The more IndyMac Bancorp withered in the last couple of weeks, the angrier I got at Sen. Charles Schumer.
The New York Democrat did what a responsible person should not. He worsened IndyMac’s fragile situation by encouraging savers to pull their money out. Financially speaking, he yelled “Fire!” in a crowded theater.
How so? He wrote a couple of weeks ago that he is “concerned that IndyMac’s financial deterioration poses significant risks to both taxpayers and borrowers and that the regulatory community may not be prepared to take measures that would help prevent the collapse of IndyMac or minimize the damage should such a failure occur.”
Now, I’m not going to argue that he wrote anything inaccurate. What’s more, I’m sure his concern was genuine.
But I will argue that he shouldn’t have said anything publicly. And if he had to say something, he should have used a different tone and more carefully chosen his words. By saying IndyMac’s deterioration poses “significant risks” to borrowers and that regulators may not be prepared to “minimize the damage” from a failure, well, how do you think mom and pop CD-holders read that?
They read that a U.S. senator was telling them IndyMac was in danger of failing and regulators may not be able to handle it. They read they may lose their money.
Not surprisingly, depositors lined up at IndyMac locations after Schumer’s rant and yanked out a reported $100 million. The run worsened IndyMac’s fragile standing.
Of course, it’s not true that savers would necessarily lose any money. So long as they have $100,000 or less in an account or less than $250,000 in a retirement account, savers would see 100 percent of their money returned quickly. But Schumer didn’t bother with many nuances; he was too busy looking around the emergency room to find the bedridden IndyMac so he could deliver his sucker punch.
What’s more, at the time Schumer delivered that punch, IndyMac was on the hunt for new capital – new investors. Here’s a surprise: IndyMac couldn’t find any. Can you think of a reason you wouldn’t want to sink a lot of your money in an enterprise that had just been publicly besmirched by a senior senator?
Unable to raise capital, IndyMac last Monday said it would close offices and lay off more than 3,000 people, more than half its staff. Many of the victims are in Southern California.
No, Schumer probably wrote nothing inaccurate, although what he wrote eventually may prove to be wrong. What I am saying is that he should have kept his mouth shut and worked behind the scenes. If he had to say something publicly, he should have chosen the kinds of words that would not have incited a minor panic.
As usual, bank regulators showed restraint and did keep mum. Asked to comment on Schumer’s letter, a spokesman for the Federal Deposit Insurance Corp. said the agency “does not comment on open and operating institutions.”
Maybe it’s just me, but I read in those words a slight but artful jab at Schumer. The FDIC has a lot of experience with fragile banks. It knows that it shouldn’t spark a run at a bank with ill-chosen words.
Charles Crumpley is editor of the Los Angeles Business Journal. He can be reached at ccrumpley@labusinessjournal.com. This article was originally published in the Los Angeles Business Journal and was reprinted with the author’s permission.