Los Angeles Times
Regulators to Schumer on IndyMac: Please shut up
5:47 PM, July 2, 2008
Sen. Charles E. Schumer publicly taunted bank regulators last week about IndyMac Bancorp's financial condition, which helped trigger a sudden outflow of deposits from the Pasadena thrift. Now the New York Democrat is getting some harsh blowback from one current and one former regulator.
Their message, distilled: Zip it, Chuck.
As noted here on Monday, Schumer sent letters to the Office of Thrift Supervision, the Federal Deposit Insurance Corp. and the Federal Home Loan Bank of San Francisco, saying he was "concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers."
Schumercharles IndyMac, which has suffered huge losses on defaulted mortgage loans, "could face a failure if prescriptive measures are not taken quickly," Schumer wrote.
Uh, wait a minute -- how could Schumer know that? And since when are regulators supposed to tell the public in advance that a particular institution has been earmarked for possible failure? All that would do is guarantee a collapse. If depositors are within FDIC insurance limits they have nothing to worry about, anyway.
That pretty much sums up the content of a letter to Schumer today from John M. Reich, director of the Office of Thrift Supervision.
"As a regulator of insured depository institutions, we do not publicly comment on the financial condition or supervisory activities related to open and operating institutions," Reich wrote. "We believe it is critically important to maintain the confidentiality of examination and supervision information."
He went on: "Dissemination of incomplete or erroneous information can erode public confidence, mislead depositors and investors, and cause unintended consequences, including depositor runs and panic stock trades. Rumors and innuendo cause damage to financial institutions that might not occur otherwise and these concerns drive our strict policy of privacy."
John D. Hawke, the U.S. comptroller of the currency (regulator of national banks) from 1998 to 2004, had more pointed words for Schumer in a story in the American Banker newspaper today.
"If Schumer continues to go public with letters raising questions about the condition of individual institutions, he will cause havoc in the banking system," Hawke said.
"Leaking his IndyMac letter to the press was reckless and grossly irresponsible. I don't see how he can be trusted with confidential information in the future. What this incredibly stupid conduct does is put at risk the willingness of regulators to share any information with the [congressional] oversight committees. After this, you'd be crazy to share information with Schumer."
The senator's office didn't respond to a request for comment today. On Monday, Schumer aide Brian Fallon offered this explanation for Schumer's action: "The home loan bank system has an obligation to lend responsibly and police its members. But it has not been doing its job. We have found the only way to get the home loan bank system to act appropriately and positively is to make public the concerns we've already expressed privately."
If that's Schumer's policy on the U.S. financial system's troubles overall, it's going to be a long, hot summer.
http://www.typepad.com/t/trackback/816965/30826560
I am an agent who, during the banking crisis of 1988 - 1992, investigated many, many failed banks. I also frequently run cases that are the subject of Congressional scrutiny.
From my vantage point, Schumer was way out of line in making his comments public. It was his chocie whether his letters to OTS and FDIC were made public; he did it on purpose - just to get more attention. He could have sent it privately but he chose not to. An irresponsible "look at me" exercise.
Members of the House and Senate get briefed on classified and otherwise confidential matters all the time. Unfortunately, I've never met a Member that didn't have an agenda, so these leaks happen all the time. Conduct like that displayed by Senator Schumer is why there is now a rule that says matters currently being investigated criminally are exempt from Congressional oversight.
Frankly, he should be censured or sued.
Jennifer, while you have a very valid point about the pain that is inflicted when a bank is closed, I'm afraid you missed what is really happening during the probationary period - the regulators and the bank are trying to work out a resolution that avoids the bank failing. These efforts are often successful and, when they are, they manage to avoid inflicting the pain on the public, the employees and the DIF. Some examples of resolutions which avoid pain are bringing in a new management, having another institution merge with the troubled bank or outright assumption by a healthy institution. So there is a reason they don't slam the door shut at the first whiff of a CAMEL 5 rating.
Bank Exec was right - confidentiality in banking regulating is vital. If banks can't speak freely with regulators for fear of Senators making these kinds of irresponsible statements, banks will stop talking to regulators - period. Then no one is going to know what's happening and the banking system will be in more jeopardy than it is today.
Indy may or may not be a troubled institution (even if I knew, I wouldn't say so publicly). But it is appropriate for all depositors and investors to know their banks - just as the banking industry is constantly reminded to "know their customers." So do your own research. If your bank's stock is crashing, and the loan loss reserves look inadequate, and they suddenly start offering CDs with seemingly outrageous rates of interest, use your best judgement.
Be safe...
Posted by: TheBankDick | July 04, 2008 at 11:18 AM
First, it is my understanding that Sen. Schumer had brought the matter of IMB to regulators' attention privately, but did not receive any feedback and, thusly, made it a specific point to go public with the express intent of putting pressure on the agencies, who he considered were being lax in their duties and responsibilities.
With respect to comments of 'TheBankDick', I find it contradictory, and hypocritical, that he would find Schumer's public release of his letter so 'irresponsible', yet mention that Congressmen all have an agenda and "these leaks happen all the time." When, BankDick, have you last called for a "leaking" Congressman to be "censured or sued"? And, pray tell, on what grounds would Schumer be sued and by whom? Also, BankDick states that the type of conduct displayed by Schumer precipitated a rule exempting Congressional oversight of matters that are being criminally investigated. BankDick, what specific case triggered the rule and is IMB being criminally investigated? Additionally, has the Senate Banking Committee ever recommended such an investigation of a bank to the DOJ? If so, what is their authority for doing so? Further, is IMB on some sort of "PROBATIONARY" status? If so, when did this occur and what is the source of your information? Regarding a CAMEL 5 rating and "slamming the door shut"...since there is no CAMEL 6 rating, what IS the criteria for "slamming the door shut"? BankDick goes on to say, "If banks can't speak freely with regulators for fear of Senators making these kinds of irresponsible statements, banks will stop talking to regulators - period." Is this meant to be a joke? Since when do banks have the option of answering regulators questions "freely" as to the banks solvency? For someone claiming to be a bank examiner of some kind...this is utter fol de rol, nonsense of the first rank. And, to suggest that the average depositor preempt the regulatory agencies functions by "knowing their banks", and satisfying the depositor's requirements of the bank's loan loss reserves is beyond ludicrous. Frankly, I'm embarrassed for BankDick..who should have signed his phony didactical piece, PiggyBankDick.
Posted by: martscan | July 06, 2008 at 01:07 AM
Regulation Man:
I don't know where it has been written that Senator Schumer's letter to the regulatory agencies was meant to be a service to IMB's customers. I'd like to see your source for this. IMB's customers and stockholders were already screwed before Schumer's letter.
a) It is my sense that Senator Schumer wrote the letters, and made them public, because of his LACK of confidence in the agencies.
b) To what other "highly classified material" are you referring? Aren't you speculating?
c) Contrary to your assertion that the FDIC is "very circumscribed" as a result of bank failures wrought by the Depression, the fact of the matter is just the opposite. The FDIC strives to be highly transparent for the public's benefit. Just ask them. Your statement, "This allows banks to trust the FDIC with sensitive information...", is patently ridiculous on the face of it. Are you telling people that banks can arbitrarily withhold information, say, a little financial statement, from the FDIC? Banks DO NOT have any options when it comes to providing ANY financial information requested of them by a regulatory agency under whose authority they answer to. PERIOD. OUGHT. ZING. ZERO. S**T!!
Regarding your claim that a woefully uninformed person, who I take to be me, erroneously stated something to do with interest not being insured... Take a lesson. I said I bought CDs less than $100K because interest plus principal in excess of $100K is NOT covered. Your scenario of mom, dad and the 2 kids apparently fails to take that fact into consideration as you maxed out the account combinations, and accrued interest on your $1.2M accounts would NOT be covered. Really, not too smart.
d) Woeful conspiracy hogwash.
Reggie, you can't convince me you're not the type that doesn't think there are boogiemen under your bed...if there are any, they should be ethically and criminally investigated.
Posted by: martscan | July 06, 2008 at 02:08 AM
To Martscan:
You missed the point.
Confidentiality and full disclosure to regulators allows the regulators to assist troubled institutions resolve their capital and liquidity problems without having to close them down. Usually thisd is done by getting another instutuion to assume some or all of the failing institution. Such negotiations occur under intense secrecy to prevent a run.
Schumer, whose legendary hubris is surpassed only by the national debt itself, just had to make another press release showing how important he was, "looking out for the people" and triggered a $1 billion + run on IndyMac by making the confidential information public. A $1 billion shift in the metrics like that kills rescue deals and, by midweek, no longer was a suitable merger was possible. Hence, he caused the closure.
So who should sue Schumer? How about the depositors who had in excess of $100,000 in deposits; there are about 10,000 of them (according to media reports). Their total loss wil be some part of $500 million (to be determined in the months and years to come - it takes that long to liquidate an institution and distribute assets).
How about the DIF? Rather than selling part or all of IndyMac back into industry, the FDIC had to go in and close it. The impact on the $53 billion DIF? Estimated to be something on the order of $5 billion (give or take a billion) - or about one tenth of the DIF funds available. And we have a lot more banks to close coming up.
Unfortunately, senators get some sort of immunity from suits for actions taken while in office, so a lawsuit actually wouldn't go forward. Pity. In one moment of poor judgement, Schumer cost thousands of employees their jobs, thousands of depositors millions of their dollars, and the DIF approximately one tenth of its reserves.
And you think the Senate's ethics panel shouldn't censure him? In China, they'd execute him for what he did.
So let's review the facts: there was no report that IndyMac was under criminal investigation, so Congress could inquire as to its condition. Under conditions of confidentiality, Schumer was briefed. When he didn't see enough activity in the media, he put it there. That started the run, which collapsed any chance for a resolution, which forced the bank's closure.
Thanks, Chuck. At least you could publicly apologize to all those you hurt...
Posted by: TheBankDick | July 12, 2008 at 08:21 AM
I just learned on the news this morning about IndyMacs takeover by the feds.
I voted for Senator Schumer in past elections and I have my current mortgage with IMB....well had. This whole thing has me wanting to start a campaign to flood this guy's office with phone calls, letters, etc expressing my extreme displeasure with his actions.
Granted, Jennifer makes some relevant points in her post. However, the bottom line is that there are protocols for this type of information to be shared and he didn't follow them. If this happened with every institution that may be having trouble, think of the outcome....We all might as well go out now and buy fireproofed mattresses.
I'm really shocked by what I feel are his reckless actions that have not only added to the current panic of the economic state of this country, but has also directly impacted others who were dependent on IMB to survive.
I hope this isn't any posturing on his part for a cabinet or other higher level position within the potentially new administration.
In the meantime, I'm trying to find out what this means for me as an individual being a NYer with an IMB backed mortgage.
Schumer, if I could have my vote back, I'd definitely take it back from you.
Posted by: IndyMacMikeNYC | July 12, 2008 at 10:04 AM
Good news for democrats=bad news for the US.
If you haven't figured this out:
the democrats WANT economic calamity, as the economy is percieved as one of the key strenghts of the democratic party.
caveat:
63% americans believe weare in a recession...we aren't.
56% of americans believed Saddam Hussien had something to do with 9/11...he didn't.
just as the WH slow walked us into Iraq, the democrats are slow walking us into an econmic crisis. We aren't there yet, and the more we do now, the less the impact later. unfortunately, the democrats LOVE where we are now, and will do nothing to help, and everything to hurt.
If you fell things are bad now, what plan of action have the democrats offerred. Not the punishing of indivuduals, the actual means of getting out of the impending mess.
Posted by: paul | July 12, 2008 at 11:07 AM
BankDick:
I get the point, loud and clear.
Rather than address the remarks I made in the first sentence of my critique of your prior comments, to wit: "First, it is my understanding that Sen. Schumer HAD brought the matter of IMB to regulators' attention PRIVATELY, but did not receive any feedback and, thusly, made it a point to go public with the express intent.........", you utterly ignore them and assume a didactic position by lecturing me on confidentiality and disclosure to regulators (I presume by banks). Could you not agree that my prior first sentence obviously evidenced my cognizance of exactly what you mention in your "point" rebuttal?
You go on to sarcastically describe Schumer's hubris as being of the stature of the national debt. Can we agree that you have been 'anti-Schumer', for lack of a better term, long before this flap? By extension, is it fair to presume, Mr. BankDick, that you are a Republican?
Are you aware of the price of IMB stock in the month prior to Schumer's revelations? In the 3 months prior? In the 6 months prior? Are you aware of ANY negative press concerning the financial state of IMB prior to Schumer's revelations? Would you agree, Mr. BankDick, that it is fair to suppose that most IMB depositors having in excess of $100K in the bank were aware of IMB's press coverage in the month before Schumer's revelations? You would agree, wouldn't you, that most stockholders of IMB were certainly aware of IMB's stock price in the month, the 3 months and 6 months prior to Schumer's revelations? Wouldn't it be fair to say, Mr. BankDick, that any reasonable person could safely assume that most depositors and stockholders of IMB were aware of IMB's deteriorating financial condition prior to Schumer's revelations? I'll take this answer as an unqualified 'yes'. Given all these conditions, isn't it fair to say that IMB was headed for insolvency and if, indeed, that is the case, isn't it fair to say that, barring the bank's successful attempt to rid their $500M+ portfolio of inferior quality Alt-A loans which they had been aggressively shopping with no takers in sight, and other attempts to shrink their balance sheet and meet mandated reserve ratios, that it was only a matter of time before the bank would be in receivership? You know perfectly well the answer to this question is a resounding YES! Ergo, did Schumer CAUSE the closure? NO. Did Schumer's actions speed the process? YES. As I have said, Schumer's only indiscretion was that he did not act SOONER. Had he brought public pressure, rightful humiliation in my view, on the reg agencies a year earlier, when IMB was in a better position, along with the industry, to peddle their junk...the bank could have been saved.
Mr. BankDick, please, stop with the law suit talk, its not only ludicrous on the face of it but it would have not get past the court house front door. A class action lawsuit brought by disgruntled depositors savvy enough to accumulate in excess of $100K, $200K in joint accounts, because the excess of $100K is not covered by the FDIC in a bank that the depositors knew for months was falling apart, against a United States Senator that did nothing but make the facts of the bank's financial condition known to the public...his employers, so to speak. Excuse me, I'm taking a laughing break.
And how about the DIF? Are you telling me an entity organized to perform a certain function is not allowed to perform that function under pain of mortal sin? So the DIF is out $5B, that is exactly why it was formed, isn't it? Yes or no, Mr. BankDick? Now member banks will get a dues assessment to bring it up to $53B...they should think ahead and raise it to $100B, they're going to need it.
Mr. BankDick, YOU don't seem to get the point. If any public official is culpable of misfeasance here it certainly is NOT a U.S. Senator..it is that, those, official(s) WITH THE EXPRESS RESPONSIBILITY OF REGULATING FINANCIAL INSTITUTIONS TO THE EXTENT THAT THE PUBLIC'S MONEY IS PROTECTED. The banking regulatory agencies DID NOT do this. What is so difficult to understand?
Mr. BankDick, on an emotional note, that you would allude to the execution of Sen. Schumer, however remote the simile, metaphor or comparison, I find reprehensible, disgusting, spiteful and indicative of your totally blind, authoritarian partisanship and contrary to everything which our country aspires to stand for. As an American, I am deeply offended by your remarks.
Posted by: martscan | July 15, 2008 at 11:15 PM
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