Banking Mayhem Limited To Shareholders

U.S. banking regulators swooped in to seize mortgage lender IndyMac Bancorp Inc (IMB.N) on Friday after withdrawals by panicked depositors led to the third-largest banking failure in U.S. history. . . . IndyMac joins top bank failures headed by the 1984 collapse of Continental Illinois National Bank & Trust Co.

The Office of Thrift Supervision (OTS) insisted IndyMac's failure was the second-largest bank failure based on FDIC figures. But the FDIC said its data showed it was third behind the collapse of First RepublicBank Corp in 1988.

From here.

Thanks to the FDIC, not many people will be hurt in the third largest bank collapse in U.S. history, despite the fact that depositors withdrew more than $1.3 billion in an 11 day June/July run on the bank.

The FDIC, which will seek a buyer for IndyMac, estimated the cost of the bank's failure to its $53 billion insurance fund at between $4 billion and $8 billion.

A particularly notable fact is the two of the worst subprime offenders, IndyMac and Countrywide, had the same founders.

IndyMac was founded in 1985 by David Loeb and Angelo Mozilo, who also founded Countrywide, another big mortgage lender whose loans helped fuel the housing boom. Countrywide was taken over last week by Bank of America Corp (BAC.N).

So, who suffers:

IndyMac had said earlier in the week it was unable to raise new capital, would slash staff by 60 percent and had stopped making home loans. Its stock then tumbled, last trading at 28 cents on the New York Stock Exchange, down 95 percent in 2008.

The FDIC insures up to $100,000 per deposit and up to $250,000 per retirement account at insured banks.

At the time of closing, IndyMac had about $1 billion of potentially uninsured deposits held by about 10,000 depositors. The FDIC said it would pay those depositors an advance dividend equal to 50 percent of the uninsured amount.

Why uninsured depositors should get anything when the FDIC is taking a hit bigger than the uninsured deposits in this incident is mysterious. Both stockholders and uninsured depositors knew the risks that they were taking. The harm to the staff and to people on the verge of closing home loans is more troubling.