IndyMac Bank Collapse Creates Problems, Not Disaster

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IndyMac Bank Collapse Creates Problems, Not Disaster

The U.S. Treasury and the FDIC seized IndyMac Bank on Friday when it ran out of cash. Some IndyMac customers spent hours in line waiting to withdraw their money, but the FDIC and other banking experts advise calm.

BANK COLLAPSE: The Federal Deposit Insurance Corporation closed IndyMac Bank on Friday, reopening it Monday morning as IndyMac Federal Bank. The bank's collapse triggered widespread worry over the health of other banks, but banking experts agree that most people have little to worry about.

by Mike Maxwell
Informify Staff Writer
July 17, 2008

Based in Pasadena, Calif., the IndyMac bank faced a sudden shortage of cash, causing Treasury regulators to step in. And although the bank—now managed by the FDIC—continues to operate, some bank customers chose instead to stand in long lines and withdraw their money Monday and Tuesday.

Feds Take Over Ailing IndyMac Bank

U.S. Department of Treasury regulators closed IndyMac Bank when the bank ran out of cash to cover its obligations. Two factors caused the money shortage:

IndyMac lending practices—The bank owned too many high-risk mortgages that homeowners couldn't make monthly payments on.
Nervous IndyMac customers—Recent rumors about IndyMac's financial trouble caused many of its customers to withdraw their money, which exacerbated the shortage.

The Office for Thrift Supervision (OTS)—a department within the U.S. Treasury—oversaw IndyMac and made the decision to close the bank down.

Nearly two weeks before, Sen. Charles Schumer (D—N.Y.) made public a letter he wrote to the OTS and FDIC regarding IndyMac's financial troubles. In the days after Schumer's letter, IndyMac customers pulled more than $1.3 billion out of their accounts.

The OTS has since criticized Sen. Schumer for publicizing his concerns, and indicated the letter contributed to IndyMac's collapse.

Schumer defended himself by blaming the OTS for failing to properly regulate IndyMac.

Some IndyMac Bank Customers Panic, Demand Withdrawals

Police re-established order after a brief struggle broke out in front of an IndyMac branch in Encino, Calif., Tuesday. Nearly 100 customers lined up to withdraw their money. When some tried to cut in line, a fight broke out.

Although some customers insist on withdrawing their funds, the vast majority of IndyMac's customers stand nothing to lose by leaving their money where it is:

FDIC employees now operate the bank.
Nearly all bank systems and account features continue to function as if nothing happened.
The FDIC insures each customer's personal deposits up to $100,000.
The FDIC insures each customers' retirement accounts up to $250,000.

Banks nearly always have FDIC insurance for their depositors. Credit unions also have deposit insurance though the National Credit Union Association. Both carry the same coverage:

FDIC Bank Insurance: What it Covers

Personal Accounts—Insured to $100,000

checking
negotiable order of withdrawal (NOW)
savings
money market deposit
certificates of deposit (CDs)

Retirement Accounts—Insured to $250,000

individual retirement accounts (IRAs)

Other Banks in Danger, FDIC Prepared

During the savings and loan crash in 1987, 534 banks collapsed. So far this year only five banks have failed.

The FDIC currently lists 90 banks as "problem" banks-up from 76 last year. These banks face similar problems as IndyMac, though not as severely. The FDIC does not disclose the names of "problem" banks.

FDIC spokeswoman LaJuan Williams-Dickerson told The Washington Post, "Every bank on our problem list is not in jeopardy of failing. It's unlikely that the majority of those banks will fail." (The Washington Post, 7/17/08)

Question for Readers:

Are you thinking of taking your money out of your bank because of the recent failure of IndyMac?

IndyMac's collapse caused many customers of other banks to wonder if their money is safe in their bank accounts. But banking customers who bank at FDIC-insured banks should keep in mind...

not many banks are at risk of failure
even if a bank fails, FDIC insurance covers the majority of potential losses

FDIC Chair Sheila Blair told NPR, "The chance that your bank is going to fail is very remote. The overwhelming majority of banks are quite healthy in this country. Even if your bank does fail, your insured deposits will be there for you." (NPR, 7/16/08)

Still, you can take a few simple steps to make sure your bank accounts are safe:

1. Make sure your bank is insured through FDIC.

Look for official FDIC signs at your bank. Ask a bank employee about FDIC insurance if you don't see any signs.
Call the FDIC at 1-877-275-3342 to find out about your bank.
Use the "Bank Find" feature on the FDIC website.

2. Diversify where you keep your money.

Make sure your total personal accounts at one bank do not exceed $100,000.
Move part of your money to a different bank (not just a different branch) if you have more than the $100,000 limit.

3. Know what the risks are.

Read the FDIC rules about coverage to learn more.

Coverages vary depending on whether the accounts are held individually or jointly. The limits of coverage apply to the total of all accounts added together, so keep your totals below the $100,000 limit. (See "Is My Money Safe?" above.)