Did Senator Schumer Cause the IndyMac Bank Collapse?

The financial markets have been rocked over the past week by the failure of IndyMac and resulting fallout. Depositors at several institutions are panicky about their own banks, while the government is struggling with solvency issues at Freddie Mac and Fannie Mae.

What was a manageable financial challenge that we were emerging from, thanks to the stewardship of our Federal Reserve Board and U.S. Treasury Department, has suddenly turned into a giant mess. History may record the current crisis as the Charles Schumer recession.

In a pointed conclusion, federal regulators lay the blame for IndyMac’s failure squarely on the shoulders of Senator Charles Schumer of New York. Schumer made his own letter to the FDIC public that questioned the bank’s viability. Senator Schumer’s letter caused a run on the bank that forced it to collapse last week due to a sudden liquidity crisis after $1.3 billion in cash was withdrawn in 11 days.

Schumer is a powerful Senator who serves on the Senate Finance committee and Banking committee. The public expects him to know what he is talking about, but in this case his letter was apparently just political posturing with your money at stake.

“I am concerned that IndyMac’s financial deterioration poses significant risks to both taxpayers and borrowers,” he wrote. The bank “could face a failure if prescriptive measures are not taken quickly.”

Here is what the regulatory agencies have concluded:

“The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors’ demands in the normal course of business and is therefore in an unsafe and unsound condition. The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.”

IndyMac had $19.06 billion in deposits on hand on their last quarterly statement March 31st 2008. That is plenty to get through almost any crisis. But when the crisis is caused by a powerful Washington politician who the public want to trust, the institution could not keep the levees from breaking.

Rather than address the controversy directly, Schumer did what politicians always do. He blamed someone else, in this turn blaming the messenger.

“If OTS had done its job as regulator and not let IndyMac’s poor and loose lending practices continue, we wouldn’t be where we are today … Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs. The regulator here was asleep at the switch,” Schumer said. “The administration is doing what they always do, blaming the fire on the person who called 9-1-1.”

Schumer does the politician’s thing here. Most of the public will not know that this was a Federal Reserve Board action that has nothing to do with the Bush Administration.

Rumor mongering has prompted the SEC to issue an unusual warning for powerful insiders to stop spreading false information about our financial institutions and markets.

What is worse is that the IndyMac’s collapse started a snowball reaction on Wall Street. Within a day, rumors began flying of potential Freddie Mac and Fannie Mae. insolvency. The Treasury Secretary on Sunday was forced to make a historic announcement that these institutions would be kept solvent.

Meanwhile the public is rushing to withdraw funds from several banks. A dire prediction is circulating that 150 banks nationwide may collapse.

When the history books are written about this period, we expect that Senator Schumer will have a special page. What started as a rough financial period may just have turned into the Charles Schumer recession.