Federal regulators and Bush Administration officials spent the weekend reassuring bank depositors nationwide that their deposits are secure and, as the ads say, insured by the Federal Deposit Insurance Corporation (FDIC).

The public information campaign was launched to quiet fears that were stoked by the failure of California-based IndyMac late Friday. IndyMac, with total assets of $32 billion, became the third largest bank to fail in U.S. history (after the liquidation of Continental Illinois National Bank & Trust Company and American Savings & Loan Association, both in the mid 1980s) and its collapse is expected to cost the bank insurance fund between $4 billion and $8 billion.

Regulators fear that depositors concern about their money will spread to other banks hard-hit by the mortgage crisis. Ironically, while the FDIC maintains a "watch list" of banks in need of close supervision IndyMac did not appear among the 90 names on the current roster.



The FDIC yanked the bank's charter after a run on its assets by bank depositors late in the week. Even as IndyMac moved to shore up its banking business by closing the bulk of its mortgage business and laying off close to one-half of its workforce, in its final 11 days nervous depositors withdrew a total of $1.3 billion.

New York Senator Chuck Schumer caught part of the blame for the bank's collapse. The Senator, in a letter to the Office of Thrift Supervision (OTC) in late June, had raised questions about the solvency of the bank. The director of the office accused Senator Schumer of giving the bank "a heart attack."

Bank deposits are insured by the FDIC up to $100,000 per depositor (not per account), and paying off depositors will consume about 10 percent of the bank insurance fund. This fact may well lead to an investigation as to why, following multiple bank failures in New England in the early 1990s the FDIC saw fit to drastically reduce insurance fund assessments on some of the nation's largest banks. Stockholders of failed banks are not covered by the insurance and generally lose all of their investments.

About $1 billion of the bank's $19 billion in deposits were uninsured. As is typical with bank failures the FDIC has projected the ultimate recovery on the sale or liquidation of the bank's assets and issued the 10,000 partially uninsured depositors an estimate that they would eventually receive $0.50 on the dollar for the remainder of their money. The final recovery could be higher as the FDIC tends to be conservative with these estimates.

The bank went downhill so rapidly there was no time for the FDIC to line up a purchaser so IndyMac, under the name IndyMac Federal Bank, FSB, will be run as a "bridge bank" until a buyer can be found. Long-time FDIC official John Bovenci will serve as executive officer of the new entity.

As in much of the fall-out from the prodigal mortgage lending, many roads seem to lead to Countrywide Mortgage. The company, which is about to be sold to Bank of America, established the bank in 1985 to specialize in jumbo mortgages that could not be sold to Freddie Mac or Fannie Mae. Countrywide and IndyMac severed their ties 12 years later, but IndyMac's CEO Michael Perry is said to remain a prot'g' of Countrywide chief Angelo Mozilo.