Senator Chuck Schumer (D-NY) is being blamed -- somewhat unfairly -- by federal regulators for causing the collapse of the bank IndyMac:
Pasadena-based IndyMac, with $32 billion in assets, was seized by the government Friday. The loss-ridden mortgage lender had faced an outflow of deposits since Schumer on June 26 made public a letter he sent to the Office of Thrift Supervision and the Federal Deposit Insurance Corp., saying he was "concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers."
Schumer’s decision to go public with those comments triggered a firestorm in Washington. Regulators on July 2 said he was contributing to "rumors and innuendo" about the bank that could hasten its demise.
On Friday, regulators specifically fingered Schumer for IndyMac’s failure. The Office of Thrift Supervision said in its statement announcing the seizure that "the immediate cause of the closing was a deposit run that began and continued" after Schumer went public with his concerns.
"This institution failed due to a liquidity crisis," OTS Director John Reich said Friday. "Although this institution was already in distress, I am troubled by any interference in the regulatory process," a reference to Schumer.
The FDIC estimates that IndyMac’s failure will cost the agency between $4 billion and $8 billion as it unloads bad loans and makes insured depositors whole.
One should distinguish here between causing the bank’s failure and triggering it. Schumer triggered the bank’s collapse, but he did not cause it. Reckless lending caused the collapse.
Unless the housing market turns around quickly, IndyMac would almost certainly have failed in the next year, with or without Schumer’s comments. Whether Schumer saved the government money or cost the government money depends on whether IndyMac was likely to lose even more money between this month and its eventual failure later this year or early next year.
Badly run businesses go out of business, especially during slowdowns in the business cycle. And banks go out of business during very deep recessions in housing.
The regulators should be focusing instead on preventing the many bank failures yet to come (perhaps by encouraging mergers where possible).