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Schumer Letter Leads to Collapse of Biggest Thrift Ever

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Troubled IndyMac Bank F.S.B. was shut down today by federal banking regulators. The government said a June 26 letter from Sen. Charles Schumer sparked the crisis that led to the collapse.

The Office of Thrift Supervision issued a press release today stating it has shut down the Pasadena, Calif.-based company and transferred operations to the Federal Deposit Insurance Corporation.

The bank, which OTS said was the biggest thrift under its supervision to ever fail, will reopen Monday as IndyMac Federal Bank FSB under the management of FDIC.

IndyMac was reportedly the second largest financial institution in U.S. history to fail.

OTS said it determined IndyMac would probably be unable to meet continued depositors’ demands in the normal course of business and was therefore in an unsafe and unsound condition.

“The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York,” OTS stated. “The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.”

OTS acknowledged that IndyMac was already hurting. The regulator cited unprecedented stress in the residential real estate market and the evaporation of the non-agency secondary mortgage market in August 2007. It first recognized that the company was in trouble from an examination that began in January.

But OTS noted “an overwhelming majority of problem institutions are able to successfully modify their operations and business plans, work closely with their regulator and eventually return to a healthy condition.”

OTS said IndyMac had a plan in place for recovery, but Schumer’s letter undermined public confidence and robbed it of recovery time.

The agency’s chief had harsh words for Schumer.

“This institution failed today due to a liquidity crisis,” OTS Director John Reich said in the announcement. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”

FDIC reported the bank had assets of $32 billion and deposits of $19 billion, of which around $1 billion were uninsured, as of March 31.

FDIC estimates it will cost between $4 billion and $8 billion to resolve IndyMac’s failure, its fifth this year. The insurance fund added that Southern Pacific Bank was the last California thrift to fail. That was in 2003.

Earlier this week, IndyMac halted conventional mortgage operations and noted it would layoff 3,800 of its 7,200 employees.

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