way to get the home loan bank system to act appropriately and positively is to make public the concerns we've already expressed privately."

If that's Schumer's policy on the U.S. financial system's troubles overall, it's going to be a long, hot summer.

Photo: Sen. Charles Schumer. Mark Wilson/Getty Images

Comments

[rukus]

I think the senators should have been much more discreet with his concerns! He should be investigated!

[Jennifer]

I have nothing but praise for Senator Schumer. What he did, in reality, was issue a legitimate warning to IndyMac's unsecured creditors that they are at risk in continuing to do business with the bank.

FDIC supposedly has a policy that there should be no "Walking Dead Banks". Yet I fear that decisions have been made, administratively, not to allow any significant financial institution to fail before the Fall elections.

The problem with that approach is that the FDIC has very clear policies on what happens if they seize a bank. While depositors up to $100,000 are insured, unsecured creditors of the banks are not paid. The seizure harms many innocent people and companies who do business with the Walking Dead Bank within the weeks or months before the seizure:

Construction loan borrowers who are depending on the bank to make a series of disbursements to pay for construction costs as they are incurred, but who, upon the bank's failure, do not receive full loan pay out and are left with mechanics lien claims and possible bankruptcy of their own;

Home buyer mortgage loan applicants who spend time and money to go through the loan process only to have it stopped part way, causing the buyer/borrowers in process to lose their purchase contract deposit when the bank won't close the loan because the bank has failed;

Buyers in escrow who are in contract with the failed bank to buy REO, with those buyers losing their buyer's purchase deposit which is in the bank's coffers, while FDIC decides to cancel the contract and not close after the seizure;

Landlords for bank branches who renew leases in good faith, and perhaps pay for tenant improvement renovations, thinking that they have a good credit tenant, when in fact FDIC will ultimately cancel the lease prematurely and stop paying rent;

Vendors who sell everything from xerox copies to computer services to printing jobs to night time cleaning services all of whom receive nothing for their accounts receivable from the failed bank.

Allowing a "Walking Dead Bank" to continue to do business, and make FDIC-rescindable contracts with innocent third parties and thereby take funds, goods or services with no intention of payment for them, is actual fraud under the law of most states. However, as shown by what FSLIC and FDIC did in the 1980's, when the party "doing the fraudulent inducement" is a federallly insured Walking Dead institution, there is no consequence suffered by the officers of that Walking Dead Bank. They are perpetrating frauds, to the detriment of others, to keep the bank operating beyond the date it becomes insolvent.

One economic statistic never disclosed in the days of the "S&L Crisis" is how much money unsecured creditors lost when the Walking Dead S&Ls were seized.

Senator Schumer should be commended for protecting the interests of IndyMac's unsecured creditors by telling the truth about what is going on.

John M. Reich's comments, as head of the federal Office of Thrift Supervision, clearly show that his organization promotes the perpetration of frauds on insolvent banks' unsecured creditors, in the name of having a stable banking system. Is that an "Unlawful taking in violation of the 4th Amendment?" If not, at the very least it is immoral and reprehensible conduct by federal officials.

[Mr Big]

I lost my job at Indymac today. They eleminated a profitable division. Toast. I'd like to think it's a New York senator's fault for helping to erode our capital base and force the CEO's hand in quickly cutting all non-core business.... but come come on, the writing's been on the wall for at least eight months.

At this point, if anything, this fiasco will only help, as it has drawn the public eye to the question of who can be bailed out by the Fed, and who can't? Why Countrywide, Bear, but not Indymac?

Side note, I'd like to see Schuner's staff investigated for anyone shorting the stock before leaking the letter. This was pure market manipulation.

[Nestor]

Jennifer,

Let's let the PROFESSIONAL BANK REGULATORS do the bank regulating. Schumer had no right to leak one-sided, inflammatory comments the way that he did. It was irresponsible and completely bone-headed.

If you were worried about all of the construction loan borrowers, mortgage loan applicants, buyers in escrow, landlords for bank branches, and various vendors BEFORE Schumer leaked his letter, then you should be really worried now.

And, by the way, most of the personal depositors I have come across during my career are insured for MORE than $100,000. Remember, the FDIC insures accounts $100,000 per owner per qualified beneficiary.

Thanks.

[Chris]

Schumer has been a blowhard for as long as I can remember. I really can't believe anyone takes the guy seriously. That aside, when you ignore the funny math of Indymac's PR department, it's quote obvious that Indymac is a Zombie Bank on the verge of insolvency. If the institution doesn't go into receivership before their Q2 report is released in early August, I suspect that the losses will be absolutely staggering. Clearly, the bank is clinging on for dear life and desperately trying to raise capital as fast as possible, but it's almost akin to trying to extinguish a forest fire with a squirtgun. WIthout a doubt, the FDIC has already placed the institution on probation, just like National City.

The one thing I really have a real problem with the idea that the Fed should in any way bail out Indymac. (They had no business bailing out Bear Stearns either.) Institutions should be allowed to fail if they make bad business decisions. A bailout only helps to worsen the situation because it allows other banks and lenders make risky decisions because they know they'll get a bailout too if something goes wrong.

On a side note, I just invested several thousand dollars in an Indymac 10 month CD, because their rates are unbeatable. I'm under the FDIC limits, so there's nothing to worry about from my perspective.

[martscan]

Jennifer has it right, in fact she nailed it. A "10".

Regarding the indignant letters from mssrs: Hawke and Reich. IMO, these are classic cases of entrenched, hubristic bureaucrats resisting encroachment on their turfs by a mere United States Senator who is fulfilling his duties and responsibilities to the American public. Poor babies.

As to Nestor's implication of his esoteric knowledge, by dint of his 'career', he has it wrong. The FDIC does NOT insure "depositors", they insure "deposits." And while a 'depositor' may have much more than $100K insured via joint accounts, trusts, business accounts, etc., he has only $100K insured in any one account. And, by the way, I never buy jumbo CDs of $100K...I always buy $95K or less CDs, depending on the rate, so the earned interest will be covered.

[Bithead]

Irresponsible, perhaps. Boneheaded, no. Think;

Why would Schumer, a Democrat from as far to the left end of the scale as one might imagine, want to erode public economic confidence during a Republican administration, and during an election year, do you suppose?

Aside from the rather nasty implications of that, one also must wonder if Schumer profits from this in terms of stock holdings in IndyMac's competition. But however that falls out, this was nothing but market manipulation from his government perch... along with the use of government provided insider information, for which Scumer should stand trial, and prison.

And I speak as a NY resident, under his misrepresentation.

[Continuum]

Yet, another example where the big boys know the details, while the rest of us are kept in the dark. Schumer did the right thing in letting the cat out of the bag.

[jack]

FOR CHRISSAKES IMB!! Your stock is a 60 Cents a damn share!!--(Kind of speaks for itself, dosent it)?? Schumer didn't cause that to happen, YOUR greedy and CORRUPT company directors did!!

He is only stating what is plain as day!! Stop blaming the messenger!!--How ludicrious!!

[Jack]

IMB--

FYI--Your stock was 64 CENTS the last time I checked. Schumer didn't need to say a word...........Buhhh Byeeeeee

[Dan]

Chuckie is seems to be a lip flapper who likes to hear himself talk. No wonder our country is in trouble. The not so esteemed senator and his collegues have been asleep at the wheel in Washington. As a result, a massive collision is unfolding in every sector of our society and old Chuckie keeps on flapping his lips away blaming everyone else except those in the halls of congress and the white house. They should all be investigaged by the PEOPLE!

[rex jones]

I agree that Shumer should be investigated as to wereas his contacts have shorted IMB stock. Also if any of his friends/contacts who have a short interest asked him to publicly send this letters. IMB stock lost 1/4 of it's value after his comments. While this sort of thing might have seemed as ingenious and unheard of my to anipulation, it is now very common place and easy to detect.

[Bill]

As the mortgage meltdown continues unfolding, the long knives come out one at a time. Just why is it OK to bail out Wall Street gamblers in NYC and then trash a California bank? Schumer should be censured by the Senate.

[Qzaki Fan]

At times like this, California voters should regret sending a lightweight twit like Barbara Boxer to the US Senate.

This is regionalism at its worst. He targeted a CA-based institution to make his point. The East-West dichotomy in rap and sports is bad enough, we don't need it playing out on the Senate floor. And how has Boxer responded???

Feinstein can't do everything. We need a junior senator who is QUALIFIED and COMPETENT (not Babs Boxer).

Vote smart next time, or lose your job and ruin California (more).

[William]

Jennifer,

"I have nothing but praise for Senator Schumer. What he did, in reality, was issue a legitimate warning to IndyMac's unsecured creditors that they are at risk in continuing to do business with the bank."

If you were an unsecured creditor, all you have to do is look at IMB's stock price. When any stock is trading for the price of a $1 value meal, you know that you have potential trouble. We do not need Schumer to tell us what we already know.

[million]

all Schumer did was pull peoples' heads out of the sand. just about everyone who's been following this debacle was aware of IMB's (and other banks mired in pay option ARMs) insolvency for years now.

Schumer did what the regulators would not, he addressed the obvious. i'm done with the lies and constant deception coming from Wall Street. it's time for some cold, hard honesty all the way around.

and i have no delusions that Chuck did this for the sake of the country, somebody will scratch his back later to return the favor... but ends/means IMO.

[Hugo]

So if I understand John M. Reich and former comptroller John D. Hawke correctly, let the bankers handle banking issues, keep pertinent information away from uninformed depositors, and why should bankers report to a lowly U.S. Senator?

LOL. As to the first assertion, bankers couldn't run a dairy queen unless they were able to offer an option ARM on the soft freeze. Do all of you not get it? Bankers DON'T KNOW WHAT THEY ARE DOING! They bring us things like Lincoln Savings & Loan and Bear Stearns, ruining the finances of thousands and leaving taxpayers to foot the bill, and yet, some of you would chastise a Senator for airing legitimate concerns about a bank's solvency? Really? Maybe we deserve 4 years of McCain afterall.

And as for the third assertion, even if regulatory boys like Reich consider Schummer nuts, or a blabber mouth, the point is that he is still YOUR BOSS, and if you want to keep your cozy lil job on a banking regulatory body, you better be upfront about all you know, or you'll have hell to pay.

Finally: Go Schummer! This is courage in action. He didn't say IMB was insolvent, he only asked. Those who withdrew their funds were skittish depositors and probably would have pulled their money out anyway.

FDIC insures your principal up $100,000 but does not include interest. If you had a 10 month cd of $95K, and IMB goes down, what will you have to show for the months you let IMB use your money? Exactly.

[Bank Exec]

I am a senior executive with a large regional bank.

I can only echo the opinions of those who've said Schumer is a loose cannon and his actions are harming many people.

This isn't about politics. This isn't about Republicans vs. Democrats. This is about the integrity of the FDIC insurance system and a regulatory oversight process that has survived many crises in spite of the bad behavior of both bankers and politicians.

If Schumer has a problem with the effectiveness of regulatory oversight, the media isn't the forum to discuss or comment on this. To mention the name of an institution, as he did, is the height of irresponsibility. If he has an issue, he should talk to the regulators, in private. His behavior is that of a rookie, not a seasoned legislator.

Schumer has now guaranteeed that no one will tell him anything other than under subpoena.

Idiot.

[Edward Woodruff]

Shame on Schumer

Sen. Schumer comments regarding Indymac Bank and its associated regulators (FDIC, OTS, and FHLB) were irresponsible, inaccurate and ultimately counter productive to the larger financial services industry and the greater public Sen. Schumer purports to serve.

As a United States Senator, he must understand the consequences of his words. Choosing to place his unsubstantiated accusations in a public forum caused unnecessary harm to both Indymac Bank and the banks individual depositors.

Customers choosing to close their accounts based on Sen. Schumer’s imprudent and inaccurate words incurred early termination fees and the loss of competitive market interest rates.

Indymac unnecessarily lost deposits at a time when, like all other banks, it is working through a very tough market. While Sen. Schumer’s comments were directed exclusively at Indymac, the larger implications were clearly associated to all institutions serviced by these same regulatory groups.

If Sen. Schumer’s true intentions were to ensure that the Home Loan Bank was doing its job to lend responsibly and police its members he failed. As an elected official, it is Sen. Schumer’s responsibility to develop his internal network to address his concerns and to engage the American public when it is prudent and necessary to do so. In this case it was neither.

Sen. Schumer’s overstated and incorrect overview specific to Indymac Bank along with his inappropriate use of the media is an unacceptable abuse of his public responsibility.

[concerned]

Come on, folks. Chuck Schumer is doing the bidding of Citicorp which has bankrolled all of his campaigns. He helped bring down Countrywide and now he is bringing down IndyMac. You folks out in California think that is a coincidence? Who benefits from the disappearance of these two major players? Duh!

What I don't get is how your two brain dead Senators let this guy kill thousands of jobs in your state for the benefit of his New York bankrollers.

[Ken Orji]

I am really scandalized that a senator in the free-enterprise USA could actively campaign to kill a corporation just to satisfy hedge funds and short sellers. And to think that Indymac employed thousands of people, some of whom are now loosing their jobs because of this low-rated senator is disturbing. Virtually all financial institutions are reeling from the unprecendented crises that the US, albeit world economy is facing. To think that some regulator's response to the crises would be to take active steps to force the downfall of a tax-paying bank is spurious. I was mad when I first heard it, I am mad now. I do not think that that man's actions were genuine, and I believe that Indymac should be entitled to recover any losses in a lawsuit against this dumb and dumber senator.

[JMH]

I agree 100% with concerned and ken's previous postings regarding the dumb, dumb senator. I believe the senator is helping Citicorp, Bof A or another major bank get rid of IndyMac. I've been in the mortgage business for 17 years and the banks that are surviving or treading water are the banks that HATED wholesale business. What does that mean to the consumer??? Consumers are going to have their hands tied when looking for a new mortgage/loan program. Yes, there were crooked, greedy mortgage professionals that took advantage of consumers and I'm glad they are exiting the business by choice (they do not know the true meaning of working for a client) or because they were forced to leave. Every industry has crooked individuals posing as good business people (any politicians come to mind?), but removing wholesale lending and the mortgage professionals who are honest and try to do the right thing for a borrower is going to hurt consumers. The few banks that survive this will have a monopoly on home loans and it will not be good. IndyMac built their business with wholesale business, expanded it to retail and despite the accusations and rumors they offered good loan products to everyone. As much as the media, government and watchdog groups sound-off about this mess how come no one interviews the borrowers who commited fraud and knew what they were getting into? For a borrower that was truly taken advantage of there are a dozen who commited fraud along side the LO or broker or on their own without the LO/Broker knowing. This mess is everyone's fault. Sen dumb dumb, why don't you give back your donations from Wall Street and start a watch dog group on your friends down in Wall Street. Leave Califonia alone.

[Chuck Scummy]

Who profited??????? When IndyMacs' stock plummeted 25% after chuckies' letter was leaked - who profited? Somebody scalped around 10M shares of IndyMac stock in just a few hours. Is this just one more example of a slime ball politician and his cronies lining their pockets at the expense of america? Hey - I could care less that chuckie caused a $100,000,000 run on the bank - I don't even care that he will be the person most responsible for the death of IndyMac - I'm just pissed because I'm not one of his cronies!

[TheBankDick]

I am an agent who, during the banking crisis of 1988 - 1992, investigated many, many failed banks. I also frequently run cases that are the subject of Congressional scrutiny.

From my vantage point, Schumer was way out of line in making his comments public. It was his chocie whether his letters to OTS and FDIC were made public; he did it on purpose - just to get more attention. He could have sent it privately but he chose not to. An irresponsible "look at me" exercise.

Members of the House and Senate get briefed on classified and otherwise confidential matters all the time. Unfortunately, I've never met a Member that didn't have an agenda, so these leaks happen all the time. Conduct like that displayed by Senator Schumer is why there is now a rule that says matters currently being investigated criminally are exempt from Congressional oversight.

Frankly, he should be censured or sued.

Jennifer, while you have a very valid point about the pain that is inflicted when a bank is closed, I'm afraid you missed what is really happening during the probationary period - the regulators and the bank are trying to work out a resolution that avoids the bank failing. These efforts are often successful and, when they are, they manage to avoid inflicting the pain on the public, the employees and the DIF. Some examples of resolutions which avoid pain are bringing in a new management, having another institution merge with the troubled bank or outright assumption by a healthy institution. So there is a reason they don't slam the door shut at the first whiff of a CAMEL 5 rating.

Bank Exec was right - confidentiality in banking regulating is vital. If banks can't speak freely with regulators for fear of Senators making these kinds of irresponsible statements, banks will stop talking to regulators - period. Then no one is going to know what's happening and the banking system will be in more jeopardy than it is today.

Indy may or may not be a troubled institution (even if I knew, I wouldn't say so publicly). But it is appropriate for all depositors and investors to know their banks - just as the banking industry is constantly reminded to "know their customers." So do your own research. If your bank's stock is crashing, and the loan loss reserves look inadequate, and they suddenly start offering CDs with seemingly outrageous rates of interest, use your best judgement.

Be safe...

[Mike]

To all the posters that are indignant that they are not part of the evil short sellers posse: it isn't possible to short a share under $5.00.
Indymac has to jump 4 400% to get back to its year ago price. IMB has been clearly dead for over six months to anyone with a frontal lobe.
While the senator may have issues the devastating and not talked about extension of credit by the FHLB will be studied for decades in our colleges.

On another note: "Indy may or may not be a troubled institution"?!! You are the one keeping our banks safe?!