FDIC's Bair offers no comfort to uninsured IndyMac depositors

The head of the Federal Deposit Insurance Corp. delivered some bad news personally to uninsured depositors who lost money last year when IndyMac Bank crashed and burned, saying an act of Congress is their only hope for recovering their funds.

“When a bank fails, we have to do what’s least-cost to our deposit insurance fund,” FDIC Chairman Sheila Bair said during a public appearance Wednesday in Los Angeles.

That’s not the answer the IndyMac depositors wanted to hear, of course. But it’s the answer they have been getting since the bank, which had specialized in stated-income mortgages and high-yield CDs, collapsed in July 2008. That left about 10,000 customers of the Pasadena-based savings and loan with losses of $270 million on deposits that exceeded FDIC insurance limits.

Congress later last year raised federal insurance coverage from $100,000 per depositor to $250,000 and loosened the requirements for trust accounts so that anyone could be listed as a beneficiary, not just immediate family members.

One of the contentions of the uninsured IndyMac depositors is that bank employees misinformed them about who could be a beneficiary of accounts, increasing their losses when the bank failed. Why not make the changes retroactive to their cases? they ask.

The uninsured depositors’ anger was intensified earlier this year by a report from the Treasury Department's Office of the Inspector General, which excoriated the Office of Thrift Supervision, IndyMac’s chief regulator, for ignoring warning signs that the bank’s loan portfolio was in trouble. Had the regulators done a better job,  IndyMac's loan losses would have been limited, the depositors say.

Bair’s comments came during a question-and-answer session after she spoke to a Town Hall Los Angeles meeting at the Regency Club in Westwood.

“In light of the OIG report, how can you justify not giving us our money back?” one of the IndyMac depositors asked. “We were misled by bank officials. We set up accounts as we were told to by the bank, and they were wrong.”

Bair said her hands were tied by the laws governing the deposit insurance fund, which already is strained by losses from a surge in bank failures.

“I know you feel it wasn’t fair,” she told the depositors, a group of whom attended the session. The situation “troubles me greatly,” Bair said, but added, “It’s something that Congress has to fix.”

The bank’s failure cost the FDIC nearly $11 billion. The remains of IndyMac were taken over by private equity investors who now are operating it as OneWest Bank.

The FDIC has repaid 50 cents of every uninsured dollar to IndyMac depositors. Last year the agency had held out hope that the uninsured depositors might get more money as the bank’s assets were liquidated, but Bair said Wednesday that it was unlikely there would be any further payments.

-- E. Scott Reckard

Photo: Sheila Bair. Credit: Toby Canham / Getty Images

Comments

[PPY]

Didn't OTS allow IndyMac to backdate capital infusion? Shouldn't all uninsured money that were deposited after that regulatory "action" be paid back at least?

How much insurance fund for insured depositors at future failed banks did FDIC waste in running its loan modification experiment?

"The FDIC chairman has been an activist in bailing-out individuals in foreclosure regardless of cost or circumstance. A year ago she attempted to arbitrarily delay millions foreclosures and has inappropriately manipulated mitigation efforts within failed banks. (I note that her efforts preceded the spike in unemployment and as such were directed primarily at housing speculators and irresponsible borrowers)"
http://theaffordablemortgagedepression.com/2009/10/26/has-sheila-bair-found-religion.aspx?ref=rss

In the loss-sharing agreement with OneWest (formerly IndyMac), FDIC shockingly undermined short sales and its loan modification effort by allowing the new owners to profit when they foreclosed homes.

"So, If I'm OneWest, why would I want to waste my time negotiating through a Short Sale, when I can make the same amount of money (if not more) by just letting it go to foreclosure? And we wonder why nobody can get a Loan Modification? Why would OneWest approve a loan modification for this guy, when they can foreclose and make over $100k? And, to add injury to insult, they have held this loan for 6 months! Not a bad ROI, huh...

Can you say "GREED"?

The scary thing is that over 50 banks have Shared Loss Agreements in place with the FDIC. Some of them include: Bank of America (go figure), CitiMortgage, Wells Fargo, etc. "
http://www.trulia.com/blog/bob_hertzog/2009/09/is_the_fdic_killing_short_sales

*imho*

[David Cohn]

It is true that it did require an act of congress to increase the FDIC insurance limit to 250K per depositor however it was the FDIC's Board of Directors that simplified coverage rules for revocable trust accounts so that coverage is based on the naming of virtually any beneficiary. The FDIC choose NOT to make this rule retroactive which could have helped thousands of depositors. Per Colleen Boles at the FDIC "Federal law prohibits federal agencies from making a new rule retroactive except in the rare instance of compelling, overriding public policy considerations. The FDIC did not pursue making the new rules retroactive, mainly because doing so would have caused significant disruption to its administration of the federal deposit insurance program." It appears that the FDIC is more concerned about protecting the FDIC than the depositors. Also, per Gordon Talbot at the FDIC, one of the first responders on sight after the failure Indymac Bank the FDIC was immediately aware of the problems regarding "qualifying" beneficiaries and revocable trust accounts after reviewing bank records. Yet still the FDIC did NOTHING to help those depositors that were fraudulently mislead by Indymac Officials that there money was safe and insured.

[Concerned Citizen]

The major problem here, is that the FDIC didn't take Prompt Corrective Action (which is *law*) against IndyMac. Had PCA been done, deposits over insured limits would have had "super-senior" status in bankruptcy proceedings, and they *would* have been recovered as close to 100% as possible. However, since the FDIC waited to close IndyMac until it was deep underwater, we have the opposite result for these depositors.

http://www.market-ticker.org/archives/1558-The-FDIC-Must-Be-Indicted.html

[Sarah]

It is not fair to let the Indymac debacle result in so many innocent victims that were depositors at a bank that was cooking its books that the Office of Thrift Supervision (OTS) knowingly allowed. The FDIC raising its deposit insurance coverage from $100,000 to $250,000 immediately after the debacle (obviously to avoid another Indymac situation) wasn't available to the group of people that actually suffered from this extraordinary situation. Why weren't the Indymac victims helped? Whether it was through making the insurance coverage retroactive or during negotiations during the sale to OneWest Bank? Depositors were provided wrong information when setting up bank accounts. Even after failure, as I was standing in the amazing long line outside the bank with my two children to figure out the status of my accounts, I was told incorrect information by an Indymac bank employee on deposit insurance coverage/limit. Bank employees were not consistent in providing the correct FDIC insurance limits/calculations.

[Varagur Chandrasekaran]

Great article!

Very nicely depicts the circumstances in which Indymac Bank had its historical failure on July 11 2008, and also the true plight of those so called "uninsured" depositors who lost their hard earned savings invested in a conservative way.

I sincerely hope that Congress law makers take this matter seriously, and do the right thing of making both HR786 & rules governing Trust accounts retroactive as of July 2008.

Billions of dollars have been spent by the government to protect sinking banks, companies, and failing mortgages.

It is very fair and reasonable that American public savings be protected more securely in this Indymac failure situation, given the fact that this situation has occurred under the same *extra-ordinary circumstances* due to mis-managed Indymac bank in mortgage industry.

Thank you.

[max]

Why should our Govt not pay back it's peeps their hard earned cash *that was in a bank* and yet the pay off 100% of bubbled credit default swaps owned by foreign entities?

[Anna Serena]

Sounds like "Bad News Bair" for the depositors when she blames Congress for failing to act. But FDIC itself has the power RIGHT NOW to allow the correction of mistakes made by bank employees which will increase the recovery of depositors by millions of dollars. Nothing in FDIC's regulations prevents this. Even worse, FDIC itself has made numerous computational errors in processing claims for insured deposits. These are not discovered, though, unless a depositor finds a lawyer and sues FDIC and then they figure it out. So when Sheila Bair says "not one penny of insured funds have been lost," she is ignoring a cache of insured funds that remain hidden from the public's view and wrapped up in administrative obstacles that prevent thousands of Indymac depositors from receiving their rightfully insured funds. And let's not forget that FDIC collected insurance premiums on "every penny" of our deposits whether FDIC called them insured or uninsured. Either way, we've paid for the coverage, but haven't gotten our peace of mind.

[Maya P.]

If Indy Mac bank had trained employees all our money would have been insured. Since Indy Mac was the wake up call and required congress to increase the insured limit from $100K to $250K, it is only fair that this new limit become retroactive to protect the uninsured at Indy Mac. Many lives are being destroyed. The FDIC will continue to collect their dues from banks and their pot will grow. Congress and FDIC - do what is right - show the American people that you care.

[tom]

I'm having a hard time figuring out why the American people should pay more than what is insured by the FDIC. If a depositor had over the amount covered by the FDIC why didn't he/she move the overage to another bank? My children shouldn't have to pay for their mistake. We've already left them a ten trillion dollar national debt and climbing.

[Heather]

I have to agree with tom here. Given the massive number of unemployed and underemployed taxpayers who are shouldering the burden for bailouts of financial institutions, it is disconcerting to listen to the whining of people who "only" got back $100,000 plus 50% of the remainder. You took a risk by making uninsured deposits, and your gamble failed. Man up and stop asking us to pay for your mistakes.

[David Cohn]

While I'm busy "MANING UP" as suggested by Heather and Tom I suggest they both get familiar with the facts. I was one of those depositors that was mislead, frauduently induced both by Indymac Bank as well as the FDIC to deposit over the insured limits. They advised me that by adding a beneficiary onto my account I would increase my insured limit by an additional $100K. I added my 15 year domestic partner onto my account as one of my beneficiaries to increase FDIC coverage an additional $100K. After the failure of Indymac I had the FDIC AKA Federal Government debit my account $106,000.00 without my consent. Come to find out that "domestic partners" are not considered "qualified" beneficiaries under FDIC guidelines so coverage is not extended. Others that do not qualify are aunts, uncles, neices, nephews, cousins and friends. Indymac as well as other banks often encouraged depositors to exceed FDIC limits by adding additional beneficiaries on the accounts. I hope that if this was to happen one day to Tom or Heathers' family that they would be able to "Man Up" and deal with their lose in a constructive way. I guess for now the rest of us can just go about our daily business and NEVER trust the government again.

[C]

Why would you take the word of some bank clerk about something that important. Banks give you an FDIC booklet that explains the insurance.

[Heather]

Don't want to get into a war of words here, but my family and I are not going to have this sort of problem, because we do due diligence on our investments. But that is beside the point. The point is that you should not expect special treatment when so many others have lost their incomes, their homes, etc. You have no more right to complain than those who signed mortgages they didn't understand and then lost their homes (for whom I also have little sympathy, although a healthy dose of compassion). You made a poor choice based on bad information and are living with the consequences. Don't ask those of us who made responsible choices to cover your losses (through higher insurance costs to our banks and thus lower interest and higher fees).

[David Cohn]

Are you people kidding? It was a manager that set-up my accounts at the bank not "some bank clerk". If we are comparing a deposit in a FDIC financial institution to as an "investment" in real estate or the stock market, that is a completely seperate debate. I found this article on the internet and everyone should understand what is the role of FDIC, OTS and Federal Government in our financial system.

The LA Times notes regarding IndyMac depositors over the insurance limit:

The head of the Federal Deposit Insurance Corp. delivered some bad news personally to uninsured depositors who lost money last year when IndyMac Bank crashed and burned, saying an act of Congress is their only hope for recovering their funds.

“When a bank fails, we have to do what’s least-cost to our deposit insurance fund,” FDIC Chairman Sheila Bair said during a public appearance Wednesday in Los Angeles.

Sheila is correct as far as she goes, but like most government employees, it is what she didn't say that is the problem, not what she did.

The problem lies with the willful and intentional refusal to enforce black-letter law, in this case Title 12, Chapter 16, Section 1831o which says in part:

Each appropriate Federal banking agency and the Corporation (acting in the Corporation’s capacity as the insurer of depository institutions under this chapter) shall carry out the purpose of this section by taking prompt corrective action to resolve the problems of insured depository institutions.

"Shall" is a specific term of art in legislation. It allows no discretion and mandates action. "May" and "Can" are two other words of course, and mean what they say - as does "shall."

This section of the law goes on to define capitalization "buckets", each of which represents a level above water, or above zero, of the excess of assets .vs. liabilities for depository institutions.

It also contains plenty of other "shall" directives such as:

Each appropriate Federal banking agency shall—
(A) closely monitor the condition of any undercapitalized insured depository institution;
(B) closely monitor compliance with capital restoration plans, restrictions, and requirements imposed under this section; and
(C) periodically review the plan, restrictions, and requirements applicable to any undercapitalized insured depository institution to determine whether the plan, restrictions, and requirements are achieving the purpose of this section.
and plenty more.

Everyone should go read that section of law, and note all the shall requirements in there.

These are not suggestions, they are mandates, and if they were followed each and every bank that has been closed by the FDIC would have resulted in ZERO loss to uninsured depositors.

The reason for this is simple, when you get down to it - a bank's "capital structure" looks like this (roughly) in terms of claims against a failed institution:

Advances and loans/liens by the government (e.g. employment taxes and liabilities)
Deposit liabilities
Senior secured debt (bondholders)
Senior unsecured debt (bondholders)
Ordinary debt (bondholders)
Preferred stockholders (hybrid stock/bondholders)
Common stockholders
Excess capital (retained earnings, etc.)

As you can see in a liquidation depositors are subordinate only to statutory preference for employment and similar related claims; the entire capital structure of the firm has to be wiped out before depositors take any loss whatsoever.

If assets are properly valued at all times by government examiners and the bank is closed in accordance with the black-letter requirements of Prompt Corrective Action, then in a liquidation the depositors will never lose any money and neither will the FDIC's Deposit Insurance Fund.

It is in fact willful and intentional blindness by government agencies, including but not limited to allowing financial institutions to lie about the value of their assets, that has resulted in these losses being sustained by ordinary Americans.

Sheila Bair and the rest of the government's "apparatus", including the OTS and OCC, will undoubtedly claim "sovereign immunity" from suit, even though in the instant case, that of IndyMac, the OTS' own inspector general has disclosed that an OTS employee and persons at IndyMac conspired together to back-date deposits, thereby distorting the bank's financial condition, and there is now a 100-bank set of history on FDIC seizures that shows the FDIC has not been and still is not following the black letter requirements of Prompt Corrective Action.

We the people must not accept this sort of malfeasance and misfeasance. These losses sustained by ordinary Americans are not the result of bad luck or even bad decisions by the banks that have failed.

Instead, these losses taken by ordinary Americans occurred as a direct result of malfeasance and misfeasance by the OTS, OCC and FDIC itself.

To be blunt, if you lost money as a consequence of being an uninsured depositor at IndyMac that loss occurred as a direct consequence of the willful blindness (or worse) of government agencies who have intentionally and wantonly refused to obey the mandates set before them under black-letter law.

In essence, we were robbed by the government.

[Varagur Chandrasekaran]

Hello,

Just would like to highlight the fact that FDIC rules regarding deposit insurance are not that simple! At least they were not projected well enough to the public (before Indymac failure) to make "informed" decisions, in our opinion.

In our personal experience, in a span of 10 days after the Indymac failure, we heard three different answers from FDIC employees themselves. First, we heard from FDIC on a Saturday that part of our “savings” is not covered. While we were making up our minds for the losses, we heard, from FDIC again, the following Friday through a phone call that ALL of our "savings" are indeed covered. The happy news didn't last longer than that weekend. That following Monday, another call comes from FDIC that we are back to square one.

All along, we did believe that we are fully covered in terms of FDIC deposit insurance before this wake-up call happened.

The point is, if the rules regarding FDIC deposit insurance are so complicated even for FDIC employees, how the common public can be expected to go over the "rules booklet" in detail and make the right decisions.

There is a big difference between "knowingly" depositing over the insurance limits and the case where one thinks that he/she is covered, but in reality it is not the case.

In our opinion, EDIE (Electronic Deposit Insurance Estimator) alike tools and proper advice from the bank *at the time of deposits" are vital to protect American public "savings". And neither of them happened up until Indymac bank failure.

Throughout my comments above, I referred to "savings" instead of "investments". As we see it, these are quite different. Common people work hard and deposit their "savings" in banks conservatively, as opposed to "invest" in stocks etc.

Given the lack of information propagation regarding FDIC rules to the public, we think it is not fair to treat both of the above cases in the same way.

Thanks.

[Andrea]

Why has preferential treatment been given to mortgage holders over people who deposited cash in cash instruments? Mortgage holders took on the very real risk that interest rates would rise and they would no longer be able to afford their loans. But depositors put in hard cash at a time when the risk of a bank failure was orders of magnitude more unlikely that a rising interest rate.

Shouldn't the people who took the relatively low risk of depositing cash in a bank savings account be given priority over the people who took a very real gamble with interest rates? Surely people who GAVE cash to the bank should at least get their cash back before mortgage holders who OWE money are relieved of some of their debt! Why should cash depositors have to pay for the mortgages of other people?

There is significant irony in the fact that many of the 10,000 people who received 50 cents on the dollar for their cash instrument deposits that were over the FDIC insured limit at Indymac have now encountered their own inability to pay their mortgage because they need the full amount of their savings deposits back in order to do so.

For those who say that depositors should have known better... Remember - this was at a time when bank failures were not everyday occurrences, and many people were not aware of the ramifications of the FDIC insurance limit - which was only $100K at the time, but was subsequently raised to $250K for those lucky enough to have been banking elsewhere.

[Iftikhar Ahmed]

We indymac depositors have been lied to , cheated and robbed by IndyMac of our hard earned savings . And now, FDIC tells us that it is unlikely any further
funds will be given us. Our only recourse now , is to go with legal action. I,
personally believe that our government regulators have failed to supervise some
of these failed banks more adequately. And we, the depositors, have been victimized and punished for their oversights. I think this is very unfair and un-
just. While I still think that a total investigation into this mess is in order, I
definitely believe that Congress should make retroactive the insurance limit so
that those sorely hurt Indymac depositors can get back the 50% that is due them!