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John F. Bovenzi, Chief Operating Officer, FDIC on The Role of Deposit Insurance in Financial Crises: Past and Present; at the International Association of Deposit Insurers (IADI) 7th Annual Conference; Arlington, VA
October 29, 2008

(1) Closing Weekend
I'll start with the closing process.
The most difficult part of a bank closing for the FDIC is separating insured from uninsured deposits in a timely manner. "Timely" generally means over a weekend. That was the case at IndyMac. Seventy people worked around the clock so the new bank could open early Monday. It was a monumental effort.

(4) Cost
Let me now turn to cost issues.
IndyMac will turn out to be the most expensive bank closing in the FDIC's history.
It could cost the FDIC $9 billion.
Virtually all of IndyMac's assets are connected to the housing market, mostly residential mortgage loans and mortgage-backed securities.
The loans are predominately in the markets that have suffered the greatest loss in housing values, California, Nevada and Florida.
Most of the loans have little or no documentation, including no verification of income.

Many were interest-only or payment option adjustable rate mortgages.

Most were designed to be refinanced after housing prices continued to appreciate.

All of these characteristics make it easy to see why the bank's losses would be high.

But while the bank's asset quality may determine the amount of loss, it is the liability side of the balance sheet tells us who absorbs those losses.

Virtually all of the bank's nondeposit liabilities were secured borrowings.

Secured lenders don't lose any money if they have adequate collateral. Since all of IndyMac's other borrowings were deposits, the FDIC and the uninsured depositors will absorb all of the losses.

Contrast that situation with the closing of Washington Mutual Bank.

There were no losses to the FDIC in that closing, despite the fact that the bank had assets that were similar to those at IndyMac.

However, on the liability side of Washington Mutual's balance sheet were $15 billion in senior and subordinated notes. That represents as much as $15 billion in cost that would have been absorbed by the FDIC had Washington Mutual's liability structure looked like IndyMac's.

This dramatic difference in cost to the FDIC between the two banks resulted in the FDIC modifying its risk-based premium structure to impose higher costs on those insured institutions that have a large portion of their liabilities secured and reducing the costs imposed on those banks that have a large portion of their liabilities unsecured and subordinate to depositors


Conclusion

In conclusion, conservatorships and bridge banks are important tools available to the FDIC to handle bank failures.

Our experience with IndyMac only strengthens that belief in this process for resolving failed banks.

But subsequent events, which no one really anticipated, have shown the value in the government having broad and flexible powers.


Every subsequent development since the failure of IndyMac Bank has been unique.

And this...

At Washington Mutual, a closed bank sale was arranged transferring $300 billion assets, at no cost to the FDIC, without protecting creditors, other than depositors.

At Wachovia, an over $800 billion bank, an open bank transaction was arranged with Citigroup that would have resulted in no expected cost to FDIC. The FDIC used its systemic risk exception to facilitate this transaction. Subsequently, Wells Fargo arranged a purchase of Wachovia without government help.

The FDIC now temporarily guarantees non-interest bearing accounts and some of the debt of banks, thrifts and their holding companies


http://www.fdic.gov/news/news/speeches/c...