What’s Next for IndyMac?

Variously called the second- or third-largest bank failure in U.S. history, the implosion of IndyMac over the weekend raises the question of what’s next–next for the bank, and next for other banks that might find themselves in similar difficulties. IndyMac, ultimately a victim of questionable mortgage lending exacerbated by a sudden loss in investor confidence, could well be the first in a line of bank failures tied to the sour real estate lending climate, but at the very least, it’s another problem for federal regulators to deal with in exceedingly uncertain times. Pasadena, Calif.-based IndyMac–a spinoff of Countrywide Financial Corp. in 1997–did not, in fact, specialize in subprime mortgages. Instead, its specialty was Alt-A loans, “alternative mortgages” that let borrowers forego income verification and other traditional documents required to demonstrate their creditworthiness–an approach whose failings are all too obvious now. IndyMac held many of the loans on its books, and in recent months, defaults on Alt-A loans grew with the downturn in the housing market. Investor confidence evaporated last week, resulting in mass withdrawals–reportedly $1.3 billion in 11 days –that proved to be the bank’s undoing. As of this morning, the FDIC has created a successor organization, IndyMac Federal Bank, which is under supervision of the agency. “In order to avoid a stampede on the bank and set off panic in other institutions, the commission will probably aggregate the uninsured and insured losses together and seek a sale of the institution at minimal loss to depositors,” Joseph Lynyak, a partner in the bank regulatory practice at Venable L.L.P. told CPN this morning. “The FDIC has the authority to take such an action under the Depositor Preference Statute.”He added that the FDIC’s move to put IndyMac into conservatorship was an unusually bold stroke, but it reflects how quickly the situation spiraled out of control, despite the fact that IndyMac’s problems were so widely known across the industry.