Yesterday I wrote about the failure of IndyMac bank and how it was seized by federal regulators on Friday, but I didn’t cover the “what’s next?” aspect. There are a couple of things in particular that investors who have IndyMac loans need to know, and for those without IndyMac loans it is still good information to understand in case you deal with other bank failures in the future.

Some of the most important things that could be impacted by IndyMac’s failure are construction loans. For those who are not familiar with construction loans, typically banks pay out the loans based on certain milestones. So, after a builder gets the foundation done, they receive a payment which covers the expenses until the next milestone, and so on. Well, now all the builders who rely on these distributions to fund the construction of their homes might have some problems. Because the FDIC (who now controls IndyMac) has certain protections, they are able get out of these loans if they so choose.

One developer’s concern was captured in The Wall Street Journal: "’I don't know what's going to happen,’ says Raymond Pacini, chief executive of Hearthside Homes, a small builder based in Irvine, Calif., that has two loans totaling $34 million from IndyMac. ‘We are just waiting for the dust to settle.’” According to the same article, a FDIC representative was quoted as saying the FDIC was prepared to do a case-by-case review of the construction loans. So, if you are a developer with an IndyMac loan, you had better cross your fingers and hope for the best. But if I were you, I would start looking for a backup plan just in case.

Another interesting development, which is not necessarily part of a typical FDIC bank seizure, is that the new IndyMac is putting all foreclosures on hold. The FDIC chairman Sheila Bair has been one of the most outspoken parties about how banks should cut borrowers some slack and really try to work things out before proceeding to foreclosure. Now that the FDIC has taken control of one of the biggest mortgage lenders in the country, Bair has a chance to test out some of her ideas and seems ready to do so. They didn’t specify whether or not they were willing to work out deals with investors who have bad loans with them but, chances are, if you were ever going to be able to cut a deal now is the time. The FDIC is actively trying to sell off IndyMac’s assets and it is very likely that the purchasing party will not be as friendly as Bair wants IndyMac to be.

Lastly, it appears that the FDIC is prepared to let depositors withdraw up to 50 percent of their uninsured deposits at this time according to the Wall Street Journal. This is probably a welcome surprise to most depositors, given the circumstances. The FDIC is hoping that the balance of those deposits will be covered eventually, but that is not guaranteed.

Labels: Banks, business, economy

On Friday federal regulators seized IndyMac Bank, making it the third largest bank failure in U.S. history according to the Wall Street Journal. The largest bank failure in U.S. history was the $40 billion failure of Continental Illinois Bank & Trust Co. back in 1984. IndyMac Bank held about $32 billion in assets, and it is estimated that the failure will cost the Federal Deposit Insurance Corp. (FDIC) between $4 and $8 billion, amounting to around 10 percent of the fund’s total reserves according to the Wall Street Journal.

If you were to ask why the bank failed you might get various answers, but here is what a couple key players had to say as reported by the Wall Street Journal:

“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.’”

Schumer responded by saying, “’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,’ Sen. Schumer said. ‘Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.’”

Personally, I prefer the idea that the bank is reaping the rewards of all the dumb loans they made. How can one possibly justify making high LTV loans to people without verifying their income? Do you think people might stretch the truth a bit if they know you aren’t going to double-check their numbers? Duh. If they actually had proof of their income, then they wouldn’t even need to come to IndyMac: They could get a better loan somewhere else.

The question now looms of whether IndyMac is just one more in a line of many banks which are to fail, or if the carnage is done. If the outlooks of banking regulators are any indication, it is worth noting that they are hiring more examiners and prepared to take a tougher line towards risky banks according to the Wall Street Journal.

I don’t believe that IndyMac will be the last bank to fall at the hands of the subprime crisis, but they very well may be the largest. If you start dealing with anything much larger than IndyMac, the government would likely get more involved in fixing problems before it came to this. I said it after the NetBank failure, and I’ll say it again: If you are depositing money in a bank right now, then make sure that it is an FDIC insured account. Not all deposit accounts are FDIC insured, and the insurance only covers the first $100,000 (and $250,000 for retirement accounts). About 10,000 depositors of IndyMac, with deposits of approximately $1 billion, learned that lesson the hard way, and may receive little if anything. If you have more than $100,000 sitting in a smaller bank deposit account, I would suggest transferring the excess over $100,000 to either a very large bank, or several insured accounts at different banks. Really though if you are going to put your money at risk, you might as well invest it in something that will return a little more than deposit accounts do.

Labels: Banks, economy, finance

Safe deposit boxes, kept in bank vaults behind thick layers of steel, are widely believed to be one of the most secure ways to store valuables. However, people should make certain considerations and be aware of certain misconceptions before placing their valuables in a safe deposit box.

One major misconception is that valuables placed in a safe deposit box are covered by FDIC insurance. The FDIC only insures bank deposits in FDIC-insured banks, but safe deposit boxes are not considered to be bank deposits and are not covered. In addition, only banks found to be negligent are legally required to cover losses in the event of damage or theft of a safe deposit box’s contents. Some homeowner insurance policies will cover losses, so check with your insurance provider. Bank robberies and major natural disasters happen more in the movies than they do in real life, so these aren’t huge concerns, but safe deposit box holders should understand the limits of their protection.

An interesting story was published in the BBC today that should be of interest to people who keep their valuables in safe deposit boxes. The story is about a man in India who kept his life’s savings inside a safe deposit box in a bank that developed a termite problem. The bank posted a notice warning customers, but the man did not visit the bank on a regular basis and never saw it. On his next visit to the bank, all he found in his safe deposit box was a pile of termite dust where once there had been money and investment papers. Because the bank posted a notice, and because the safe deposit box itself was not damaged, the bank was not found liable.

The lessons of this story are 1) Make sure you understand exactly what is and is not covered by the bank when you open the safe deposit box, and 2) Make sure you have insurance to protect whatever is not covered by the bank. If you put your entire life savings in one spot, make sure it is 100 percent safe and secure.

Safe deposit boxes have their place. Your valuables are certainly much safer in a safe deposit box than they would be in your home, and many insurance companies will charge lower premiums for coverage of certain valuables if they are held in a safe deposit box. If you are storing investments such as gold or other precious metals, a safe deposit box will probably be your best bet. However, it is important that people understand exactly what they are getting with a safe deposit box, so they do not enter the arrangement with any preconceived notions. If you want to make sure your valuables are protected, ask questions and then get additional insurance if necessary.

Labels: Banks, Gold, investments