Apparently the second largest bank failure in American history was just announced yesterday. IndyMac Bank has been closed by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation (FDIC) was named the Conservator. IndyMac Bank’s assets has been transferred to a new FDIC insured federal entity called IndyMac Federal Bank and the FDIC has control over its operations. This is the fifth bank failure in 2008, but it is by far the largest since IndyMac has over $32 billion in holdings. The FDIC will probably try to get a buyer for IndyMac’s assets while keeping it in operations for a little while. It is estimated that it would cost FDIC $4 to $8 billion to dispose of IndyMac.
So is it time to panic? Well, lets take a look at history. The last time there was a housing bubble was in the late 80s. After that the bubble promptly popped, many many banks failed. According to the FDIC failed banks history there were 127 bank failures in 1991 and the total assets held by these dead banks was around $63 billion. Leading up to 1991 there were 207 failures in 1989, and 169 failures in 1990, but the total assets in those years were only $29.2 billion and $15.7 billion respectively. The horror of those years is now known as the savings and loans crisis. After this crisis, the FDIC significantly raised the insurance premiums on deposits and new banking bills were created that is supposed to stop insolvent banks from operating.
If you adjust for inflation, $63 billion in 1991 is equivalent to around $100 billion today. The five bank failures of this year adds up to more than $34 billion in assets. So I think the worst is yet to come and all of us will experience some pain.  It’s going to get worse before it gets better, but there is very little we can do to stop the insolvent banks from failing at this point. The good news is that the economy recovered the last time around and if you bought an index fund in 1991 and just sat on it you would be quite a bit ahead today. So once again I reiterate, if you are an investor then you shouldn’t panic and just keep your long term investments.
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2 comments ↓
Those with multiple accounts under $100,000 but combined are more that $100,000. are probably screwed. During the S & L mess I had a friend with three accounts each under $100,000 that totaled $230,000. She was reimbursed a total of $100,000. Those at the S & L assured her all the money was insured. There was another S & L across the street. She lobbied Congress to no avail.
IndyMac’s failure is a lesson to everyone that overborrowing - whether it’s for a mortgage, student loan, credit card, or anything - is always bad, and always catches up with you in the end. Overlending, lending to unqualified borrowers, is equally bad and is what killed IndyMac.
Please be safe out there.
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