$1.3 billion in losses, brought to you by Chuck Schumer

Posted on July 12, 2008

We’re seeing the third largest bank failure in United States history today with the seizure of IndyMac by federal regulators (emphasis added):

IndyMac Bank, a prolific mortgage specialist that helped fuel the housing boom, was seized Friday by federal regulators, in the third-largest bank failure in U.S. history.

IndyMac is the biggest mortgage lender to go under since a fall in housing prices and surge in defaults began rippling through the economy last year — and it likely won’t be the last. Banking regulators are bracing for a slew of failures over the next year as analysts say housing prices have yet to bottom out.

The collapse is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC’s $53 billion deposit-insurance fund.

The Pasadena, Calif., thrift was one of the largest savings and loans in the country, with about $32 billion in assets. It now joins an infamous list of collapsed banks, topped by Continental Illinois National Bank & Trust Co., which failed in 1984 with $40 billion of assets. The second-largest failure was American Savings & Loan Association of Stockton, Calif., in 1988.

The director of the Office of Thrift Supervision, John Reich, blamed IndyMac’s failure on comments made in late June by Sen. Charles Schumer (D., N.Y.), who sent a letter to the regulator raising concerns about the bank’s solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a “heart attack.”

“Would the institution have failed without the deposit run?” Mr. Reich asked reporters. “We’ll never know the answer to that question.”

The letter in question is one Schumer released publicly June 26th, demanding action to prevent the collapse. What happened? Depositors got scared, pulling their money out of the bank, leaving the FDIC with no choice but to close the bank and pick up a bill of over $1 billion. And guess who gets to pick up the tab for the FDIC? That’s right, folks: it’s you and me, the American taxpayers.

I worked in banking for a few years. The FDIC only insures up to $100,000. Anyone with account balances higher than that are just going to have to eat the losses. But of course, if they have a bank account balance of over $100,000, that makes them “the rich”, and “the rich” is a group of evil, greedy corporate stooges, so I guess this isn’t a tragedy, is it?

Maybe, just maybe, things like this could be avoided if the Democrats would stop meddling with the free market. The more Democrats try to interfere with our economy, the more it crashes. And the more it crashes, the more government intervention Democrats think is necessary. And somehow, Americans keep voting Chuck Schumer & Co. into office.

How much money can we afford to lose before we wise up?

Hat Tip: Hot Air

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6 Responses to “$1.3 billion in losses, brought to you by Chuck Schumer”

Not a Yank on July 12th, 2008 3:05 pm

it is not American’s that keep voting Schumer into office it is the democrats that are buried in Queens that keep voting for him.

Curb the democrat voting fraud and these people would be on the unemployment role where they belong.
Jeff Molby on July 12th, 2008 3:19 pm

But of course, if they have a bank account balance of over $100,000, that makes them “the rich”

No, it makes them “the stupid”.

The FDIC insures $100,000 per account. If you have that kind of money sitting around and you didn’t take the 10 minutes necessary to learn that you should spread it around a bit…

Maybe, just maybe, things like this could be avoided if the Democrats would stop meddling with the free market.

All he did was point out that the emperor appeared to be naked. That’s hardly “meddling with the free market”. If Warren Buffett had written the same exact letter, it would have had the same exact result.

The root problem is that we rely on a foolish policy of fractional reserve banking. This policy has been the cause of every bank run everywhere. always.

When I create a savings account, the bank promises me I can pull my money out at any time. Yet they never have enough money on hand to guarantee that. When the market starts to question the solvency of a bank, it necessarily turns into a fast-paced, high-stakes game of musical chairs.

The FDIC is merely a kludge that attempts to minimize the impact of this flawed policy.

The real solution is to require 100% reserves for demand deposit accounts. No, this won’t result in money sitting unnecessarily in vaults. It will simply make time deposit accounts more common.

Simple changes like that would solve so many of our problems, but they require a special kind of bravery: the willingness to question long-held policies.

Instead, as you correctly point out, the knee-jerk reaction is always to build more regulation on top of our current monstrosities.
Jeremiah on July 13th, 2008 1:26 am

What? Quit pretending like you know something about economics. The lack of Federal Reserve and Executive Branch oversight is what allowed IndyMac (and many others) to engage in unsound “financial engineering”. Look at IndyMac’s stock price collapse BEFORE Schumer’s comments! If Schumer’s comments broke the back of IndyMac, it was only the final feather on that load of crap. More banks are going to fail, and it won’t be a single Senator’s fault - you can squarely blame the Fed for refusing to use the regulatory power granted to it by Congress.
Jeremiah on July 13th, 2008 1:46 am

Depending on who your inclined to believe, we spend $1.3 BILLION in Iraq in less than 4 days. Assuming (and I don’t) that Schumer “caused” the implosion of IndyMac, you can argue that at least his comments have a real dollar limit in terms of impact.

“The Pentagon has previously said that the war [in Iraq] costs approximately $9.5 billion a month, but some economists say the figure is closer to $25 billion a month when long-term health care for veterans and interest are factored in.”

http://money.cnn.com/2008/06/11/news/economy/iraq_war_hearing/index.htm?cnn=yes
Monk on July 13th, 2008 8:43 pm

Schumer is lying, sub-human scum… pure and simple. He represents everything that is wrong with politicians and politics in this country today. We need another American revolution fast or I fear for our children’s future.
jason smith on July 14th, 2008 11:02 pm

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.

http://www.nytimes.com/2007/07/30/washington/30schumer.html?_r=1&oref=slogin

“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)
http://www.housingwire.com/2008/07/03/regulators-to-schumer-weve-got-a-whole-bag-of-shhh-with-your-name-on-it/

“And do remember that there are many investment bankers located in New York, making them pretty influential constituents of Sen. Schumer.”
http://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!
http://www.cnn.com/2008/POLITICS/07/13/indymac.schumer/?iref=mpstoryview