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Banking regulators close IndyMac

The Office of Thrift Supervision shuts down mortgage lender IndyMac and transfers the operations to the Federal Deposit Insurance Corporation.

By Catherine Clifford, CNNMoney.com staff writer and Roddy Boyd, Fortune writer

Last Updated: July 11, 2008: 8:59 PM EDT

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NEW YORK (CNNMoney.com) -- In the second largest bank failure in U.S. history, Pasdena, Calif.- based IndyMac was closed down on Friday, according to a press release on the FDIC's website.

The bank's operations will be transferred to the Federal Deposit Insurance Corporation.

According to the FDIC, IndyMac's failure will mean about $1 billion in lost deposits held by approximately 10,000 customers. The agency says the failure will cost it between $4 and $8 billion, based on preliminary estimates.

In a conference call late Friday night, FDIC Chairman Sheila Bair said "it's possible this will be the most costly bank failure in history, but it's too soon to say." The failure "could also affect premiums paid by all banks for deposit insurance," she said.

Customers who bank at IndyMac Bank will automatically have their funds transferred over to the IndyMac Federal, FSB, which will be controlled by the FDIC. They will have uninterrupted customer service and access to their funds by ATM, debit cards and checks, in the same way as before.

However, customers will have no access to on-line and phone banking services this weekend, according to the FDIC, but services will resume on Monday. Loan customers should continue making loan payments as usual.

IndyMac, with total assets of $32.01 billion and total deposits of $19.06 billion, is the fifth bank to have failed this year. Between 2005 and 2007, there had been only three bank failures. The 104 banks that FDIC has taken over in the last 15 years have combined assets of $14.2 billion, according to FDIC annual reports.

Continental Illinois was the largest bank failure ever, with $40B in assets when it failed, in 1984 according to FDIC archives.

When a bank shuts down, all accounts are insured to at least $100,000. Certain accounts can be insured in excess of the $100,000, but customers with more than $100,000 in their account may require review by an FDIC Claim Agent according to an FDIC factsheet.

"Those with uninsured deposits will get at least half that money back, and they could get more back, depending on what the FDIC gets when it sells off the bank assets," said Bair.

On the conference call, Bair said, "there will be increased failures, but it will be within range of what we can handle. People should not worry."

The head of the FDIC is looking to hire 25 staffers to deal with an anticipated increase in failures, a move that would increase its staff by 11%. Among those it hopes to hire are recent retirees who worked through the S&L crisis.

IndyMac specialized in what it had long argued were minimally risky: low documentation loans to residential mortgage borrowers.

On Tuesday, IndyMac - which has 33 branches and $18 billion in saving deposits in addition to its mortgage-lending franchise - announced that it was firing 53% of its workforce and exiting its retail and wholesale lending units. Last year, prior to the collapse, the lender was ranked eleventh in residential mortgage origination, according to trade publication Inside Mortgage Finance.

More importantly, the Pasadena-based IndyMac also disclosed that regulators from the Office of Thrift Supervision no longer consider it "Well capitalized." As a result, since Tuesday, the bank hasn't been able to accept brokered deposits, or short-term investments in large dollar amounts from brokers seeking the highest return on certificates of deposit.

Over the past two years,<,b>IndyMac has dropped over 95% in stock price, or about $3.5 billion in market capitalization. Shares traded down nearly 10% on Friday to close at 28 cents.

IndyMac lost $184.2 million in the first quarter and announced on Monday that it was expecting a wider loss for the second quarter. It lost $614 million last year stemming from its focus on the Alt-A mortgage sector, where it originates loans to borrowers who fall between prime (or conforming) and sub-prime on the credit spectrum. The lender's chief executive, Michael Perry, had long argued that it was being unfairly punished given its relatively paltry exposure to sub-prime mortgages.

Rising Alt-A and prime mortgage delinquencies likely were enough indication for investors, however, that the housing crisis had moved beyond the weakest borrowers. Even worse, with the securitization markets in collapse, IndyMac has no way to get new loans off its books. As it turns out, IndyMac was a leader in loans requiring little income and asset documentation, a category that has had disastrous levels of delinquencies at other troubled lenders. What loans the bank had made recently were to borrowers with well-documented assets and income, but those are sharply less profitable with respect to fees and interest income.

Instead of mortgage origination, IndyMac's filing on Monday said it will focus on its reverse mortgage, its retail branch network and its mortgage servicing operations. But as a practical matter, the growth restrictions placed on IndyMac by regulators and the banks and brokerages it does business with, as well as the sharply higher borrowing costs, place the profitability of even its non-mortgage-related banking efforts in doubt.

Even efforts to prop up the bank hurt it. Last month, Senator Charles Schumer (D-NY) wrote a series of letters to bank regulators in Washington D.C. and California asking them to take steps to prevent the bank's "likely collapse." In response, about $100 million in customer deposits has been withdrawn from the bank, according to one of its filings.

For additional information, the FDIC has established a toll-free number for customers of IndyMac Federal Bank, FSB. The toll-free number is 1-866-806-5919 and will operate today from 3:00 p.m. to 9:00 p.m. (PDT), and then daily from 8:00 a.m. to 8:00 p.m. thereafter, except Sunday, July 13, when the hours will be 8:00 a.m. to 6:00 p.m. Customers also may visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/IndyMac.html for further information.

CNNMoney.com Sr. Writer Chris Isidore contributed to this report

First Published: July 11, 2008: 8:55 PM EDT

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