By now you’ve heard that IndyMac Bank was taken over by the FDIC. Its pretty much the end for the mortgage provider. But you probably don’t know the whole story. Stick around because this does have an “I am your father” moment.
Way back in 2007 IndyMac found themselves in the middle of a mortgage industry meltdown. They weren’t heavy in sub primes, but weren’t heavy in quality mortgages either. Instead they opted for Alt-A mortgages which are in between. The typical APR is also between sub prime and traditional quality mortgages. Had the credit crunch been limited to sub primes IndyMac would have probably escaped this mess. Instead its harder for anyone without a credit rating of 700+ to get financing anymore. So IndyMac had some trouble.
Here’s what happens during the credit crunch. The bank looks at their portfolio of mortgages, based on perceived risk they have to keep a certain amount of cash on hand to offset potential loss. The credit crisis completely changed the way banks look at risk in mortgages, so the banks had to get more cash stockpiled. Many of the big banks have successfully raised the necessary cash (also referred to as capital) to do this. IndyMac announced their intentions to raise capital as well….. only no one was interested.
The fallout occurred after that. Sen. Charles Schumer, D-N.Y a known critic of the Office of Thrift Supervision (OTS), wrote a publicized letter to the OTS laying out his concerns of IndyMac. Perhaps sparking a self-fulfilling prophecy, a run on the bank occurred. The FDIC took control at that point. The Federal Deposit Insurance Corporation insures all basic deposit accounts up to $100,000, so any folks with less than that at IndyMac are fine. If you had $150,000 in one account, you are looking at getting about $125,000 back, or 50% of what you had over $100,000. I’m sorry, if you’re that dumb, you deserve to lose your money. Naturally the OTS released a statement blaming Schumer for causing the bank run. Thanks government, once again you fight and point fingers while citizens suffer.
So that’s the end of the story. Bank had some bad loans and couldn’t raise capital right? So that means it could happen to any of the banks right? You forgot about the “I am your father” moment didn’t you?
First of all, IndyMac Bank IS NOT A BANK. Its a Savings and Loan which puts it in slightly different regulatory standards than traditional banks. Secondly, is there something in the name IndyMac that sounds familiar? IndyMac, Freddie Mac, Mac is a term for a mortgage holding company. Like Freddie Mac, IndyMac would buy mortgages from other banks, repackage them, and sell on the market as mortgage backed securities. But if we already had Freddie Mac, why do we need IndyMac. Well Freddie will only handle good loans, not the Alt-A and sub prime loans, so IndyMac did.
So we have Freddie Mac for the good loans and IndyMac for the not-so-good loans. During the credit crisis IndyMac started having trouble selling their mortgage backed securities to investors, so they just kept them on their books. Doing so required them to raise more capital, which as I noted earlier was a “Fail”. Why then did they keep buying the bad loans from the mortgage companies? I smell skin cancer and tanning oil…
To see why, we need to go back in time to 1985 when a younger Angelo “Tropicana” Mozillo started Countrywide Mortgage Investment. Yes that’s the same Angelo “Tropicana” Mozillo that was the CEO of Countrywide Financial. When I first discovered this all I could picture was Luke Skywalker in the cloud city finding out Darth Vader was his father, “NOOOOOOOOOOO! Thats impossible!” he screamed with a severed hand. IndyMac was nothing but a dumphouse for Countrywide’s own loans. Mozillo spun off IndyMac in 1997, but the relationships were still there and he was smart enough to put a pawn in charge of IndyMac. Like Star Wars, the story is surprising but just makes perfect sense.
For more than 20 years, IndyMac has been the dump truck for Countrywide’s sketchy practices. If Countrywide goes down for fraud then of course IndyMac will too. Countrywide would fraudulently grant a mortgage, sell it to IndyMac, who would bundle it with other loans and sell to investors. Why has the media not pointed this out? Multiple television broadcasts and news outlets have ignored it. Only after reading Wikipedia and then doing a news search did I discover this. The media prefers to scare you, because you come back for more. They won’t tell you this link exists instead the run BS articles with headlines like “Is Your Bank Next?”. Please. Once again the Orange Face haunts my dreams.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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