Sen. Charles E. Schumer, D-N.Y., is defending himself against Bush administration charges that letters he sent to bank regulators spurred a depositors' run on the IndyMac bank, its collapse and seizure by the Federal Deposit Insurance Corporation.
The Pasadena, Calif., bank, which specialized in the riskiest types of mortgages, was seized by the FDIC on Friday. It is the largest regulated thrift institution ever taken over by the FDIC. Estimates of the cost of the federal takeover range from $4 billion to $8 billion.
On June 26, Schumer, a member of the Senate Banking Committee, wrote to four regulatory agencies saying, "I am writing to you out of concern for the safety and soundness risks posed by IndyMac. 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."
As it happened, depositors withdrew $1.3 billion from IndyMac in the 11 business days that followed Schumer's letter, according to the Associated Press.
On Friday, the director of one of the regulatory agencies blamed the bank's failure on the run that followed Schumer's letter. John M. Reich, head of the Office of Thrift Supervision, told the Washington Post that the run frustrated efforts to sell IndyMac by spooking off potential investors.
However, when Schumer wrote to the four agencies, IndyMac had already lost 97 percent of its market value in a year.
Reich told a conference call "when a member of the U.S. Senate makes such a public statement, it doesn't take much to frighten the depositors of an institution. It was an unprecedented act on the senator's part and the result speaks for itself."
At a press conference Sunday, Schumer said "the regulator here was asleep at the switch. The (Bush) administration is doing what they always do, blaming the fire on the person who called 911."
Schumer said his June 26 letter provided "no new revelations" about IndyMac, but merely pointed out problems that had been accumulating for a long time. Schumer is the third-ranking leader of the Democratic majority and is chairman of the Senate Democratic Campaign Committee.
The effect of public statements on bank solvency has been debated for decades. CNBC, the cable financial network, briefly carried a sensational headline on Friday about the federally chartered mortgage backer, Fanny Mae, which is now the subject of a proposed federal bailout. The headline said falsely that Fanny Mae was conducting a "going out of business sale."
Today, the New York Times predicted that up to 150 banks out of 7,500 will fail in the U.S. in the next year to year and a half.
What to you think about the effect of such publicity on the health of these institutions?
--- Douglas Turner
