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New York Sen. Charles E. Schumer was accused of speeding the failure of IndyMac Bancorp in July by publicly questioning the bank's solvency.
Now Senate Majority Leader Harry Reid is getting credit for sparking a blistering sell-off in insurance stocks.
MetLife Inc., Hartford Financial Services Group and Prudential Financial Inc. all fell by double-digit percentage amounts today after Reid on Wednesday said the financial-system bailout plan was crucial because a large insurer was at risk of failing.
 Reid specifically cited "a major insurance company -- one with a name that everyone knows -- that's on the verge of going bankrupt," according to Dow Jones Newswires.
Today, the Nevada Democrat backtracked. A statement from his office said that Reid was "not personally aware of any particular company being on the verge of bankruptcy" and that "he has no special knowledge about nor has he talked to any insurance company officials," Dow Jones reported.
But with investors already on high alert after the Federal Reserve’s rescue of insurance titan American International Group Inc. on Sept. 16, and with the credit crunch still making funding difficult for even the largest U.S. financial companies, Reid's comments were the equivalent of pouring gasoline on a grease fire.
MetLife plunged $7.19, or 14.9%, to $40.96; Hartford dived $12.20, or 32%, to $25.91; and Prudential slid $7.15, or 11%, to $57.65.
And no one can blame "short sellers" because all three of the stocks are covered by the Securities and Exchange Commission’s temporary ban on short sales of financial issues.
In the credit-default swap market, where investors buy and sell protection against bond defaults, the cost of insuring against defaults by the three companies rocketed to record levels, Bloomberg News reported.
Insurance companies’ stocks have been sliding for two weeks as the credit crunch has worsened. Investors also are worried about the sinking value of the companies’ investment portfolios, as stocks, corporate and municipal bonds have been pounded since August.
On Wednesday, Hartford issued a statement saying it was "confident in our financial strength." MetLife said in a statement today that it was "financially sound" and "fully able to meet all its obligations."
In late June, Democrat Schumer made public a letter he had sent to federal bank regulators, expressing concern that Pasadena-based IndyMac Bancorp was on the brink of failure.
When regulators seized IndyMac in mid-July, they accused Schumer of fomenting a panic run on deposits that made the bank’s collapse inevitable.
Photo: Sen. Harry Reid (Jay Mallin / Bloomberg News)
The Federal Deposit Insurance Corp. keeps finding more IndyMac Bank deposits that are entitled to insurance coverage. And that’s upping the agency’s bill in the Pasadena bank’s collapse.
My colleague E. Scott Reckard reports that the FDIC’s latest tally of uninsured deposits at IndyMac has reduced the total to $541 million, the second downward revision of the estimate since the government seized the failed mortgage lender July 11.
The FDIC originally estimated that $1 billion of IndyMac's $19 billion in deposits was uninsured. Last month, the agency revised the figure down to about $600 million.
The latest number resulted from the ongoing, tedious process of interviewing depositors about complicated accounts, especially trust accounts for which every beneficiary must be verified, FDIC spokesman David Barr told Reckard.
Although FDIC insurance is capped at $100,000 per customer per bank, depositors can insure many times that amount by setting up joint accounts.
Some IndyMac depositors still haven’t responded to phone calls and letters asking them to discuss their trust accounts and beneficiaries, the FDIC told Reckard. Of IndyMac's 275,000 accounts, "We are still waiting to hear from about 160 customers," Barr said.
The FDIC estimated at first that IndyMac's collapse would cost the insurance fund $4 billion to $8 billion. That figure has since been revised to $8.9 billion.
California Atty. Gen. Jerry Brown won’t be investigating Sen. Charles E. Schumer for damning comments the New York Democrat made about Pasadena-based IndyMac Bancorp days before its collapse.
Brown’s office on Thursday sent a thanks-but-no-thanks letter to former IndyMac employees who had requested a Schumer probe.
"While we deeply regret the circumstances surrounding IndyMac's failure, we believe that there is insufficient evidence for us to investigate Senator Schumer at this time," the letter says. Read it here.
 A group of 51 ex-IndyMac workers wrote to Brown last month accusing Schumer of a "malicious, politically motivated act" aimed at bringing down IndyMac.
Schumer on June 26 made public a letter he had sent to the Office of Thrift Supervision and the Federal Deposit Insurance Corp., saying he was "concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers."
When the OTS seized IndyMac on July 11 it specifically fingered Schumer in the bank’s demise, saying that "the immediate cause of the closing was a deposit run that began and continued" after Schumer went public with his concerns.
The letter from the IndyMac ex-employees asked Brown to prosecute Schumer under a state law making it a misdemeanor to spread false and damaging statements or rumors about a bank.
Schumer's critics said he was trying to push IndyMac over the brink to make trouble for the Bush administration; Schumer asserted that banking regulators were "asleep at the switch" on IndyMac and that he was trying to wake them up.
It's politics all around in this particular financial debacle. As my colleague E. Scott Reckard wrote on Aug. 16, the IndyMac employee group had a partisan ally in their efforts to have Schumer investigated by Brown: Their letter was publicized by Alexandria, Va.-based CRC Public Relations, a firm whose clients have included the Republican National Committee, the National Republican Senatorial Committee and the National Republican Congressional Committee.
Photo: Sen. Charles E. Schumer (D-N.Y.). Mark Wilson /Getty Images
From Times staff writer E. Scott Reckard:
July portfolio data for L.A.-based mortgage lender FirstFed Financial Corp. are giving the company’s battered stock a pop today.
In a monthly operational update filed with the Securities and Exchange Commission, the parent of First Federal Bank of California said it made 30% more loans in July than in June, and 166% more than in July 2007.
That’s significant because the mortgages the thrift now is originating -- mostly loans with five years of fixed payments that then become adjustable-rate -- are fully documented loans to Californians who have to prove they can afford the payments.
 It’s a contrast to the "liar loans" that got FirstFed and a host of other California thrifts in trouble: stated-income option ARMs that didn’t require borrowers to document their incomes and allowed them to pay so little that their loan balances went up.
And as FirstFed reshapes itself as a more traditional lender, it’s slowly working off some of the hangover from the era of credit excess. The firm’s ratio of nonperforming assets to total assets, a key measure of dud loans, was 7.56% on July 31. That’s still extraordinarily high, and up from 1.01% a year earlier. But it was down noticeably from the 8.20% recorded at the end of June.
Single-family loans delinquent by 60 to 89 days rose to $101.4 million from $81.4 million in the month. But newer delinquencies -- mortgages 30 to 59 days late -- edged down to $123.4 million from $126.3 million. And non-accrual single-family loans (mortgages on which payment has stopped) totaled $437.2 million, down 11% from $491.7 million a month earlier.
FirstFed CEO Babette Heimbuch called the July results "encouraging," although she added in an e-mail that there could be no guarantees the improvements would continue.
The thrift’s deposits totaled $4.16 billion at the end of last month, up 7.7% from June 30. But retail deposits declined 8.1% to $2.91 billion, most likely as some nervous depositors bolted after seeing the losses suffered by uninsured depositors at failed IndyMac Bank.
FirstFed made up the difference by increasing its brokered deposits -- funds brought in by third parties chasing high-yielding CDs.
The need to raise funds through "hot money" brokers is one of the ongoing risks that FirstFed faces –- along with falling California home prices, rising short-term interest rates and tighter federal regulation, Keefe, Bruyette & Woods analyst Fred Cannon noted in a report this morning.
Still, as FirstFed’s problems with its old easy-money loans go down, its stock is going up along with the number of more rational loans the lender now is writing. "Short sellers" who had bet on the company's demise have been pulling back on those trades, and may be doing so again today by buying the stock to close out previous sales of borrowed shares.
The stock shot as high as $11.98 early today. At about 10:30 a.m. PDT it was up $1.69, or 18.6%, to $10.79. The shares hit a low of $3.99 on July 14.
Photo: FirstFed CEO Babette Heimbuch. Michael Robinson Chavez / Los Angeles Times
There’s no middle ground left in the field of California-based publicly traded banks.
With the takeover deal announced Monday for Union Bank parent UnionBanCal Corp., the list of publicly traded banks with headquarters in the Golden State begins with $609-billion-asset Wells Fargo & Co. -- and then drops all the way down to Beverly Hills-based City National Corp., with $16 billion in assets.
San Francisco-based UnionBanCal, with $60 billion in assets, has been the second-largest publicly traded bank headquartered in California. IndyMac Bank had been No. 3 -- until the government declared the Pasadena lender insolvent last month and seized it.
 Of course, Union Bank isn’t going anywhere. And its shares already had been 65%-owned by Japan’s Mitsubishi UFJ Financial Group; the Japanese parent is just buying the remaining 35% now, for $3.5 billion.
As for IndyMac, the Federal Deposit Insurance Corp. is looking for a buyer.
Consolidation has been shrinking the number of U.S. banks for the last 30 years and it’s unlikely to stop soon. Many, maybe most, individuals and businesses probably don’t care where their bank is headquartered as long as it provides them with the services they want. Bank of America Corp. didn't become less of a competitor in California when the headquarters moved to Charlotte, N.C., in 1998.
But for investors, small- and mid-size bank stocks have always provided a way to bet on the economies of specific geographic regions.
Managements of many smaller California banks naturally want to believe they’ll survive further consolidation. The bigger question at the moment is how many will survive losses on real estate loans -- particularly if troubles worsen in commercial properties.
The state’s real estate woes mean investors who would like to bargain-hunt for other potential takeover targets among remaining California banks face a minefield. Pick the wrong stock and you could lose it all, a la IndyMac.
Mitsubishi UFJ has made clear it wants to buy other U.S. banks. Brent Christ, who follows banks for research firm Fox-Pitt Kelton, tells my colleague E. Scott Reckard that if Mitsubishi were to shop for other California lenders it would probably seek out those that have weathered the credit storm better than others so far. But then, that would be a logical strategy for any potential buyer.
Christ mentioned two possible targets: San Rafael-based Westamerica Bancorp, which operates in Northern California and the Central Valley; and PacWest Bancorp, the parent of Pacific Western Bank, which has branches in Los Angeles, Orange, Riverside and San Bernardino counties as well as its home turf of San Diego.
As for the new No. 2 publicly traded California bank, City National, it would be a relatively small ticket for a deep-pocketed buyer: With the shares down 37% from their peak in mid-2007, City National’s stock market value now is $2.4 billion.
The bank has dodged troubles in the residential mortgage market, although it has been facing rising write-offs for loans to home builders.
In any case, as Christ points out, City National hasn't shown any interest in giving up its independence.
Wall Street has plenty of doubts about the survival of Downey Financial Corp., as the Newport Beach-based lender’s $2 share price indicates.
Now, one analyst is sticking his neck out, asserting that Downey won’t follow IndyMac Bank into the ranks of failed lenders.
Christopher Whalen, a partner at Hawthorne-based market research firm Institutional Risk Analytics, says that despite Downey’s high mortgage loan default rate, he believes that "hysteria and media hype" may be obscuring the value in what he considers a strong retail banking franchise.
 He thinks the firm’s $60-million stock market value is "silly" -- as in, way too low -- even assuming what he says are worst-case numbers for future loan losses.
Whalen is a smart guy who more than a year ago was warning of massive losses in the banking system because of the subprime debacle. So he has street credibility. His commentary on Downey has been posted on the SeekingAlpha investing website.
Part of Whalen’s defense of Downey rests on the fact that the $13-billion-asset thrift has a strong core base of deposits, and therefore doesn’t depend on the kind of hot money (i.e., "brokered" deposits) that funded IndyMac Bank.
But as one commenter on the SeekingAlpha site notes, Downey’s solvency depends on whether it has enough balance-sheet capital to handle another wave of loan markdowns. The deposits may stay put, but a bank with no capital cushion is a busted bank.
Whalen seems to be betting that a deep-pocketed acquirer will see the potential long-term value of Downey’s deposit and lending franchises before the thrift has to take more write-offs that could be fatal.
Wall Street already knows that some private-equity investors have been kicking the tires at Downey. But the market isn’t willing to bet that common shareholders would get much of a premium even if a deal were to happen.
After all, with Downey's bad loans now accounting for 11.4% of total assets (and that's not counting what the thrift calls its "performing" troubled debt), the company isn’t negotiating from a position of strength.
From Times staff writer E. Scott Reckard:
It’s looking like substantially fewer big depositors will end up losing money in failed IndyMac Bank.
John Bovenzi, who was named to head the Pasadena bank when the Federal Deposit Insurance Corp. took control of it July 11, said in a memo to the staff today that "it now appears that there were about $600 million in uninsured deposits" when the government seized the lender.
That’s 40% less than the FDIC’s original $1-billion estimate.
 An FDIC spokesman said the reduced figure stemmed from the agency’s work since July 11 to identify jointly held accounts, trust accounts and other ways that customers had structured their deposits to stay within FDIC insurance limits.
IndyMac had about $19 billion in total deposits when it was declared insolvent.
The FDIC has paid uninsured depositors 50% of their money upfront. Whether they get back more will depend on what the agency can get for the bank’s assets as it sells them.
The FDIC originally estimated that IndyMac’s failure would cost the insurance fund $4 billion to $8 billion. Bovenzi didn't provide an updated estimate.
Two other highlights from his memo:
-- IndyMac is offering holders of home equity credit lines a rebate of 2% of their line of credit’s maximum, up to $1,500, if they pay off their unpaid balance and close down their line of credit. IndyMac has 27,000 such customers, Bovenzi said.
-- The bank has followed through on promises from FDIC Chairwoman Sheila Bair to stop foreclosure proceedings for owner-occupied homes pending a review of whether the loans can be modified to mutually benefit the borrower and the FDIC. More than 60,000 borrowers with loans serviced by IndyMac are 60 or more days behind on payments, according to Bovenzi, who said he would provide more details on the modification program soon.
Photo: IndyMac CEO John Bovenzi. Andrew Gombert / European Pressphoto Agency
From Times staff writer E. Scott Reckard:
IndyMac Bank’s failure in July was expected to make matters worse for other ailing banks by spooking depositors. We’re now seeing that that wasn’t idle speculation.
Vineyard National Bancorp of Corona said Monday that housing-related losses and depositors’ withdrawal of funds after IndyMac’s collapse have cast doubt on its future and it must raise substantial amounts of capital to continue operations through this year.
 A community bank with $1.8 billion in loans and $1.9 billion in deposits as of June 30, Vineyard had specialized in financing home builders. To fund its loans the bank relied on high-yielding certificates of deposit.
In its quarterly filing with the Securities and Exchange Commission on Monday, Vineyard said that "negative publicity relating to our financial results and the financial results of other financial institutions, together with the seizure of IndyMac Bank by federal regulators in July, has caused a significant amount of customer deposit withdrawals."
The result, the company said, is "affecting our liquidity and our ability to meet our obligations as they have come due." It said that "significant additional sources" of funds were needed to continue operations through 2008 and beyond.
As The Times reported last week, bank regulators have classified Vineyard and its operating subsidiary, Vineyard Bank, as troubled and have imposed a series of restrictions on operations.
"Based on their assessment of our ability to continue to operate in a safe and sound manner, our regulators may take other and further action, including assumption of control of the Bank, to protect the interests of depositors insured by the FDIC," Vineyard said in its filing.
Vineyard’s shares fell 8 cents to a seven-year low of $1.92 before the filing. The price has plunged 49% since the end of June.
Newport Beach-based Downey Financial Corp. on Monday also said it suffered deposit outflows in July, but Downey said about 40% of that money has since returned. See this earlier post.
Struggling thrift Downey Financial Corp. said today that it succeeded in staunching a recent outflow of deposits. But the firm warned that if cash begins to flee again it could face a hard time lining up new sources of capital.
Newport Beach-based Downey, parent of Downey Savings & Loan, said in its quarterly financial filing with the Securities and Exchange Commission that "after the end of the second quarter the bank experienced elevated levels of deposit withdrawals."
But "more recently, in response to steps taken by management to address the situation, the bank has experienced net deposit inflows," Downey said. It didn’t quantify those inflows. Total deposits were about $9.8 billion as of June 30. UPDATE: Downey CEO Tom Prince told my colleague William Heisel this afternoon that the bank last week recovered about 40% of the deposits that left in July. "We now have some distance from the IndyMac situation, and people are starting to feel more confident about their deposits," Prince said.
 The company, reeling from losses on adjustable-rate mortgage loans, has for months been high on Wall Street’s list of the most seriously troubled lenders.
The failure of Pasadena-based IndyMac Bank on July 11 heightened concerns about the potential for depositors to lose money if their savings exceeded federal deposit insurance limits. IndyMac had about $1 billion in uninsured accounts.
Bank industry analysts expected some nervous depositors to exit Downey and other loss-ridden thrifts in the wake of IndyMac’s collapse. Downey’s filing today confirmed that. Another ailing Southland bank, Vineyard National Bancorp of Corona, said in a filing today that it has suffered a "significant amount of customer deposit withdrawals."
Although Downey said its deposit situation now has stabilized, the firm warned that it was close to maxing out its line of credit with the Federal Home Loan Bank System, which provides a credit backstop for cash-needy thrifts. The company said its borrowings from the system surged from $1.5 billion on June 30 to $2.8 billion as of Aug. 8. Its credit line currently is capped at $3 billion. Prince said Downey ramped up its borrowing from the FHLB as a safety measure, in case it needed cash to meet deposit-redemption requests.
"If elevated levels of net deposit outflows resume, the bank’s usual sources of liquidity could become depleted, and the bank would be required to raise additional capital or enter into new financing arrangements to satisfy its liquidity needs," Downey said in its SEC filing. "In the current economic environment, there are no assurances that we would be able to raise additional capital or enter into additional financing arrangements."
The firm’s board ousted top management on July 24 and signaled it would consider selling the business, but there has been no news on that effort since.
Downey’s shares slid after the filing was reported. They closed down 14 cents at $2.10.
Photo: A Downey branch in Costa Mesa. Lori Shepler/Los Angeles Times
We all can start getting used to this: Friday is going to be Bank Failure Day in the U.S.A.
The Federal Deposit Insurance Corp. said late today that it took control of First Priority Bank of Bradenton, Fla., marking the eighth bank failure this year -- and the fourth just since July 11, when the feds seized IndyMac Bank of Pasadena.
First Priority had assets of $259 million and deposits of $227 million. And in a sign that the high-profile failure of IndyMac still hasn’t persuaded all bank depositors to keep their accounts within FDIC insurance limits, the agency estimated that First Priority had about $13 million in uninsured deposits.
 SunTrust Banks Inc. of Atlanta agreed to buy First Priority’s insured deposits and to take over the bank’s six branches. But the uninsured depositors, as in IndyMac’s case, will be paid 50% of those balances upfront and then will have to wait to see what the FDIC gets as it liquidates First Priority’s assets.
The FDIC prefers to close or sell insolvent banks on Fridays and reopen them on Mondays under government control or under a new owner.
FDIC Chairwoman Sheila Bair has been upfront in preparing the public -- and Congress -- for a surge in bank failures ahead, as real estate loan losses wipe out more lenders’ capital.
One week ago the agency took control of First Heritage Bank of Newport Beach and First National Bank of Nevada in Reno and turned them both over to Mutual of Omaha Bank. In those moves the uninsured depositors didn’t lose money because Mutual of Omaha agreed to assume all $3.2 billion of the banks’ deposits.
The FDIC is required by law to resolve bank failures in whatever way costs its insurance fund the least amount of money. That can depend on how much an acquiring bank is willing to pay for all or part of a failed institution.
Photo: FDIC Chairwoman Sheila Bair. Chip Somodevilla / Getty Images
The Federal Deposit Insurance Corp. has its work cut out to get failed IndyMac Bank in shape for a potential buyer or buyers, FDIC Chairwoman Sheila Bair suggests in a Bloomberg TV interview to be broadcast this weekend.
"There are a number of things about this institution that, to be honest with you, make it unattractive to a potential purchaser," Bair says in the interview, according to a preview story from Bloomberg.
 She cites the Pasadena bank’s mortgage losses, its reliance on brokered deposits and its relatively small "core deposit base," Bloomberg says.
"What we're trying to do now is do what we can to strengthen it, strengthen the asset quality, strengthen the servicing portfolio, so we can sell it off and get a better value, hopefully," Bair said.
Not much news in that, but it made me wonder if Bair was signaling that the FDIC won’t be able to sell IndyMac within 90 days, as per the plan it announced when it took control of the bank July 11. A spokesman for the FDIC, however, said the agency still was expecting to make the sale in that time window.
Meanwhile, HousingWire.com has a good story on the complications the FDIC faces in finding a buyer or buyers for IndyMac’s huge loan-servicing business, which handles $200 billion in mortgages, most of which have been securitized.
"There aren’t but four or five firms that could take on this big of a portfolio in one piece, and so far, it’s anyone’s guess if there’s interest there enough to make it the least costly scenario the FDIC will look for," one banker tells HousingWire.com.
Read the full story here.
Photo: FDIC Chairwoman Sheila Bair. Dennis Brack/Bloomberg News
People with uninsured deposits at IndyMac Bank learned the hard way that the Federal Deposit Insurance Corp. wasn't kidding about its insurance limits.
But will the FDIC be able to stick with its rules as the number of failed banks rises?
My column in The Times this weekend looks at some of the risks posed to the banking system by the same deposit insurance that's designed to protect the system. One issue is that the expanded awareness of the insurance limits, after IndyMac's high-profile failure, could hasten deposit runs as rumors fly about other troubled banks.
A run on deposits can virtually guarantee a bank's failure -- and make things worse for the FDIC, which already figures its caseload is going to balloon because of bank loan losses from the housing bust.
IndyMac had about $1 billion in uninsured deposits.
I note that some bank industry analysts think it would make more sense for the government to protect all deposits rather than maintain the insurance limits. Japan decreed blanket protection from 1997 to 2002 amid a severe loss of faith in its banking system.
Mike Shedlock (Mish) at Global Economic Trend Analysis has another idea about deposit insurance: He says it should be scrapped entirely, except for unlimited insurance on checking accounts. Read his views here.
"Short sellers" have been betting heavily on the demise of Newport Beach-based mortgage lender Downey Financial Corp. It’s looking more and more like they had this one right.
With the thrift’s announcement this morning of another huge quarterly loss -- $218.9 million, or $7.86 a share -– Downey’s shares have plunged again. They were down 72 cents, or 27%, to $2.01 at about 11:30 a.m. PDT.
That’s still above the recent closing low of $1.28 on July 14. But Downey’s management shakeup today, and its announcement that it is "exploring a broad range of strategic alternatives" for the business, clearly have some shareholders figuring they may wind up with nothing, a la IndyMac Bancorp shareholders.
 Downey’s non-performing assets (bad loans) jumped by $395 million in the quarter ended June 30, to $1.96 billion. That is 15.5% of its total assets, double the percentage at year’s end.
The total of loans that were 90 days or more past due was $796 million at June 30, up from $576 million at March 31 and $314 million at year’s end.
"They have a portfolio that is literally falling apart," said Paul Miller, an analyst at Friedman Billings Ramsey & Co.
Meanwhile, the bank is bleeding deposits as some customers vote with their feet. Total deposits were $9.88 billion at June 30, down $364 milllion from three months earlier and down $616 million since year's end.
Short sellers -- traders who borrow stock and sell it, betting the price will decline -- have helped to hammer Downey's shares in the last two months. The number of shorted shares reached 15.9 million at June 30, more than half the company’s total outstanding.
Downey may well have been a victim of "naked" short selling, the strategy the Securities and Exchange Commission cracked down on beginning last week.
But before vilifying the short sellers, it’s worth remembering: They weren’t the ones who made the mortgage loans that now are dragging Downey under the waves.
Look who else is taking a whack at Sen. Chuck Schumer for his June outing of IndyMac Bank as likely to fail: It’s Lori Mozilo, sister of Countrywide Financial Corp. founder Angelo Mozilo.
Writing on the Huffington Post, Angelo’s youngest sister offers a defense of her brother, who she said "believed every American could one day own a home and be a part of the shared experiment called America."
She calls him "the staunchest believer in the American dream I have ever met."
 Lori Mozilo gets a little confused about political titles in her piece. She refers to Rep. Henry Waxman (D-Calif.), who convened a hearing in March on the mortgage crisis and summoned Angelo Mozilo to testify, as "Senator Waxman." (In his dreams, no doubt.)
In any case, she ends with an attack on Schumer (a real senator, Democrat from New York), noting that "Schumer's public release of a letter to the Office of Thrift Supervision and the FDIC expressing concerns about IndyMac's viability has been cited by the OTS as one of the major reasons for the bank's liquidity crisis and its subsequent take over."
She concludes: "Chuck Schumer vigorously denies his actions had any effect on the situation. Perhaps Senator Waxman should convene another panel. The press can fire up the TV cameras and we can all start asking some questions. Surely someone else is ready for their close-up."
Photo: Sen. Charles E Schumer. Credit: Andrew Harrer / Bloomberg News
Wells Fargo & Co. depositors generally earn a lot less on their money than they could get elsewhere.
The bank’s shareholders should be very grateful: Those cheap deposits are buffering the company’s bottom line against loan losses.
San Francisco-based Wells on Wednesday reported better-than-expected second-quarter earnings and a 10% boost in the dividend on its stock.
 The news -- which reinforced the view that Wells is certain to be a survivor of the current banking industry mess -- sent the company’s shares rocketing $6.72, or 33%, to $27.23. It was a bad day for short sellers who’ve been betting against the stock. They picked the wrong horse to lose.
Wells’ net income in the quarter ended June 30 fell 23% from a year earlier, to $1.75 billion, or 53 cents a share. But that beat analysts’ average estimate of 50 cents a share.
And the company portrayed itself as benefiting from its rivals’ woes. "We are open for business and getting lots of it," CEO John Stumpf said in the earnings report.
Wells is facing higher loan losses, like nearly all banks. The company last quarter recorded a $3 billion provision for credit losses, which is what pulled earnings down. Non-performing assets totaled $5.23 billion at June 30, or 1.3% of all loans, up 16% from the level just three months earlier.
Within its substantial real-estate-loan portfolio, the bank warned that the quality of its $84-billion in home-equity loans "continued to deteriorate as property values search for a bottom." And Wells has unrealized losses of $2.1 billion on its portfolio of mortgage-backed securities, up from $598 million three months ago. Those could turn into real losses if the market doesn’t improve and Wells decides to sell out.
Still, the bank has a big advantage with its core deposit base of $318 billion: The cost of holding on to that money remains relatively low, which helps to give Wells a wider profit margin on its loans than many of its rivals earn.
Wells says it benefited last quarter from its "disciplined deposit pricing." Translation: It isn’t paying much for that cash. In California, the bank’s current yield on a one-year, $25,000 certificate of deposit is just 1.6%, compared with a national average of 2.48%, according to rate-tracker Informa Research Services.
If Wells’ depositors began to look elsewhere in large numbers, that would be a problem. But given the TV images of long lines of depositors outside the branches of failed IndyMac Bank -- which was notorious for paying high yields -- it could be that many Wells customers will be content to stay just where they are.
And they might soon have more company: "The hysteria being spread concerning bank safety is likely to result in deposits from smaller banks moving to Wells," said Richard Bove, an analyst at Ladenburg Thalmann.
Photo: Paul Sakuma/Associated Press
The sight of depositors lined up outside IndyMac Bank branches today to pull their money can’t be giving comfort to bank regulators.
It gave none to bank stock investors: Wall Street hammered bank shares across the board. The BKX index of 24 major and regional bank issues plunged 8.5%, deepening its year-to-date loss to 43%.
Check out the day’s percentage declines in National City Corp., Washington Mutual, Zions Bancorp and Downey Financial, to name just four.
Investors who are dumping bank stocks, even at these severely depressed levels, are voting with their feet. The question is, how many bank depositors around the nation today are doing the same?
 There’s the potential for a vicious circle here: Investors fear bank failures, so they pound the stocks. Depositors, seeing Wall Street’s reaction, begin to pull their funds, worrying (probably needlessly) that their money is in another IndyMac. A deposit run then can turn a reasonably healthy bank into a problem bank in a hurry.
Sheila Bair, head of the Federal Deposit Insurance Corp., is trying her best to induce calm, saying over the weekend that "the overwhelming majority of banks in this country are safe and sound."
But we’re in an environment where there has been no payoff for taking chances in the financial system.
By the FDIC’s count, about 10,000 IndyMac customers held a total of $1 billion in uninsured deposits in the bank. If those customers believed that the deposit insurance limit didn’t matter -- and that the government would back all of their savings if IndyMac failed -- they have just now come to realize how wrong they were.
Too late.
If you’re over the FDIC’s insurance limit at IndyMac, the agency will let you pull out half of whatever you have on deposit above the limit. Then you’ll wait to find out what the FDIC can get as it sells off IndyMac’s assets.
The FDIC can’t predict what portion of the remaining uninsured deposits, if any, will be repaid.
That is a horrible situation for those depositors. They should have known better, but they either ignored the insurance limits or put off doing something about their funds.
So we can imagine what’s going on around the nation today. How many bank customers, now realizing that it is possible to lose money if your deposits exceed the federal insurance limits, are trying to make sure that they don’t repeat IndyMac customers’ grave mistake?
The banks aren’t going to tell us if they’re facing a wave of customers either withdrawing money to get below the FDIC’s limits or restructuring their accounts to stay within those limits. It isn’t in any bank’s interest to be that upfront.
The FDIC may be right when it says the risk of your bank failing is extremely low. But the fate of uninsured depositors at IndyMac is a bell-ringer. It says you can lose.
For many Americans, that now may be all they need to know.
Photo: Customers wait outside of IndyMac's headquarters office in Pasadena today. Al Seib / Los Angeles Times
The Federal Deposit Insurance Corp. today provided more guidance for IndyMac Bank customers who are awaiting the bank’s reopening on Monday, after it was declared insolvent on Friday and seized by the government.
Some key points from a news conference the FDIC held today, as relayed by Times staff writer Kathy M. Kristof:
--Customers with home-equity credit lines will have their accounts frozen and "reviewed on a case-by-case basis," according to the FDIC. That’s a move by the agency to make sure its losses on the bank’s loan portfolio don’t balloon from the FDIC’s current estimates.
--Lines of credit to commercial construction contractors also will be frozen pending a review, but construction loans made to individual consumers won’t be affected.
--Customers of IndyMac’s reverse-mortgage subsidiary will continue to have access to their funds. Reverse mortgages provide elderly homeowners with either regular payments or a line of credit secured by their homes.
--For insured depositors, the bank will continue to honor existing terms on accounts, meaning the interest rates on outstanding certificates of deposit will be whatever IndyMac promised.
But that won’t apply to so-called brokered deposits -- funds brought in by Wall Street firms or other middlemen. Those deposits stopped accruing interest Friday, and once the FDIC identifies all the uninsured depositors the brokered deposits that are within insurance limits will be returned to their owners.
--Depositors with funds over the FDIC’s insurance limits will have access to 50% of the uninsured sum beginning on Monday. Whether they get any more of that money back will depend on how much the FDIC recovers in selling IndyMac assets in the next few months.
Sen. Chuck Schumer today went on another counterattack against federal banking regulators who’ve blamed him for helping cause the failure of IndyMac Bank.
At a news conference, the New York Democrat repeated his contention that the bank’s regulator had been "asleep at the switch." He said his public questioning of IndyMac’s financial health in late June merely stated the obvious.
"The administration is doing what they always do, blaming the fire on the person who called 911," Schumer said, according to the Associated Press’ story from the news conference in New York.
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