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Don't blame depositors for IndyMac's failure

Robert Niles
By Robert Niles
Published: July 12, 2008 at 4:26 PM (MST)
A thought from ground zero of the IndyMac Bank failure (IndyMac, like SensibleTalk, is based in Pasadena, California)...

I find it disturbing that federal regulators are trying to blame the mortgage lender's failure on a run of customer withdrawals.

A run is simply the inevitable final stage of a bank failure. Saying that a run killed a bank is like saying that a patient died because his heart stopped beating. Well, yeah, but there was something more significant that caused the heart to fail.

In IndyMac's case, that was its sloppy lending to unqualified homebuyers, on the mistaken belief that home prices would continue to rise forever. When prices started to fall, borrowers were left owing more than their homes were worth. They either defaulted or walked away, and IndyMac was left holding the bag.

Anyone with two open eyes and an engaged brain could have seen more than a year ago what was coming at IndyMac. U.S. Charles Schumer was hardly the first person to see the bank's problems when he last month questioned the bank's health. But that didn't stop federal regulators from blaming Schumer, a Democrat, for the bank's failure. Office of Thrift Supervision John Reich told the Wall Street Journal yesterday that Schumer's comments were a "heart attack" that killed the bank.

Schumer's response? "If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today."

What did Reich want Schumer to do? To shut up and pretend that everything was fine? Government-enforced consumer ignorance is no way to save a bank, or the economy.

No, Schumer was right. The government's opportunity to save IndyMac from itself came years before, when IndyMac, like Countrywide and most of the rest of the U.S. banking industry, decided to trash well-established lending standards to chase short-term profits in a housing bubble.

By pumping billions of dollars in shaky loans into the housing market, banks inflated the prices of homes, which people could buy only by taking larger and larger mortgages from the banks. It was a pyramid scheme, highly profitable in the short term, but, like all such schemes, doomed to inevitable collapse.

Just like IndyMac Bank.

Robert Niles also can be found at

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