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Wednesday, Jun 7, 2023

Stewing about IndyMac: Plenty of Blame to Go Around

In today’s world, you don’t need a lot of ingredients to create a run on a bank with all the resultant lost jobs, concerned depositors and shareholders, and loss of confidence in our system. First, you need a politician to discuss the economy (which he or she may or may not have any knowledge about at all) and mention that a particular financial institution is having problems. Then you add a little media attention to get the ingredients to start churning. Next, interview some former weather anchor who is now called an “experienced financial advisor” to add a little spice to the mixture. Then add some red meat by calling in the FDIC to close the bank. What do you end up with? The perfect financial stew to start a run on the bank. Based on this brew, the media has something to talk about. They announce that billions of dollars of senior citizens’ savings are lost. They proclaim that women and orphans are going to be out on the streets with no assurance that their money is still safe in the banking system. The FDIC allows only a few people at a time to enter the failed bank so that long lines are created. The lines themselves add to the panic, leading even more people to get in line. The media next reminds people of their parents and grandparents suffering through the Great Depression. Even the homeless will get in line to get free coffee and water. It’s the quintessential self-fulfilling prophecy! Now that the stew is starting to boil, why not give customers who have waited in line for hours (and some, overnight) a cashier’s check with the old bank’s name on it? That’s a real confidence builder; a check issued by a government-proclaimed failed financial institution. One might think that an official letter from the FDIC might be included with the cashier’s check, assuring that whoever cashes the check of its full value. Perhaps other financial institutions should be assured that, with proper identification, the cashier’s check would be honored for payment. Of course, there is no such letter from the FDIC and no media coverage to assure people that the checks are good. Now let’s start fermenting the stew by interviewing all the frustrated people and hearing their horror stories of how long they waited in line to get their money. The FDIC should have assured the customers in writing that their money was safe and requested that customers to keep their money on deposit, then when the FDIC sells the bank, the new owner would maintain a higher percentage of the deposits’ value. This would lessen future losses to the banking system. After the above-described IndyMac Bank debacle, with the FDIC realizing the losses will exceed $4 billion with more than $9 billion of deposits being withdrawn, the FDIC now has an excuse to raise the deposit insurance premiums to all the surviving banks which have followed the banking regulator’s caveats. This is just another form of tax increase. One thing the media has forgotten to mention is that the losses from this one bank failure, and the FDIC causing the run on the bank, most likely equals the losses of all the deposits from the failed savings and loans in the ’80s. Maybe even the ’60s, ’70s and ’80s combined. Where were all of our elected officials when this happened? This situation would have given them an opportunity for a lot of free media attention. They could have reached out to the public and announced that the banking system is sound. They could have assured depositors not to worry and that the system will not fail. Maybe they know something we don’t. Now the media has helped cause a run off of more than $9 billion of deposits, could it be possible that when the next bank fails they will have a better system in place? Maybe cashier’s checks drawn on the account of the FDIC? I suggest that they print them now; I have a strange feeling that we will need them soon. This is a brew that really puts me in a stew. Rickey M. Gelb is managing general partner of Gelb Enterprises, a real estate development and property management company.

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