IndyMac Bank was founded as Countrywide Mortgage investment as a means of handling single family mortgage loans too big to be handled by Freddie Mac and Fannie Mae. 

In 2007, IndyMac suffered significant losses, mostly because it was unable to sell mortgages due to the decline in the secondary market.  IndyMac reported that it had nearly $2 billion in non-performing loans, increasing more than 40% from the previous quarter.

The bank’s risk-based capital reserves reported for March 31 dropped within a fraction of the minimum required by regulatory guidelines.  A rating downgrade reduced the value of assets held by InyMac so it could not meet the June 30 requirements.

In June 2008, several letters from Senator Charles Schumer (D-NY), a member of the Senate Banking committee were released, stating his opinion that “The possible collapse of big mortgage lender IndyMac Bancorp Inc. poses significant financial risks to its borrowers and depositors, and regulators may not be ready to intervene to protect them.”

The effect of these letters caused a run on the bank.  In the 11 days following the disclosing of the letters, depositors withdrew $1.3 billion in deposits.  Shares on the New York Stock Exchange went to $0.31 from a 2006 high of $50.  This was compounded by an alleged fraud issue where an $18 million cash injection from its parent company was backdated to seem like the bank met requirements.  The fraud issue is being investigated by the FBI. 

IndyMac is one of the largest bank failures in American history.

The FDIC stepped in, seized the bank and its remaining assets and placed the bank into conservatorship.  Depositors were assured of continuing access through ATMs, existing checks and debit cards, telephone and Internet.

The FDIC sent two of its top officials to run the bank.  Slashing CD rates and expensive management rewards reduced operating costs and high-priced artworks spread throughout the offices were sold.    Attention was then turned to analyze risky mortgages made in California where home prices had fallen sharply.  IndyMac modified the loans of more than 10,000 borrowers to decrease the option of foreclosure and keep people in their homes.

With the turnaround of IndyMac in a relatively short period, the government has shown it can rescue a bank through nationalization and return it to the private sector rapidly.  The IndyMac exercise was costly ($11 billion) and should be used only in certain cases. 

Since early in 2008, the FDIC has seized 41 failed banks, but normally has a buyer lined up before the takeover occurs.  Failed banks are generally closed on Friday and reopen Monday with new owners and a new name.

With the stress testing proceeding at the largest banks in the country, the outcomes could result in more nationalizations.  The IndyMac example is important to the Obama administration as a “how-to” example of how takeovers can work.

A number of prominent Republicans and fiscal conservatives, including former Federal Reserve chair Alan Greenspan have joined those who support nationalization or at least increased control of troubled banks.

Many Americans and economists are against the idea of nationalization as fundamentally against American tradition.  A recent USA Today-Gallup poll found that 57% of Americans are against “temporarily nationalizing U.S. banks,” but when the word “nationalization” is changed to a less threatening version of “taking over” only 44% oppose the concept.

Examining the example of IndyMac against the other three institutions of Freddie Mac, Fannie Mae and AIG, shows IndyMac is the only bank that has been returned to private ownership.  The others seem to be far from privatization.