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Is Schumer to blame for IndyMac's collapse? Not really.--

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).

AnonLawStudent:
According to the OTS Press Release Indymac had "chang[ed] its operations and business plan" in an effort to restructure, and "was actively seeking to arrange a significant capital infusion or find a buyer." Given the repeated statements that - while the institution was in distress - it was closed only as the result of a liquidity crisis, one would be hard pressed to say that Schumer did not in fact cause the failure, at least based on current evidence. Indeed, if it were inadequately capitalized, regulators would almost certainly have closed it prior to the run. (I say that while acknowledging that the solvency picture of other institutions, ahem, Northern Rock, has been known to change post-seizure.)
7.14.2008 7:07pm
Brian Day (mail):
One should distinguish here between causing the bank's failure and triggering it.

A good distinction to keep in mind. So does that absolve Schumer from any responsibility?
7.14.2008 7:07pm
30yearProf:
"Triggering" a bank failure for political gain is still unacceptable. Schumer interfered with efforts to cushion/prevent the collapse only to get his name in the headlines. The bank's troubles were no secret.
7.14.2008 7:15pm
wooga:
If Anon's link is correct, and the problems were already on the way to being fixed, then Schumer's remarks are reprehensible, causing an unnecessary collapse.

However, I am skeptical. I'm think IndyMac was going to continue on its merry way of mismanagement, and the collapse was going to come eventually. Perhaps Schumer causing a run now is less damaging than the run we would have gotten in six months.

Maybe Schumer can be excused on that theory... but even so, the point remains that he was still the one who triggered the run at this point in time.
7.14.2008 7:24pm
Laura S.:

Unless the housing market turns around quickly, IndyMac would almost certainly have failed in the next year, with or without Schumer's comments.


No. They may have failed IF they were unable to raise funds through rights offerings. Sick businesses need not fail; the existing owners share may be diluted by investment.

Also, considering that IMB was not a heavy player in the sub-prime market: they specialized in Alt-A which is different than the "toxic waste", your claim is rather aggressive.

Lastly: the situation is not that bad. The default rate across all mortgages is quite manageable at present. While, the housing market could deteriorate further--causing trouble--a turn around is by no means needed. Most analysis suggests that if prices stabilize soon, the mortgage market is oversold.

Schumer should be ashamed. He caused a bank run that bleed 1.2 Billion in deposits from IMB in less than a week.
7.14.2008 7:36pm
Crunchy Frog:
Jim Lindgren: So if someone is dying of cancer it's okay to shoot him, under the the theory that he's going to die anyway?
7.14.2008 7:36pm
Charlie (Colorado) (mail):
It would appear that you're making a distinction without a difference, Jim. So Schumer didn't "cause" the bank to fail --- he merely caused a bank run that exhausted IndyMac's liquid reserves, thereby forcing the bank to close. I'm unclear, at least, how that's different.
7.14.2008 8:00pm
cathyf:
If Schumer had shorted the stock before he publicized the letter, then that would be clearly illegal. How is getting political gain different from financial gain? (Given the mysterious ways that congresscritters' net worth climbs far in excess of their official income, it's not clear that there is much difference between political and financial gain...)
7.14.2008 8:11pm
DangerMouse:
Jim Lindgren: So if someone is dying of cancer it's okay to shoot him, under the the theory that he's going to die anyway?

You really shouldn't have asked that question. There are plenty of people here who would answer "yes."
7.14.2008 8:25pm
The Drill SGT:

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.


If what Schumer did was save the taxpayers money, why wouldn't the best policy be for the FDIC to publish a list of the most risky 10% of US banks and encourage their collapse, thus saving the taxpayers eventual money? That's your defense, right?

If publishing the names of the nation's weakest banks is not good policy, then why can't a reasonable person consider that what Scummer was really doing was doing was to jump in front of a mike to seize an opportunity for publicity even though it cost shareholders and the Tazpayers billions. shame :(
7.14.2008 8:35pm
EH (mail):
The Drill SGT:
even though it cost shareholders and the Tazpayers billions. shame :(


Maybe I'm assuming too much, but the "cost...taxpayers billions" does not seem like it should be skated over so lightly, much less by someone who calls themselves a drill sergeant (that's the assumption right there). I find it curious that nary a peep is issued about the huge bailouts we're having this year, or the almost-fact that the US is nationalizing its secondary mortgage industry. But let's crow on and on about Mr. Schumer.
7.14.2008 8:50pm
BlackX (mail):
Considering that Schumer is such a self-serving scum****, I don't mind in the least if he takes heat he doesn't deserve on one issue. He doesn't get enough heat for the issues he does deserve it on.
7.14.2008 8:55pm
LM (mail):
DangerMouse

Jim Lindgren: So if someone is dying of cancer it's okay to shoot him, under the the theory that he's going to die anyway?

You really shouldn't have asked that question. There are plenty of people here who would answer "yes."

Outrage! (I'd need to know which someone you had in mind.)
7.14.2008 9:06pm
Guest12345:
The FDIC and SEC should all get involved. The FDIC in identifying customers who bailed on IMB during the period in question. Anyone who yanked their money from an insured account should be forfeiting any future FDIC insurance of their monies (at any institution) as the point of the FDIC is that people won't have to run and withdraw their cash. Thus allowing the banks to avoid these sorts of runs.

The SEC should be investigating Schumer to see who may have profited from his statements. Additionally, as he is in the legislative branch and the SEC/FDIC/etc. are executive branch, I don't know that he has any real business giving them suggestions. As such his various immunities as a congressman should be eliminated.

I also find it interesting that the assertion is that IMB was under capitalized and that was the cause rather than, potentially incorrect, statements by a politician causing a panic among customers. Would it be safe to say that Al Qaida was not the cause of the collapse of the twin towers, but rather the trigger? And as such how much liability should the "terrorists" assume? And how much should the port authority assume for building buildings of that scale leading to the collapse of said buildings?
7.14.2008 9:07pm
The Drill SGT:

Maybe I'm assuming too much, but the "cost...taxpayers billions" does not seem like it should be skated over so lightly, much less by someone who calls themselves a drill sergeant (that's the assumption right there). I find it curious that nary a peep is issued about the huge bailouts we're having this year, or the almost-fact that the US is nationalizing its secondary mortgage industry. But let's crow on and on about Mr. Schumer.


1. CBS reports:
The FDIC estimated that its takeover of IndyMac would cost between $4 billion and $8 billion. Pasadena, Calif.-based IndyMac Bancorp Inc., the holding company for IndyMac Bank, has been struggling to raise capital as the housing slump deepens. IndyMac had $32.01 billion in assets as of March 31.


so what part of shareholders and taxpayers are gonna lose billions don't you understand?

2. the ad hominem insult? Yes, I was a Drill Sergeant, US Army, attended Ft Lewis Drill Sergeant Class 6-71 in July-August 1971. Graduated first in the class, and was assigned the MOS 00F30. After my tour in Nam BTW. Got any questions?

3. The topic of the post was a defense of Schumer. I didn't feel it requirted to deplore all the other frauds, Enron, Fannie Mae, Keating SL, Arthur Anderson, Global Crossing, MCI, Teapot Dome, etc that have gone on in the past 50 years before commenting? because I didn't it makes my statements wrong or unreliable?

4. Or maybe you just have a partisan bias that wants to support Schumer regardless of any fact basis?
7.14.2008 9:14pm
chsw (mail):
IndyMac was not on the regulators' watch list of banks. Hence, the evidence supports a viewpoint that Schumer triggered a fatal run on the bank by leaking that memorandum.

I'm no lawyer, but I would think that the "speech and debate" clause may not exempt Senator Schumer from a class action suit brought by all of those injured and inconvenienced by IndyMac's collapse. If the taxpayers must pick up $3-5 billion to wind up IndyMac's affairs, that is quite a potential contingency fee.

chsw
7.14.2008 9:26pm
John (mail):
Have we forgotten proximate cause? The bank may well have avoided collapse without the run on its assets "triggered" by Schumer.
7.14.2008 9:30pm
eh1982 (mail):
I'm not sure taxpayers are really going to lose money in this case. FDIC insurance is paid for by banks. If the dollar amount is large enough, depositors might notice a change in fees and/or interest. But I would imagine not.
7.14.2008 9:31pm
The Drill SGT:

FDIC insurance is paid for by banks.


Clearly a liberal lawyer or art major :) Somebody said we should give basic economics classes to the Democratic Congresspersons recently.

Banks are either stockholders or depositors. In either case, they are taxpayers. Taxpayers, directly or indirectly will pay for the bank collapse.


PS: Before EH jumps in, Yes, I have an undergrad degree in Econ and an MBA (Operations Research), both from the University of California. Some of us beady eyed baby killers can read and write.
7.14.2008 9:45pm
jackson12345 (mail):
New York Times reported that hedge fund managers have a new champion in their effort to keep legally dodging the taxes the rest of us pay: none other than New York Senator Charles Schumer. Now you know who is Schumer's friend and why he caused the bank run on Indymac. He truly support hedge fund and private equity because they truly support him.

nytimes.com/2007/07/30/washington/30schumer.html

"Large Investor decided to pay a few bucks to a Senator in New York to force the issue."(Prospect Mortgage Backed By Sterling Fund—Private Equity Acquired The Mortgage Branches from Indymac before FDIC takeover)
housingwire.com/2008/07/03/

"And do remember that there are many investment bankers located in New York, making them pretty influential constituents of Sen. Schumer."
www.pasadenastarnews.com/opinions/ci_9783402

"In a Sunday news conference, he said everything in his letter was already known to the public."
If it was already known to the public, what is the reason for his public letter? It is contradict to what he said previouly :"I just bring private message to the public. Do not kill the messanger." What a great liar from time to time!
cnn.com/2008/POLITICS/07/13/indymac.schumer
7.14.2008 9:47pm
byomtov (mail):
There is an inconsistency between arguing that

1) IndyMac was solvent, but illiquid

and

2) The takeover is going to cost the FDIC or the Treasury billions.

If they were solvent then their assets should cover the payouts when they can be sold. Isn't the point to calm things by paying off depositers so the assets can be liquidated, either by selling or just waitingfor borrowers to pay off, in an orderly fashion?
7.14.2008 9:50pm
eh1982 (mail):
Sorry Drill, but when I hear taxpayers are going to pay x it usually means that the Treasury has to pay something. In THIS case, FDIC will pay which is funded by insurance premiums.

Almost everyone in this country is a taxpayer. Does that mean that anything one of them buys is paid for by taxpayers? I bought some porn the other day, and I'm a taxpayer. Does that mean that taxpayers are funding the porn industry?
7.14.2008 9:56pm
The Drill SGT:

Does that mean that taxpayers are funding the porn industry?

I understand the CIA does have some investments, but I digress :)

I understand your point, and I think you understand mine.
7.14.2008 9:59pm
AnonLawStudent:

I am skeptical. I'm think[ing] IndyMac was going to continue on its merry way of mismanagement, and the collapse was going to come eventually.

As the OTS stated in its press release, the agency had "directed appropriate changes and was finalizing a new set of enforcement actions" at the time of the collapse. Banking enforcement actions come with teeth, including automatic denial of administrative approvals based on downgraded financial condition, and - if the bank fails to comply with an enforcement order - strict liability civil penalties for officers, removal of management, permanent bans from the banking industry, or termination of deposit insurance. See generally 12 USC 1818.

If they were solvent then their assets should cover the payouts when they can be sold.

Not quite. One has to accept a significant discount in order to sell an asset NOW rather than on one's own terms. Hence the reason why, despite the statutory requirement for "least costly" resolution, 12 USC 1823(c)(4), the FDIC has a poor record in liquidations. Moreover, a true liquidation dissipates the going-concern value of the institution. As an aside, the firesale issue will be particularly costly in the current climate, given that a significant component of the subprime mess is the lack of a model to forecast default rates and, by extension, assess the value of a pool of mortgages.
7.14.2008 10:23pm
Porkchop:
byomtov:

The reason there is no inconsistency is that now the assets will be sold for less -- FDIC asset sales are done at firesale prices. The FDIC is notorious for making lousy deals and then patting itself on the back for its masterful negotiating. IndyMac probably would have been able to either recover on the assets or sell itself to another institution for a better price than the FDIC can get. FDIC can't get as good a deal from a buyer. In addition, IndyMac had only a few (30+) physical branches, so there is no money made from branch sales. It was mostly a mortgage banking organization that happened to have a thrift charter, not a real bank. It had to securitize in order to stay in business.

eh1982:

Banks pay deposit insurance premiums based on their level of deposits. They pass the cost on to the depositors in the form of lower interest payments or to borrowers in the form of higher interest rates. It won't be a direct taxpayer bailout (like, say Fannie and Freddie), but it might as well be.

chsw:

IndyMac was not on the troubled bank list precisely because if it had been, it would have been readily identifiable. There aren't that many banks with that level of assets that are likely to make the list. (The current list has 90 banks with approximately $27 billion in assets, or approximately $300 million in average assets. So, if you made it 91 banks with approximately $59 billion in assets, it wouldn't have been hard to figure out who they were talking about.
7.14.2008 10:37pm
TM Lutas (mail) (www):
Here's a few propositions that may be useful food for thought.

1. Banks do not run their property portfolios of foreclosed real estate very well.
2. Governments are even worse at doing so which is why they are consistently willing to sell at lower prices than banks.
3. Government regulators are not good at running banks. This is why we have a private banking sector.

Destroying confidence in a bank causes losses. Bank assets lose value because they go through a period of conservative government run bad management. This is why regulators often try to merge failing banks. They themselves know that government conservatorship is a far worse option for the taxpayers and the economy than a quiet negotiated transfer to a more reasonably run institution.

Sen. Schumer cost the public fisc a significant amount of money. He also reduced the value of our physical stock of housing assets because the foreclosed properties will be handled worse.
7.14.2008 11:19pm
cathyf:
If Schumer's hedge-fund buddies had shorted IndyMac stock, he released the letter, and then the hedge-fund buddies split their resulting profits, Mr. Schumer would be on his way to jail now. But since the hedge-fund buddies paid him off before he talked down the stock, he gets off scot free...
7.14.2008 11:26pm
autolykos:

Have we forgotten proximate cause? The bank may well have avoided collapse without the run on its assets "triggered" by Schumer.


I thought the same thing. Do we really have a law professor arguing for some kind of distinction between triggering an event and causing it?

It's not like people cut the Missouri MySpace Mom slack because she only "triggered" her daughter's enemy's suicide. The fact that healthy people don't commit suicide when someone commits a cruel prank on them doesn't absolve her of responsibility any more than the fact that healthy banks don't collapse when a person questions their solvency absolves Schumer.
7.14.2008 11:26pm
Anton (mail):
"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."

I can't support this distinction. My understanding of the word when used as a verb is that "trigger" refers to a chain reaction, causing another event to take place.

If you want to say, "reckless lending caused the collapse", very well; and because, as you say, Schumer triggered the bank's collapse, he played a part in its collapse. You don't know, you merely speculate, that Indy Mac would have collapsed without Schumer's remarks.

What you perhaps should have said is, "I think Indy Mac would have collapsed anyway, so Schumer's remarks had a small effect," or perhaps you should not have used the word "trigger".

You might then have been right, although I know a bank regulator who thinks the collapse of Indy Mac, in trouble though it was, could have been turned around.
7.15.2008 12:17am
Snarky:
People who mention that banks pay premiums for FDIC insurance as a way to justify that system have to account for a particular point.

If the premiums are profitable, why isn't such insurance offered by insurance companies?

Can you say market failure? And also, subsidized insurance rates.
7.15.2008 12:23am
Sunflower (mail):

The SEC should be investigating Schumer to see who may have profited from his statements.


He can't claim ignorance. He had a motive and the American taxpayers were not in his interest at all.
7.15.2008 1:05am
cathyf:
The regulators should be focusing instead on preventing the many bank failures yet to come (perhaps by encouraging mergers where possible).
Well, it's pretty hard to "encourage" mergers when you've got US Senators using the confidential financial information that they have learned from their offices to queer the deals.

Or perhaps you meant that statement as irony? You should try inserting a smileyface or a "/sarcasm" or something like that because the irony isn't obvious...
7.15.2008 9:05am
ParatrooperJJ (mail):
That being said, he still should have kept his mouth shut and not disclosed confidential information.
7.15.2008 9:35am
Prof. S. (mail):
byomtov - I'm not a CPA, and I'm borrowing this from basic corporate law, but there are two ways of defining insolvency - either as net worth (assets < liabilities) and equitably solvent as in being able to pay your bills as they come due. For example, I am insolvent in terms of net worth (stupid studnet loans), but am equitably solvent (i.e. I pay my bills on time).

If IndyMac could pay its "bills" (including depositer withdrawls) on time, then it was fine and could keep going along, even it would require greater oversight and assistance from regulators such as the Office of the Comptroller of Currency. What appears to have happened here, however, is that Schumer suddenly increased IndyMac's "bills" suddenly and it couldn't withstand the pressure.

To complete the analogy, imagine my mortgage holder suddenly demanded that I amortize my mortgage over 5 years instead of 30. This would increase my payment by something like five-fold. Could we say that the Bank didn't cause my insolvency, since I was already insolvent? It mixes the two types of insolvency.

I'm not the most familiar with this situation, but I'm gathering that this is analogous to what happened here. Schumer's statements dramatically increased IndyMac's monthly expenses, thus causing them to run into liquidity problems and to go under.
7.15.2008 9:46am
Chris Bell (mail) (www):
The inability of people to make up their minds here is funny.

ParatrooperJJ:
That being said, he still should have kept his mouth shut and not disclosed confidential information.

30yearProf:
The bank's troubles were no secret.

The WSJ has a hit piece out today on Schumer. They compare him to someone that shouts "fire" in a crowded theater, and to the "tipsters" in the 1930s that spread false rumors about banks to cause bank runs.

Note that both of those analogies involve someone spreading lies, whereas Schumer didn't say anything that wasn't (1) true or (2) easily, publicly available.
7.15.2008 9:48am
Leland (mail):
Chris,

You quote two different commenters and suggests that people can't make up their minds. I would say ParatrooperJJ made up his mind that Schumer should have kept his mouth shut. 30yearProf made up his mind that the bank troubles were no secret. I would say you can't make a coherent argument.

You then say, "Schumer didn't say anything that wasn't true." Really? I thought Schumer gave his opinion that the bank might collapse. Pretty interesting theory that speculation of the future is considered fact. Apparently many investors agreed with you, because they took their funds out of a bank that was at the time solvent.

Tell us Mr. Bell, if a Senator announced a possible investigation of you for some nefarious reason, what would that do to your career?
7.15.2008 10:49am
AnonLawStudent:
Does anyone have a link to the text of Schumer's letter, as well as information on how he published it? I don't see it on Schumer's webpage, the FDIC's press release page, or the OTS's press release page. I ask because much of the information generated by banking regulatory in NOT "publicly available," so the contents of the letter are important.
7.15.2008 10:59am
AnonLawStudent:
Let's try that again, this time coherently...

I ask because much of the information generated by banking regulatory authorities is NOT "publicly available," so the contents of the letter are important.
7.15.2008 11:01am
Chris Bell (mail) (www):
I was obviously comparing two different people who are basing their arguments on completely opposite factual situations.

I think if a Senator out-of-the-blue announced an unfounded investigation into me it would be devastating. I think if a Senator announced a reasonable investigation after I had been arrested and arraigned, it would not have much effect at all on my career, which would already be in bad shape. Besides, if I did something wrong shouldn't there BE an investigation? This whole thread reeks of the idea that politicians should never criticize companies, even if the companies are doing badly and fully deserve the criticism.

Have a look at IndyMac's stock. Over the past year it has fallen from around $30/share to about $0.30/share. What was the share price the day of Schumer's letter?

80 cents.

Explain to me again how Schumer caused this? Oh yeah, through his incredible revelation that the bank was not doing well.

PS. I love that fact that the IndyMac execs came out and told everyone that IndyMac was fine. Liars. They were on death's door and everyone knew it. Schumer's only "crime" was to let regular people know, instead of keeping the info "private" on Wall Street.
7.15.2008 11:17am
tbw:
Chris Bell:

"Have a look at IndyMac's stock. Over the past year it has fallen from around $30/share to about $0.30/share. What was the share price the day of Schumer's letter?

80 cents.

Explain to me again how Schumer caused this? Oh yeah, through his incredible revelation that the bank was not doing well."

This is completely irrelevant. First, depositors are creditors, not equity holders. The equity value of Indymac is not relevant to whether there would have been sufficient funds to cover deposits. Second, the low equity value meant that Indymac may have been delisted from the exchange, which simply does not reach the level of bank failure. There are many non-publicly traded banks in the United States, either trading on the pink sheets or held privately, which do not suffer failure.

The bottom line is that Schumer caused failure by inciting a run on the bank. Had Indymac failed in the regular course of business, regulators could have worked out a deal so that a healthier institution could have assumed the deposits. An assumption such as this would have avoided the negative costs of bank closure for the customers and saved the regulators money, since the assuming bank would likely have had to assume unattractive Indymac assets to compensate for receiving valueable deposits. Its indefensible, and I am at a loss as to how anyone could argue that there were no consequences.
7.15.2008 12:05pm
Chris Bell (mail) (www):
Fact: IndyMac was in danger of failure
Fact: IndyMac was probably going to fail anyway
Fact: This was no big surprise to sophisticated investors

So Schumer's crime was... telling the little guys?
7.15.2008 12:28pm
Chris Bell (mail) (www):
To be more specific, you said:
The bottom line is that Schumer caused failure by inciting a run on the bank. Had Indymac failed in the regular course of business, regulators could have worked out a deal so that a healthier institution could have assumed the deposits.
Schumer is arguing that the failure was imminent and the regulators weren't doing anything. He sent a private letter to them telling them to get off their ass, and then released the letter when nothing happened.
7.15.2008 12:33pm
AnonLawStudent:
Chris Bell,

If you would care to review the last TFR (regulatory report) for Indymac, it's available here by typing "Indymac" into the "financial institution" blank; CCR is the relevant schedule. As of 3/31, Indymac was well capitalized, cf. here for definition. The degradation occurred sometime between May 12 and July 7, see here. Given that information, I think it very likely that IndyMac was still adequately capitalized, although I would certainly be interested in any evidence - as opposed to declarations of "Fact: by Chris Bell" - to the contrary. Even if we knew with certainty that Indymac would fail, that failure was likely several quarters away, see page 7 of this document, which notes that "most of the failed banks [analyzed by the study] moved from the well-capitalized classification to failure during a four- to eight-quarter period." Regardless of Schumer's protestations to the contrary, Indymac had the potential to recover, and failure almost certainly wasn't "imminent."
7.15.2008 1:19pm
Chris Bell (mail) (www):
My earlier post was a bit flippant, and yes, depositors are not equity holders. I am not claiming that Schumer did not cause the final run on the bank. ("Cause" in the sense of being the final trigger.) I am challenging the notion that Schumer was morally culpable in some sense.

For example, the WSJ stated today that Schumer cried "fire" in crowded theater. That analogy usually implies that the theater was not actually on fire, but here it seems that the theater was actually on fire! After accusing Schumer of causing the failure, Reich admitted that the bank probably would have failed anyway.

More over, what did Schumer say that wasn't already known?

I've also heard that GM is in bad shape, but I hesitate to mention it in case I am blamed for GM's collapse.
7.15.2008 1:35pm
Chris Bell (mail) (www):
If Schumer released any confidential info or made his assessment based on financials not available to the market, then I'll join you in saying he acted badly. If he was just commenting on the market or chastising a regulator to do get off its but and do something, then I will not join you.

Public officials shouldn't be forced to have unsupported rosy outlooks. If something is in trouble, and it really is in trouble, they should be free to say so.
7.15.2008 1:41pm
byomtov (mail):
Prof S,

What you call two different kinds of insolvency is just the difference between illiquidity and insolvency.

If you are unable to pay your bills, but have assets, you are illiquid. If you could get market value for you assets, or use them as collateral for loans, you could pay the bills and go on.

If the assets are inadequate you are insolvent.

That's why it's a good idea to have a "lender of last resort" for liquidity problems.

It may well be that IndyMac was only lliquid - what you call "equity solvent" -then the loss should be small.

In your example, if you can refinance your mortgage with another lender you're OK. If you can't then you're in trouble.
7.15.2008 1:45pm
Patrick C (mail):
Public officials shouldn't be forced to have unsupported rosy outlooks. If something is in trouble, and it really is in trouble, they should be free to say so.

No one was saying that IndyMac Bank had a rosy outlook. If anything, it was guardedly positive. The asset quality problems were serious, but mgmt was taking steps to deal with it. With time, IndyMac's assets and deposit liabilities might have been transferred to another institution and the bank charter voluntarily surrendered, with no hit to the Federal Deposit Insurance Fund. But then again, it could have failed. We'll never know because Chuckles' irresponsible remarks caused a liquidity crisis--over $1 billion flowed out of IndyMac in the days and weeks after he made the content of his June 26 letter public.

No responsible public official should be free to make reckless comments that can sink a financial institution and cause harm to the financial services sector and a loss to the insurance fund. But then Chuckles has amply demonstrated time and again that he is not a responsible public official.
7.15.2008 2:26pm
Chris Bell (mail) (www):
Patrick:

You describe Schumer's letter as "irresponsible" and "reckless". Care to be more specific? What did he say that was irresponsible or reckless?

I assume that such a statement would have to be:

-Inaccurate, OR
-Accurate, but not otherwise known to the public

(Otherwise, the Senator would just be saying truthful things that were publicly known. You can call that irresponsible if you want, but we may just have to disagree.)

So what did the Senator say that fits that description?
7.15.2008 3:04pm
Patrick C (mail):
I haven't been able to find the text of Schumer's letter. Curiously it's not on his website in the Banking Finance press release archive; a search of the terms IndyMac and Indy Mac also came up empty.

However I did find this LA Times story:

On June 26, Schumer said in letters to the FDIC, the OTS and two other federal agencies that IndyMac might have "serious problems" with its loan holdings.

"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."

Schumer suggests that bank management and/or financial institution regulators were not taking prescriptive measures. However, this was not the case:

As a result of an OTS examination that began in January 2008, the OTS deemed IndyMac to be in troubled condition. An overwhelming majority of problem institutions are able to successfully modify their operations and business plans, work closely with their regulator and eventually return to a healthy condition.

IndyMac had reacted to market conditions and OTS concerns in November 2007 by changing its operations and business plan to build a foundation for recovery. IndyMac was actively seeking to arrange a significant capital infusion or find a buyer.

http://www.ots.treas.gov/docs/7/778029.html

Contrary to Schumer's letter, both the regulators and bank mgmt were aware of the situation and had already taken prescriptive measures to address the asset quality situation months before his June 26 letter. From this we can conclude that the only reason Schumer released this letter to the public, this letter that supposedly brought to regulators' attention conditions at IndyMac that were well known to them, was not to protect the public, but to get publicity for Charles Schumer. Unfortunately, the net result of Schumer's actions actually caused the bank failure that he purported to avert.
7.15.2008 3:51pm
tbw:
Chris Bell:

Your comments fail to distinguish between "bad shape," as used in the GM example, or in the IndyMac example, and stating that a corporation will fail imminently. Schumer said: "IndyMac appears close to collapse," which is in the latter category. Similarly, even if it is public knowledge that a corporation has substantial subprime exposure, has a low stock price, etc., none of that implies public knowledge of imminent failure. Schumer was the first to bridge that wide divide.

Regarding Schumer's mental state, such a statement as the one above could be irresponsible or reckless without conforming to the inaccurate/accurate dichotomy. For example, a statement that Schumer should have known with a substantial certainty would cause a banking run would suffice for recklessness. Surely as a member of the Senate Banking Committee he should have realized within a substantial certainty: 1) the danger of runs on potentially undercapitalized banks; and 2) that a statement such as "IndyMac appears close to collapse" by an influential committee member had the potential to incite such a run.
7.15.2008 4:03pm
cathyf:
If Schumer ... made his assessment based on financials not available to the market, then I'll join you in saying he acted badly.
Ok, join up. What Schumer apparently said was:
"...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."
This is analysis, a conclusion, which the market knew had been reached by someone whose position gives him access to financials not available to the market.

The market price based upon the publicly available information on the day Schumer released his letter was 80 cents/share. After Schumer released the information in the letter, the price went to 30 cents/share. Therefore Schumer made public 50 cents/share worth of new information in his letter. Therefore his assertion that his letter did not contain information that was not publicly available beforehand is simply, provably, false.
7.15.2008 5:39pm
Porkchop:

To be more specific, you said:


The bottom line is that Schumer caused failure by inciting a run on the bank. Had Indymac failed in the regular course of business, regulators could have worked out a deal so that a healthier institution could have assumed the deposits.



Schumer is arguing that the failure was imminent and the regulators weren't doing anything. He sent a private letter to them telling them to get off their ass, and then released the letter when nothing happened.

Chris Bell:



The Schumer letter was dated June 26; it was reported in the June 27 Wall Street Journal. That means that it was released to the press not later than the night of June 26 (or maybe the wee hours of June 27). You don't even know whether the regulators got the letter before it was released to the press -- this was not about getting the regulators "off their ass," it was about Chuck Schumer getting "on the front page."
7.15.2008 9:00pm
AnonLawStudent:
The list of recent WSJ articles involving Schumer (Schumer's letter) is here. The article that Porkchop is describing is at the bottom of the list.
7.15.2008 9:48pm
PC:
7.16.2008 6:25pm
Research Peon:
The WSJ article says that people during the depression were indicted for questioning the solvency of banks. Anyone have cites to relevant cases/statutes?
7.18.2008 6:54pm