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Regulators to Schumer on IndyMac: Please shut up

July 2, 2008 |  5:47 pm

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."

Schumercharles 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

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