Senator causes bank Failure

Many of us have read about the failure of the IndyMac Bank headquartered in Pasadena, CA.  The decision to close the $32 billion dollar financial institution was taken by the Office of Thrift Supervision (OTS) who acts for the Federal Deposit Insurance Corporation (FDIC).

Many financial institutions have been classed as “troubled” as a result of the sub prime mortgage market collapse and the housing situation in general.  But most will survive if permitted to restructure their operations to meet the demands of the current financial industry climate.

So what happened to IndyMac? It seems likely that the proximate cause of the collapse is traceable to the specific thoughtless and stupid actions of Charles Schumer, senior Senator from New York.  The idiot Senator, for political reasons wrote a letter to the OTS expressing his professional and wonderfully qualified opinion that the IndyMac Bank – headquartered, by the way in California – three thousand miles away from the Senator’s state of New York – was not viable.  Then he released the letter to the press and started an 11 day run on the bank that brought it down. 

Lets be clear – all banks loan out far more money then they actually have on deposit – it is called pyramiding reserves.  NO BANK IN THE COUNTRY MAINTAINS CASH RESERVES SUFFICIENT TO COVER A SUSTAINED RUN ON THE BANK BY DEPOSITORS.

The press release from OTS < link here > specifically lays the blame for the crash on the Schumer letter and the resulting demands of depositors who had lost faith in their bank because of Schumer’s careless and public statements. The specific paragraph is quoted here – follow the link for the full press release from OTS.

“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. “

Schumer could have voiced his concerns, if it was even remotely his responsibility to do, privately to regulators.  He chose to make his letter public for political gain and directly caused the collapse of a major institution.  In the 11 days following his letter, and an inflammatory headline in the Pasadena Star News “IndyMac appears close to collapse” based upon the Schumer letter, depositors withdrew more than $100 million dollars in cash from the bank.  Prior to the letter, the Bank was receiving a net positive cash flow from depositors.

The opinion writers have not picked up on this yet.  I expect outrage from conservative writers who will be shocked and appalled that a sitting US Senator can do this kind of damage to the economy at large and then hide behind his immunity for his “official” actions. Senator McCain has an excellent campaign issue if he moves decisively to take advantage of it. (yeah, right…)

For more details, see the Wall Street Journal article < link here >.

Senator Schumer was irresponsible and politically motivated.  He should face sanctions and possible impeachment.  I will hope to see civil actions filed against him by shareholders and depositors to test the immunity of this questionably “official” action.