Why are so many banks failing..is the government covering the wrong asses?
It’s a legitimate question. I think the reasons are similar. Over at ProPublica, a great site btw, they have a good piece up entitled: Anatomy of a Bank Failure. In the writeup, they examine the failure of California’s IndyMac, aka Independent National Mortgage Corporation. IndyMac was the first big bank to fail in this nightmare on wall street. They hit the skids in July.
The article is interesting in that it points a finger at the federal government office known as the Office of Thrift Supervision or OTS. John Reich, the head cheese at OTS has faced questioning before, and usually blames someone else it seems, namely a Senate banking committee member.
On June 26th of this year, Chuckie Schumer wrote a letter to the OTS and the SEC asking wtf was going on with IndyMac. The letter was published in the media and immediately customers started pulling out their money. The ProPublica article paints a different picture of what was going down:
While Schumer’s famously ill-timed letter clearly hastened IndyMac’s end, a detailed review of filings with the Securities and Exchange Commission and the Office of Thrift Supervision for December 2007 and March 2008 suggest that prospects for keeping the S&L afloat were all but nonexistent: The lender’s demise was a matter of when, not if.
The filings raise the question of whether federal regulators felt it was more important to protect the bank’s shareholders and executives than to safeguard the Federal Deposit Insurance Fund that would ultimately pay for the losses. The current cost of the IndyMac failure, according to the FDIC, is $8.9 billion – a number that would undoubtedly have been smaller had the OTS called in the FDIC six months earlier.
As was the case with WaMu IndyMac, also a Savings and Loan, was neck-deep in the subprime mortgage debacle. When it was known that IndyMac was struggling, the OTS didn’t do what they could of to keep the taxpayers ass covered, in other words, they covered the banks ass. Again from the ProPublica writeup:
A conservative strategy by the OTS would have been to downgrade the S&L, and thereby limit the risk to the FDIC fund that protects insured deposits. Instead, to buy time in the hope that a new business plan would improve IndyMac’s earnings, regulators let the firm take modest write-downs of 5 percent or so in some of its troubled mortgage assets. This helped IndyMac keep its risk-based capital ratio barely above the 10 percent floor and allowed it to qualify as “well-capitalized,” thus avoiding being added to the FDIC’s list of problem institutions.
As a result, IndyMac was able to keep borrowing from the Federal Home Loan Bank and pulling in insured deposits. The insured deposits rose to $16 billion as of March 31, compared with $8.8 billion on June 30, 2007. The result: much greater exposure for the FDIC when IndyMac finally collapsed.
That was wrong on every level. This is a nation of people, not corporations. Or its supposed to be. It’s disgusting that time and time again, the OTS refused to turn IndyMac over to the control of the FDIC, buying their bullshit lines that things were getting better, when in reality they were lying their collective asses off.
In other words, they protected the CEO’s and shareholders as long as they could…to the detriment of the American Taxpayer which was left holding the bag of toxic mortgages and covering all the checking and savings accounts insured by the FDIC. IndyMac was sucking wind in 2007 and the OTS knew it. As this article from the Boston Herald notes about the loans IndyMac was holding at the time they collapsed:
IndyMac had 742,000 mortgages in its portfolio at the time – 60,000 of which were 60 days delinquent or at some stage of foreclosure.
That is a lot of payments that were not being made. But remember, these loans were primarily crap loans known as “Alt-A loans, dubbed “stated income” or “liar” loans, because people who received them often couldn’t demonstrate they could pay the interest on the loan, particularly if, after a period of time, the loan reset at a higher rate.“~ProPublica.
The first thing the FDIC did when they took over IndyMac was to halt all foreclosure proceedings and reexamine the loans and the individuals that got them. Of the 60,000 non-paying mortgages, 40,000 will most likely qualify for the governments mortgage loan rewrite program. This was not only a good thing for the homeowners it is also a good thing for the folks holding those ‘mortgage-backed securities’. As this Reuters article explains:
Restoring troubled loans into performing ones has yielded 87 cents on the dollar for a mortgage later sold, compared with 32 cents for nonperforming mortgages, Bair said, citing data over the past few years.
Of course Ms. Bair, the FDIC chairwoman could be full of shit too. The government is…cough..banking on older financial models for their optimistic data, plus they are praying to God that once the loans are rewritten, the individuals will continue to make the mortgage payments.
The truth is…no one friggin knows how this crap is going to turnout. No one..and its gonna take years to figure it the hell out because so many people got home loans they never would of gotten if rules, regulations and just common-fucking-sense had not been ignored.