Now that the health care bill has been passed into law, many Americans are asking, what’s next? Will it be Immigration Reform? Will it be Cap and Trade in the Senate?
Take a cue from the White House’s recent announcement to use TARP funds to expand the housing aid program, which will also enable some homeowners to refinance their current private-lender mortgages through the Federal Housing Administration (FHA) instead. And if you’ve followed some of my SEIU posts in recent months, you know very well that Financial Reform has been number two on their list.
Just days ago, the Senate Banking Committee approved Senator Chris Dodd’s (D-CT) financial reform proposal, the Restoring American Financial Stability Act of 2010. Behind the scenes, Dodd is said to have been working with House Financial Services Committee Chairman Barney Frank (D-MA) to negotiate a final version of the bill that the House will approve. Just two weeks before it passed the Health Care bill last December, the House passed H.R.4173, the Wall Street Reform and Consumer Protection Act of 2009. While Dodd’s bill is viewed as less stringent than the House bill, both include a controversial stand-alone Consumer Financial Protection Agency (CFPA). If these next several weeks of closed-door negotiations are successful, word on The Hill is that we could see financial reform enacted by Memorial Day.
The proposed legislation, most specifically the CFPA, extends far beyond Wall Street; it will expand government even further and give it unprecedented powers like never before. And with more government power comes the potential for abuse.
Let’s be reminded, for example, of what Senator Chuck Schumer did to one financial institution in 2008.
IndyMac Bank, the Pasadena, California savings and loan and spinoff unit of Countrywide, had become a notable mortgage lender during the housing boom from 2003 to 2007, specializing in
Alt-A credit loans– mortgages just above subprime. But by early 2007, borrower delinquencies set in, as did the sub-prime mortgage crisis, and IndyMac began to also suffer the indirect impacts of the subprime market. The bank became the target of short selling, its debt was downgraded to junk status, its stock prices declined, while housing prices tanked. Granted, IndyMac made some poor decisions with its initial business model and should have been managed differently. But by nature of the free market system, the forces of the declining real estate market and its negative effects on profit and demand were already forcing IndyMac to change its model.
So by November of 2007, the bank changed its direction from the secondary non-agency loan market to that of qualifying government sponsored enterprise originating mortgage loans (i.e. Fannie Mae & Freddie Mac). After barely enduring through its mortgage-related losses and divesting some of its more troubled assets, IndyMac was stabilized but left very short on liquidity. In early 2008, it laid off a quarter of its workforce and began seeking out capital infusion. While its financial struggles were certainly no secret, federal regulators worked with IndyMac over the course of nine months to monitor realignment of the business, and assure the bank remained focused on maintaining the stability of its existing depositors, most of which was FDIC insured. For the latter half of 2008, IndyMac was expected to try and maintain a relatively flat performance line as it continued to realign and search for investors, with the intent of rebuilding capital and the stock’s worth. In the words of the regulators, at that critical juncture, the most important thing IndyMac relied upon for its chance at turning its business around was time.
But on June 26, 2008, Senator Chuck Schumer (D-NY) cut that time short.
That day, Schumer took it upon himself to pen a letter to the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC) and the Federal Home Loan Bank of San Francisco. In the letter, Schumer stated that he was
…”concerned that IndyMac’s financial deterioration poses significant risks to both taxpayers and borrowers… IndyMac could face failure if prescriptive measures are not taken quickly.”
Schumer noted IndyMac’s falling stock price, climbing delinquency rate and recent downgrading by analysts and stated that “a significant move by IndyMac’s depositors to redeem their deposits could leave the firm in a disastrous financial situation.”
And then, in an unprecedented action, Schumer’s staff publicly released the letter on June 27th, providing it to a number of publications, including The Wall Street Journal. The following day, in the Pasadena Star-News, IndyMac’s hometown newspaper, one story headlined: “IndyMac appears close to collapse.”
Chaos ensued.
Over the next several days, customers were lined up outside IndyMac branches in Southern California to withdraw their funds. In a later statement, IndyMac acknowledged that afteSchumer’s letter went public, “we did experience elevated customer inquiries and withdrawals in our branch network…of roughly $100 million.”
IndyMac had already been suffering low stock prices at $1.23 a share on June 24, 2008,. But on June 26, the date of Schumer’s letter, IndyMac closed at $0.80 a share. On July 1, it was down to $0.65 a share, and by July 11, it closed at $0.28. In the 11 days that followed the release of Schumer’s letter, depositors made a run on the bank to withdraw a total of $1.3 billion.
The bank was seized and placed into conservatorship on July 11th, 2008.
Many, including the OTS, blamed IndyMac’s failure on the release of Schumer’s letter, in fact, many still blame Schumer. Others maintain that IndyMac’s state was already evident from its low stock prices, and that Schumer was looking out for the interests of consumers. Regardless of the outcome, the action of publicly releasing a damaging letter of this nature was in itself a clear abuse of any Senator’s power and public responsibility. If Schumer were simply trying to alert the regulators into taking action, it was unnecessary. Regulators were already monitoring IndyMac and had been working with it on solutions to generate capital to avoid a severe liquidity crisis. Schumer was well aware of this. He wrote the letter anyway. And then he publicly released it to the media. That panicked, and in the end, only hurt consumers.
Given the fact that IndyMac’s hopes for turnaround were rooted not in improving its performance short-term, but rather in its courting of buyers and investors, it’s safe to conclude that the chaos triggered by Schumer’s letter all but killed any immediate interest from potential buyers. The ultimate blame lies with Indymac, but other factors interfered to eliminate the potential for different outcomes. Senator Schumer’s letter very surely played a significant role in IndyMac’s eventual fate.
John M. Reich, Director of Office of Thrift Supervision (OTS) responded to Schumer’s action in a July 11, 2008 press release from the OTS,
“This institution failed today due to a liquidity crisis…Although this institution was already in distress, I am troubled by any interference in the regulatory process.”
And the following month, Reich reiterated this position when he provided a lengthy commentary on the incident as he spoke at the American Bankers Association Summer Meeting:
“I can give you a number of recent egregious examples, including the recent failure of IndyMac about which you have already heard plenty. IndyMac had been in a troubled financial situation that was caused, in part, by unprecedented stress in the residential real estate market, combined with the evaporation of the non-agency secondary mortgage market in August of 2007. The OTS had significant concerns with the bank’s funding strategy, had directed appropriate changes and was finalizing a new set of enforcement actions to address its numerous problems. IndyMac was actively seeking to arrange a significant capital infusion or find a buyer. All prospects of rescuing IndyMac disappeared after a June 26 letter to the OTS and the FDIC from Senator Charles Schumer that publicly expressed concerns about IndyMac’s viability and caused depositors to withdraw approximately $1.3 billion from their accounts.
The IndyMac closing led to further speculation about other banks and thrifts that might be in trouble, fueled by widespread media coverage–especially among television stations–about lists of problem banks developed by research firms and analysts. Seemingly oblivious to the fact that they could drive otherwise healthy banks to fail and push troubled institutions away from potential solutions toward ruin, TV reporters staked out banks on these rogue lists, interviewed customers and stoked public fears.
In a time when consumer confidence is already flagging and the general public is skittish and understandably concerned about what their financial futures will hold, this behavior goes beyond irresponsible. It’s reprehensible.
I am an ardent believer in free speech and the First Amendment, but I also know our Supreme Court has ruled that free speech has its limits. You cannot scream “fire!” in a crowded theater. Nor, in my view, should anyone feel free to scream “failure!” in a bank lobby. This, in effect, is what happened across America just last week and it was shameful.”
But Schumer accepted zero responsibility, stating
“Make no mistake about it: IndyMac’s problems were caused by IndyMac’s management and no one else,” Schumer spokesman Brian Fallon said in an email. “The home loan bank system has an obligation to lend responsibly and police its members. But it has not been doing its job. We have found the only way to get the home loan bank system to act appropriately and positively is to make public the concerns we’ve already expressed privately.”
He also added, “Everything that was talked about in our letter was already public. So there were no new revelations in our letter at all.”
Well, that last statement said it all. If the information in the letter was already public, which it was, then why publicize the letter to the news media? And why would a Senator from New York suddenly take so much interest in a bank on the other side of the country?
Yes, there is much more to this story. And yes, there’s a reason we’re revisiting it. But we’re saving that for another day. You’ll just have to stay tuned in the meantime as the Financial Reform debate heats up.