IndyMac: Too Big to Fail?
By
Andrew Jeffery
Jul 02, 2008 1:00 pm
Senator questions bank's financial strength, may force Fed to act.
IndyMac?
Spun out of Countrywide (CFC) in the late 1980s, IndyMac is a Southern California thrift and mortgage originator specializing in loans a couple of notches above subprime. Known as “Alt-A,” these mortgages thrived during the credit boom, when verifying a borrower's income was considered due-diligence overkill.
IndyMac aggressively issued these loans, along with billions in option adjustable rate mortgages, or option ARMs, to become the country’s second largest private mortgage lender. Countrywide
Since the mortgage market stumbled last year, however, IndyMac's shares have plummeted. They now sit at just 70 cents per share, down from over $47 in December 2006.
Thanks to Senator Chuck Schumer, the Federal Reserve may need to decide whether IndyMac’s potential demise is too great a risk for the fragile financial system to bear. According to The Wall Street Journal, Schumer sent a letter to banking regulators last week suggesting that they look more closely into the bank’s financial strength - and the potential implications of its collapse.
The letter kicked off a small-scale bank run, with frightened customers yanking $100 million, or 0.5%, out of total deposits.
Yesterday, in a statement to the Securities and Exchange Commission, IndyMac said it hoped the stampede caused by Schumer’s letter would soon subside; branch traffic is already slowing. The bank claims to be working closely with the Federal Deposit and Insurance Corporation (FDIC) to strengthen its balance sheet.
At issue isn't whether another troubled mortgage company will go bust - IndyMac certainly wouldn’t be the first. But Schumer’s involvement is likely to force Chairman Bernanke’s hand, compelling him to determine which firms fall under the shadow of the Fed’s umbrella.
By orchestrating a bailout of Countrywide by Bank of America (BAC), as well as of Bear Stearns by JP Morgan (JPM), the Fed set a dangerous precedent. While there may have been sound arguments for saving these firms to prevent outright financial panic, can the same be said about IndyMac, a bank with a market capitalization of just $70 million?
And what about KeyCorp (KEY), Fifth Third (FITB) or Zions Bancorp (ZION), all of which have recently gone to the rapidly closing financing window?
These are questions regulators must answer, and soon.
Struggling companies -- especially banks -- need to go bust, in order to stimulate healthy new growth. The Fed's propping-up of doomed institutions only forestalls or hampers this process.
The financial system is bloated with firms that should go out of business - and it's time that it went on a diet.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
(12)
Reply
2008-07-02 13:04:12
Insurers
In respect to insurers, they need to keep and save all the cash possible including stop paying dividends, deleverage AGGRESSIVELY from all their risky liabilities specially those CDS-CDO's, RMBS-ABS of uncertain value, in order to remediate their book values, once their book values are sound they need to reinstate their triple A rating again to write new low risk public bond insurance business. They can also open or extend a line of credit to make sure to continue operations and dissipate doubts. This will also prevent further downgrades from rating agencies.
They are already doing these, so it will take some time to deleverage their books from uncertainties and rewrite new business again. This coming back will be the best advertisement to recruit new clients.
They are already doing these, so it will take some time to deleverage their books from uncertainties and rewrite new business again. This coming back will be the best advertisement to recruit new clients.
2008-07-02 13:50:09
Propping up IMB
Hi Eric,
Everything I have heard about IndyMac executives mirrors your comments. IndyMac was innovative throughout the boom in its ability to vertically integrate its business lines and tap the capital markets.
Although IndyMac may not have retained a lot of exposure to the securities it issued, the business in which it operated so profitably during the boom has fundamentally changed. The company issued billions in mortgages that should never have been written. And even though theirs may have been some of the better quality loans, a 100% LTV loan in California issued in 2006 was a disastrous loan, no matter how it was underwritten.
While the company switched product lines - along with the rest of the industry - to conforming paper, there simply is no longer the demand there once was for new mortgages. Alt-A -- its bread and butter -- is all but non-existent, and there is much capacity and resources that need to be worked through -- industrywide, not just at IndyMac.
Banks do need to fail, they must during a credit cycle like this one (and the one back in the 90s after the S&L crisis). Although in the near term its bad for the economy - not to mention employees - its important for the rebuilding process. Excess capacity needs to be shaken out, and new, sleeker businesses will replace ones with outdated models. The originate and sell business model may no longer be viable on a large scale.
I have no doubt Mike Perry and the rest of his team is doing everything they can to survive. What remains to be seen is whether its really in our best interests for the WaMus, Countrywides, IndyMacs, etc to continue to operate. Consolidation is necessary, and will happen, its just a metter of time.
Appreciate the comments, especially from someone with the experience you have as a former employee.
Andrew
Everything I have heard about IndyMac executives mirrors your comments. IndyMac was innovative throughout the boom in its ability to vertically integrate its business lines and tap the capital markets.
Although IndyMac may not have retained a lot of exposure to the securities it issued, the business in which it operated so profitably during the boom has fundamentally changed. The company issued billions in mortgages that should never have been written. And even though theirs may have been some of the better quality loans, a 100% LTV loan in California issued in 2006 was a disastrous loan, no matter how it was underwritten.
While the company switched product lines - along with the rest of the industry - to conforming paper, there simply is no longer the demand there once was for new mortgages. Alt-A -- its bread and butter -- is all but non-existent, and there is much capacity and resources that need to be worked through -- industrywide, not just at IndyMac.
Banks do need to fail, they must during a credit cycle like this one (and the one back in the 90s after the S&L crisis). Although in the near term its bad for the economy - not to mention employees - its important for the rebuilding process. Excess capacity needs to be shaken out, and new, sleeker businesses will replace ones with outdated models. The originate and sell business model may no longer be viable on a large scale.
I have no doubt Mike Perry and the rest of his team is doing everything they can to survive. What remains to be seen is whether its really in our best interests for the WaMus, Countrywides, IndyMacs, etc to continue to operate. Consolidation is necessary, and will happen, its just a metter of time.
Appreciate the comments, especially from someone with the experience you have as a former employee.
Andrew
2008-07-02 14:05:23
Why do most of you want Indymac to fail anyway?
Hi Jude,
I covered my short position .... last August! Talk about being early. I don't want banks to fail so I can make a couple of bucks, rather, for the long term health of the economy weaker firms need to be weeded out. It's what happens in a recession -- its just been a long time since we've had a real one!
Andrew
I covered my short position .... last August! Talk about being early. I don't want banks to fail so I can make a couple of bucks, rather, for the long term health of the economy weaker firms need to be weeded out. It's what happens in a recession -- its just been a long time since we've had a real one!
Andrew
2008-07-02 14:34:10
Propping up IMB
As a former employee of Indymac Bank, I can say that this company did NOT in fact have a large portion of its assets in either subprime or option ARMs. Where they do have exposure is in construction loans, particularly to large builders putting up subdivisions. These capital intensive loans take 2-3 years to go through the cycle of funding to payoff, and since a real estate cycle can change pretty rapidly, such a change happening in the middle of a three-year loan can mean that a builder turns over the keys more often.
The executives for whom I worked at Indymac were brilliant businessmen who are doing their best to balance sound lending practices with being competitive in the market. When the secondary market for jumbo loans disappeared in August 2007, they rapidly shifted focus to be more of a conforming, Fannie/Freddie lender. Their big problem now is that they didn't have a big footprint in that market earlier, so the bigger banks like Wells Fargo, Bank of America (my current employer), Citibank, and Chase are drinking Indymac's milkshake.
For the Fed to consider propping up IMB at this time is not ill-conceived. Letting banks go bust is absolutely terrible for the economy, although it might be good for capitalism in general. IMB is not a doomed institution. With some capital (a la Washington Mutual and Countrywide), an exit strategy from this mess can be implemented.
The executives for whom I worked at Indymac were brilliant businessmen who are doing their best to balance sound lending practices with being competitive in the market. When the secondary market for jumbo loans disappeared in August 2007, they rapidly shifted focus to be more of a conforming, Fannie/Freddie lender. Their big problem now is that they didn't have a big footprint in that market earlier, so the bigger banks like Wells Fargo, Bank of America (my current employer), Citibank, and Chase are drinking Indymac's milkshake.
For the Fed to consider propping up IMB at this time is not ill-conceived. Letting banks go bust is absolutely terrible for the economy, although it might be good for capitalism in general. IMB is not a doomed institution. With some capital (a la Washington Mutual and Countrywide), an exit strategy from this mess can be implemented.
2008-07-02 15:15:32
Why do most of you want Indymac to fail anyway?
The stock is chaep enough for you to cover your short positions and look for another play. You have made enough killing. Save our markets! Jude Orji
2008-07-02 15:22:10
Propping up IMB
Why should the Fed save every bank? Would the Fed save my business when it is ailing? It's funny how these businesses want to privatize the profits and have no regulation but demand to be bailed out when things go bad.
2008-07-02 20:50:40
Propping up IMB
I worked at IMB in the Construction Lending Division as well. However, my thoughts on IMB's particular dilemma differ from Eric's.
IMB, like many lenders, is paying the price for making three basic errors:
1. They made FAR too many loans below prime. Specifically, ALT-A and Subprime. The atmosphere during the boom at IMB can be likened to drunken sailors on a spending spree.
2. They got drunk on their own successes, and then ignored basic lending practices. Not only did they ignore the signals that indicated rates would go back up, they failed to hedge themselves properly for those inevitable increases.
3. Don't be like Dooky and bet everything on one horse. In the last lap of the race, IMB realized its horse blew all its energy on the first lap. You can't change horses halfway through the last lap and expect to win. Hell, you can't even expect to finish. Therefore, their attempts to morph into a conforming, Fannie/Freddie lender are too little, much too late.
For these simple reasons, IMB should not be given Corporate Welfare. As brilliant as some of those people were, they turned-out to make some pretty arrogant and silly business decisions.
P.S. Eric - I enjoyed the annual drink and breakfasts at the conferences. Next year, drinks are on me...
;)
IMB, like many lenders, is paying the price for making three basic errors:
1. They made FAR too many loans below prime. Specifically, ALT-A and Subprime. The atmosphere during the boom at IMB can be likened to drunken sailors on a spending spree.
2. They got drunk on their own successes, and then ignored basic lending practices. Not only did they ignore the signals that indicated rates would go back up, they failed to hedge themselves properly for those inevitable increases.
3. Don't be like Dooky and bet everything on one horse. In the last lap of the race, IMB realized its horse blew all its energy on the first lap. You can't change horses halfway through the last lap and expect to win. Hell, you can't even expect to finish. Therefore, their attempts to morph into a conforming, Fannie/Freddie lender are too little, much too late.
For these simple reasons, IMB should not be given Corporate Welfare. As brilliant as some of those people were, they turned-out to make some pretty arrogant and silly business decisions.
P.S. Eric - I enjoyed the annual drink and breakfasts at the conferences. Next year, drinks are on me...
;)
2008-07-02 22:07:42
Propping up IMB
John Doe -- don't know who you are, but you make some good points. I would say that Indymac did some good things to hedge against market downturns. In Construction Lending, for example, there was a rapid shift away from products that fixed the rate during construction, eliminating interest rate margin compression. What they failed to do, however, was recognize early enough that high LTV/low FICO/stated income loans were extremely risky. The problem is, such loans were part of bank's being competitive. All lenders had the products, but some -- like B of A and Wells -- were more careful not to fill their portfolio with too much of it. Being primarily an alt-A lender, Indymac didn't have the agility to compete with the big boys. They had to carve out a niche, they made fantastic money for years. I really don't know if Wall Street was sending out signals for a measurable period of time that would have suggested pulling back on alt-A. When the market crashed, it crashed hard and it crashed quickly. I went on vacation for six days at the end of July 2007, and when I came back, the industry had changed dramatically. It was hard for a lot of lenders to deal with that shift, hence the failures of the subprime lenders, the near collapse of Thornburgh, and the virtual emasculation of the wholesale business.
2008-07-02 23:30:25
Former Market Intel Mgr for IndyMac here...
I too am a former employee of IndyMac. I was also an employee of BofA, and Countrywide throughout my career.
The comments and posts I read on the net get me a bit anxious to really outline the reasons for the mortgage collapse which I am more than intelligent and experienced to do.
Before everyone became a closet economist and your best friend became a "mortgage expert" rest assured that many people and systems are at fault. As it pertains to IndyMac,
my opinion (note, "my" opinion) is that you have a very smart and saavy businessman at the helm of IMB, the landscape in which they grew was fluid with areas for brokers to fraud the system.
The customers fraud ed their lenders, the FED didn't care if you were licensed to sell loans as many brokers were not, and the customers didn't want to read what they had signed or educate themselves enough to not be in the position many are. Sure, many are fine but the majority are not. Also, more collapse to come due in part to 2/28 arms Q3 '08, and if the guys who listen to our calls had created a centralized system to record all loan documents, we might be able to really blame the right people.
This is dot com part duex. Not every mom and dad can become a dot com stock trader overnight but many did, and not every potential homeowner can become a grand financial decision maker overnight but some tried.
We all failed in this crisis and no one is to blame but us. That means all of us. The Fed, the bank, the broker, the customer, the builder and on.
It will happen again because you can't get our precious economy back in shape without strong real estate and strong job growth.
I might not speak directly about my role in developing new products for IndyMac, but I will say that Mike Perry is a very capable CEO and I will always admire his leadership and no bull behavior as a leader.
BTW, If any bank will survive, I'd bet on IndyMac.
The comments and posts I read on the net get me a bit anxious to really outline the reasons for the mortgage collapse which I am more than intelligent and experienced to do.
Before everyone became a closet economist and your best friend became a "mortgage expert" rest assured that many people and systems are at fault. As it pertains to IndyMac,
my opinion (note, "my" opinion) is that you have a very smart and saavy businessman at the helm of IMB, the landscape in which they grew was fluid with areas for brokers to fraud the system.
The customers fraud ed their lenders, the FED didn't care if you were licensed to sell loans as many brokers were not, and the customers didn't want to read what they had signed or educate themselves enough to not be in the position many are. Sure, many are fine but the majority are not. Also, more collapse to come due in part to 2/28 arms Q3 '08, and if the guys who listen to our calls had created a centralized system to record all loan documents, we might be able to really blame the right people.
This is dot com part duex. Not every mom and dad can become a dot com stock trader overnight but many did, and not every potential homeowner can become a grand financial decision maker overnight but some tried.
We all failed in this crisis and no one is to blame but us. That means all of us. The Fed, the bank, the broker, the customer, the builder and on.
It will happen again because you can't get our precious economy back in shape without strong real estate and strong job growth.
I might not speak directly about my role in developing new products for IndyMac, but I will say that Mike Perry is a very capable CEO and I will always admire his leadership and no bull behavior as a leader.
BTW, If any bank will survive, I'd bet on IndyMac.
2008-07-02 23:59:45
Propping up IMB
While working as a financial advisor prior to my arrival at IMB, I had been fortunate enough to experience the stock market crash. I learned something that has always stuck with me. What goes up, must come down. In addition, what goes down, must come up. Although it is a basic principal, I think it is often overlooked.
I agree IMB went to some lengths to shore-up the dams, it was still FAR too late in the game for it to have any meaningful impact. Besides, these practices should have been in place all along.
As you know, the vast majority of CTP loans were SI, and if you had a "problem" loan, you simply submitted it at the end of the month. It was pretty much a guarantee it would be approved, closed, and funded so that goals were met, or exceeded. We are only talking about the CTP Division here; the same mindset was systemic all through IMB, AND the industry.
I know IMB loved to throw around the term "competitive”, but that word was often used to justify loose lending practices. IMB, like many lenders, wanted its fair share of the fast and easy money. Who is to blame? The banks who gave people the rope, or the eager beavers who willingly climbed on the chair and put their heads in the noose? The borrowers had dreams of jet skis, new cars, and costly additions to homes they could barely afford.
For those of us who work, or have worked, in finance know that the majority of Americans are clueless when it comes to personal finance. Doing the right thing is not always easy, but it IS the most prudent thing to do. My point is that the banks KNOW better. Had IMB been a little more conservative, they may have made a few billion less, but they may not be facing complete meltdown. But hey – run em' up, and shut em' down…
Just a thought...
MC
I agree IMB went to some lengths to shore-up the dams, it was still FAR too late in the game for it to have any meaningful impact. Besides, these practices should have been in place all along.
As you know, the vast majority of CTP loans were SI, and if you had a "problem" loan, you simply submitted it at the end of the month. It was pretty much a guarantee it would be approved, closed, and funded so that goals were met, or exceeded. We are only talking about the CTP Division here; the same mindset was systemic all through IMB, AND the industry.
I know IMB loved to throw around the term "competitive”, but that word was often used to justify loose lending practices. IMB, like many lenders, wanted its fair share of the fast and easy money. Who is to blame? The banks who gave people the rope, or the eager beavers who willingly climbed on the chair and put their heads in the noose? The borrowers had dreams of jet skis, new cars, and costly additions to homes they could barely afford.
For those of us who work, or have worked, in finance know that the majority of Americans are clueless when it comes to personal finance. Doing the right thing is not always easy, but it IS the most prudent thing to do. My point is that the banks KNOW better. Had IMB been a little more conservative, they may have made a few billion less, but they may not be facing complete meltdown. But hey – run em' up, and shut em' down…
Just a thought...
MC
2008-07-03 21:19:23
Propping up IMB
As a mortgage broker placing both purchase and construction loans with IndyMac during the 'good times' I can echo what many have said in this blog. No bank maintained more stringent underwriting than IMB. No bank ever came back with more conditions to satisfy than IMB. When a borrower received final approval for a submission, that loan had been looked at from every single possible angle, upside down and backward. IMB had the best trained, most concientious staff and managers of any bank out there. There were no loose lending policies at IMB. This is a bank that will pull out with flying colors..
2008-07-07 11:55:12
Where did all the impersonators come from?
It seems that over the past ten years or so that our financial institutions have been run not by bankers or real lenders but by a group of brain dead inpersonators. They seem to think that due diligence is something used by sissies and not for macho financial geniuses. Well look who will be paying for thier stipidity and arrogance. As usual the tax payer will put up the billions of dollars needed to clean up after the parade has passed. I believe that capital punishment should be a possible penalty for those who failed to discharge their duties with due diligence and instead performed like a bunch of overpaid fools.
Get real-time options trading ideas from Steve Smith, veteran options trader and newsletter author, plus let him show you the way to cut risk and boost your returns through the strategic use of options. Click here for a free 14 day trial to OptionSmith by Steve Smith.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved
