Lax IndyMac regulation worsened exposure of depositors

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Cheryl Hodgson tells a group of senior citizens in Laguna Woods how IndyMac Bank's collapse cost her $130,000.

Had the Office of Thrift Supervision done its job, the loss of $270 million in deposits when IndyMac collapsed might have been prevented, a federal report says.

By William Heisel

After selling her Orange County home, Cheryl Hodgson parked an escrow check for about $360,000 with IndyMac Bancorp.

Less than a month later, the Pasadena-based thrift was seized by the federal government -- and Hodgson lost $130,000.

"I looked around at the interest rates and saw that IndyMac was offering a really good rate," Hodgson said. "You would think someone at the bank could have explained to me that I was putting in money well above the insurance limit."

Although accounts at the time were insured only up to $100,000, Hodgson ended up recovering $230,000 because the Federal Deposit Insurance Corp. covered half of uninsured deposits.

Still, she was among an estimated 10,000 depositors who lost $270 million in deposits when IndyMac collapsed under the weight of mortgage loan defaults.

These losses might have been prevented had federal regulators done their jobs in overseeing IndyMac, a government report this week determined.

The report from the Treasury Department's inspector general excoriated the Office of Thrift Supervision for ignoring warning signs that IndyMac's loan portfolio was quicksand, costing the Federal Deposit Insurance Corp. $10.7 billion.

The report casts a shadow over both the OTS and its director, John M. Reich, who stepped down Friday.

"John Reich's reign was catastrophic to the OTS, the FDIC and the uninsured depositors in particular," said Richard Newsom, a retired FDIC and California state bank examiner, referring to the failures of IndyMac, Washington Mutual Bank and other institutions. Reich declined to comment for this story. OTS officials said that Reich, after taking office in 2005, increased the number of bank examiners and worked hard to make sure that struggling thrifts recovered their footing and stayed in business.

The Times found that those efforts were too little, too late in the case of IndyMac.

* OTS officials became concerned about IndyMac's strength in early 2007, said Timothy T. Ward, OTS Deputy Director for Examinations, Supervision and Consumer Protection. He said officials moved up a scheduled bank exam for IndyMac, but the review did not begin until January 2008.

* IndyMac's top managers tried to secure OTS approval of another questionable accounting maneuver in the company's final months, according to company e-mails, before persuading the agency to allow it to backdate a capital infusion, a move that is now the subject of a federal investigation.

* The OTS ignored concerns from the FDIC that the bank was using recklessly high interest rates to lure in new deposits to cover its losses, interviews and documents show.

IndyMac prospered during the real estate boom, which fueled demand for its so-called alt-A mortgages, loans that it granted to borrowers with clean credit but with little or no documentation of their income. It would then sell those loans to other banks or investors through bundled securities.

As the real estate market collapsed, however, IndyMac was stuck with loans it couldn't sell.

"The secondary market for mortgage-backed securities had dried up," said Ward.

Ward said the review the agency conducted in January 2008 resulted in a downgrade of IndyMac's status, putting it one step away from being labeled a "troubled institution."

At the same time, the OTS allowed IndyMac to make a major change in its books that kept it from insolvency.

Instead of continuing to carry more than $10 billion in loans that no investors would buy, it moved those loans to its "held for investment" portfolio.

Had it been forced to acknowledge that these loans were never going to be profitable, it would have had to report that its losses were more than six times larger than its operating capital.

more....

http://www.latimes.com/business/la-fi-indy...0,4629972.story

[Jasman0717 9]

Damn I want to sell my condo once the equity comes back and will park the profit in a house in Colorado

Edited March 1, 2009 by jasman0717