Who Robbed FDIC $6 billion?

On the way back from work last Friday, I heard on the radio IndyMac Bank was closed by authorities and taken over by FDIC. IndyMac Bank had $19 billion in deposits. This failure is the largest in recent history. It matched in size the Bank of New England failure in 1991.

In previous bank failures, FDIC usually let other banks bid for the failed bank and pick a winner to take over the failed bank’s assets and deposits. For example when NetBank failed, it was given to ING. This time it’s different. No other bank raised their hand. I guess nobody wanted IndyMac’s questionable mortgage portfolio. FDIC set up a brand new bridge bank. It will manage the assets and liability itself until it can find an acquirer later on.

According to FDIC’s press release, this IndyMac Bank failure will cost FDIC $4 to $8 billion.

“Based on preliminary analysis, the estimated cost of the resolution to the Deposit Insurance Fund is between $4 and $8 billion.”

Let’s take the middle and just call it $6 billion. So FDIC is out $6 billion. The question is who has it? In other words, who robbed FDIC $6 billion? I have a few candidates in mind but I’d like to hear from you first. I will give my thoughts on Wednesday.

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  1. Ted says

    If you want a single name, I’ll throw out Alan Greenspan. He lowered the mortgage interest rates to near zero which started the real estate fire.

    If you want a systemic answer, I’ll give you greedy homeowners, greedy realtors, greedy mortgage brokers, greedy appraisal and lender reps, greedy banks, greedy financial managers that packaged the mortgages, and greedy investors looking for a free lunch.

  2. Harry Sit says

    Ted – I’m actually looking for who specifically have taken the $6 billion FDIC will lose in resolving this failure. Alan Greenspan may have caused the housing and mortgage crisis, but he certainly doesn’t have $6 billion.

  3. neha says

    I suggest two places: 1) Into the pockets of those who shorted IndyMac and caused the drop in stock price from $47 to $0.14. and 2) real estate sellers who got a high value for their house before the bubble popped.

  4. calgeek says

    The immediate recipients of the $6B are the depositers who got pretty high yields knowing that if push came to shove, the FDIC would protect their principal (up to $100k). Indirectly, the people who took out mortgages and didn’t pay them back stole the money.

    Does the FDIC charge the banks a premium, so that statistically they can cover any losses, or do banks get this insurance for free? Insurance is clearly necessary to keep people from keeping money under their mattresses, but I think the banking industry should collectively bear some of the risk. Gee maybe then they’d be more careful about regulating each other, hmm….

  5. Anonymous says

    I’ll agree with the 2nd part of neha’s answer, the prior owners of the real estate that Indymac now owns.

    The $6B figure should represent the amount of money that Indymac’s assets are short to cover its deposits. The reason Indymac is short is that the value of mortgages it has on its books has fallen.

    One thing that confuses me is in the press release the FDIC says that Indymac had $32B in assets and $19B in deposits. If Indymac really has $32B in assets and depositors have first priority why would the FDIC lose any money on this?

  6. Harry Sit says

    As promised, my thoughts are in this follow-up post:

    Who Really Robbed FDIC $6 Billion

    Calgreek – FDIC charges insurance premium from all banks. Indirectly all depositors pay the insurance premium. The premium is a little higher for banks who have lower funding levels but I think the premium differential is too small to make a difference on the banks’ risk taking appetite.

    Anon – The $32 billion assets number in the FDIC press release must be book value. If all IndyMac’s mortgages are paid off in full immediately, IndyMac would have $32 billion. But we know that’s not the case. When FDIC eventually sells those mortgages and other assets to another bank, they expect to get only $11 to $15 billion, or $4 to $8 billion short of the $19 billion in deposits. That’s my interpretation. Otherwise it doesn’t make sense.

  7. frank says

    try bill clinton who was in office when the 1933 depression act
    or Glass-Steagall Act was repealed.
    it was put in place after the depression to make banks be banks and brokers be brokers.
    banks were not allowed to leverage their loans and had to hold cash.
    or at least alot more than now. no way were they allowed to use 30 or 40 times every dollar they had in the bank

  8. Harry Sit says

    Frank – Your blame for Bill Clinton is absolutely wrong. Glass-Steagall Act was repealed by Gramm-Leach-Bliley Act in 1999. The three names in Gramm-Leach-Bliley, Senator Graham, Rep. Leach and Rep. Bliley were all republicans. The law passed in the Senate 90-8-1 and in the House 362-57-15. It was veto-proof. President Clinton had to sign it.

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