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Paul Kiesel
Paul Kiesel
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Indymac: Second-Largest Bank Failure in U.S. History

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The federal government took control of IndyMac today, as the Office of Thrift Supervision transferred control of the $32-billion bank to the Federal Deposit Insurance Corp (FDIC).

Indymac’s failure is considered the second-largest bank failure in U.S. history.

IndyMac’s failure is second only to the 1984 failure of Continental Illinois Bank, which had assets of $40 billion at the time.

Federal authorities said the takeover of IndyMac would cost the FDIC between $4 billion and $8 billion.

As of 3 p.m. today, IndyMac shut the doors to its Pasadena branch. Customers pleaded with bank tellers still inside the building, in hopes of being able to take some of their money out. According to the Los Angeles Times, one woman was overheard saying, “Please, please, I want to take out a portion,” (Los Angeles Times, 7/11/08).

IndyMac customers will not be able to take out any funds over the weekend. Hopefully, they’ll be able to access their accounts Monday morning.

In the meantime, it appears that IndyMac will be absolved from having to face any lawsuits over the next 90 days, however, the Alt-A mortgage lender may still be held liable for any pending litigation it currently faces after the 90 day stay (TILA violations).

The failure of IndyMac will shake investor confidence, could adversely affect the financial health (or perceived financial health) of Fannie Mae and Freddie Mac, and it could precipitate a recession that would have been unthinkable 18 months ago — this is a more severe bank failure than federal regulators anticipated.

If one is to look at the largest bank failure in U.S. history — the 1984 failure of Continental Illinois Bank — that bank’s failure ostensibly brought about the Savings and Loan crisis of the 1980s and 1990s; the $160 billion lost during that period (of which $124 billion was paid for by U.S taxpayers) was triggered by the same reckless economic policies that have taken place during the mortgage crisis: deregulation of financial markets, imprudent real estate lending, and keeping insolvent S&Ls open. However, what took place today with IndyMac, and what is apparently on the horizon (see Fannie and Freddie), appears to be the beginning of a larger and more financially devastating problem for the U.S. economy than the S&L crisis.