to OTS. John Reich, the OTS head, said that Schumer's letter gave the bank a “heart attack” and “undermined the public confidence essential for a financial institution.” Indeed, an OTS press release said that “the immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to OTS and the FDIC from Senator Charles Schumer of New York.”1
Because of the accelerated timeline, there was no time to carefully prepare for the bank's closing. Within days of Senator Schumer's letter being released, IndyMac was on the verge of running out of money. The week after the Schumer letter, the bank announced plans to reduce its workforce from 7,200 to 3,400, and to close its wholesale and retail new loan divisions. But that didn't stop the hemorrhaging. The bank's stock price, which had been $50 in 2006, fell to just 28 cents on July 11.
We knew IndyMac had to be closed immediately. Without a ready buyer there were only two choices: we could shut the bank down completely or we could take it over and run it ourselves. Both options were (in the polite terminology of economists) suboptimal.
IndyMac was the seventh-largest savings and loan in the country, with over $32 billion in assets. More importantly, it also managed a $184 billion mortgage-servicing operation. Closing the bank could mean disrupting service on all of the bank's mortgages. Customers might not be able to make their monthly payments or pay off their mortgages. Payments wouldn't be sent to the investors who had purchased securities backed by those mortgages. There would be great uncertainty and disruption in the market. The value of those loans would quickly dissipate, and the losses to the FDIC's deposit insurance fund would grow significantly.
There was only one real choice. IndyMac would have to be placed into a conservatorship, which meant closing the bank, then reopening it as a new bank under the ownership and control of the FDIC, until it could be sold back into the private sector. IndyMac would, in other words, have to be nationalized.
I reflected on these developments the evening I arrived in Pasadena. IndyMac would be closed the following afternoon, on Friday, July 11, 2008. It would be the largest single bank the FDIC had ever closed. The following Monday morning it would be reopened as a new bank under FDIC ownership. I would be responsible for managing the newly constituted “bridge” bank.
Sheila Bair and I had discussed the possibility of my running the bank a few days earlier. While bankers with private-sector experience are typically recruited by the FDIC to manage failed banks, we didn't have enough time to find anyone. Moreover, we thought it would be beneficial to have someone running the bank who possessed an understanding of issues related to deposit insurance. There were thousands of uninsured depositors who would be angry when they found out that they were going to lose some of their money as a result of the closing; that anger could spill over into broader public concern about the safety of deposits at other banks; and there were important policy issues surrounding the creation and management of a government-owned bank.
At 9 A.M. on Friday, July 11, about 60 FDIC employees and contractors gathered in a conference room at the Sheraton Pasadena on East Cordova Street, using a fictitious company name, to review our final preparations for the bank closing. As the financial crisis unfolded in the months ahead, most of the people in that room would move from one bank closing to another, staying in one place just long enough to ensure a successful transition of a closed bank to its new owners. In this case, some of the people in the room would remain behind to help me run the bank.
Rick Hoffman was a bank-closing veteran. He had closed hundreds of banks over the course of his career. He reminded the assembled group that this would be a traumatic event for the people who lived and worked in the local community. We had a job to do, but we had to be sensitive to what the bank's employees and their customers would be experiencing.
I told the group that we were at a critical point in time. The public had grown accustomed to a world where banks did not fail, particularly larger banks. This would be a wake-up call that the problems in the financial sector were getting worse. The world would be watching how we handled this situation. We knew the events of that day would be historic, but none of us could have predicted the extent of the financial crisis that would follow.
As I looked around the room, I saw many people whom I had worked with over the years. Most of them had been through the banking and savings-and-loan (S&L) crisis of the 1980s and early 1990s. I could see the confidence in their eyes. Closing banks is an unusual profession, with unique challenges, but they knew what they needed to do.
After the one-hour meeting, several of us drove over to the bank's headquarters on Walnut Street. From the outside it didn't seem as if there were anything special about the bank's six-story building. Everything seemed pretty quiet. We went down to the basement of the building next door, which the bank also leased. Bank examiners from the OTS were already combing through IndyMac records, and doing so in the least desirable space in the building, something examiners are accustomed to when they go on bank examinations. In a couple of hours, we would begin a weekend of nonstop activity, but for now we just grabbed a few chairs, sat, and waited.
Just before 2 P.M., we walked over to the main building and took the elevator to the sixth floor boardroom. IndyMac's senior managers had gathered there to meet with us. The bank's chief executive officer, Michael Perry, was seated at the head of the long board table that filled much of the room. His senior managers were on each side of him. The OTS examiners sat opposite us. Without much explanation they quickly told the assembled group that IndyMac was being closed and the FDIC was taking control. The bank's senior officials knew that this day was coming, but we still could see their stunned looks. It's one thing to know that something traumatic is going to happen; it's quite another when it actually does.
The OTS examiners turned the meeting over to us. We took a little more time and told the group that a new bank, IndyMac Federal Bank, would be established under the FDIC's ownership to continue the bank's operations until it could be sold. We explained how this would impact the bank's operations, what our immediate needs were, and what our plans were going forward. We let them know that most of them still had jobs and that we would need their help in contacting the bank's employees.
Following the one-hour meeting, Rick Hoffman and I walked down the hall with Michael Perry to his corner office. Wall-to-wall windows provided a spectacular view of the San Gabriel Mountains. The desk at one end of the room overlooked a large black conference table with six chairs around it at the other end. A large flat-screen TV covered most of the wall behind that table. Looking around, it was clear to see that Perry already had removed his belongings from the office.
We sat down at the conference table and confirmed to Perry that he would not have a job with the new bank. This was standard practice. We never retained the CEO of a failed bank. Perry understood and offered to provide us help and answer any questions. He asked if he could send one final e-mail to the bank's employees. He read the seven sentences to us. “I gave everything I had to keep IndyMac Bank safe and sound, and preserve as many jobs as possible.” He asked that the employees “work as hard, smart, and courageously for the regulators as you did for me.” It was a very emotional moment for the youthful-looking Perry (described as “baby faced” by the Washington Post), and he had difficultly reading his message to us.
We let Perry send his e-mail to the bank's employees and told him that he would need to speak with the FDIC's investigative staff before he left the building. Having the bank's senior officials speak with the FDIC's investigators also is a standard part of the bank-closing process. The investigation at IndyMac later would determine that there were more than adequate grounds to sue Perry and some of the other senior managers at IndyMac for damages due to their mismanagement. Perry eventually settled with the FDIC by paying $1 million from his own funds, agreeing to be banned from ever working again in the banking industry, and allowing the FDIC to pursue collections of up to $11 million from his liability insurance coverage.
The Treasury Department's inspector general later reviewed the circumstances surrounding the closing of IndyMac. It confirmed that while the deposit run was a contributing factor in the timing of the closing, the underlying cause of the failure was the unsafe and unsound manner in which the bank operated. Indeed, the public disclosure of the letter did not cause IndyMac's problems. The bank was deeply insolvent and was going to be closed.
