Limbaugh's Fever Dream: Sen. Schumer Tried To "Destroy" A Bank And "Started" The Financial Crisis

››› ››› TERRY KREPEL

Rush Limbaugh claimed that Sen. Charles Schumer (D-NY) "tr[ied] to destroy" IndyMac Bank and "thereby started a panic that probably started the financial collapse that led to the Great Recession." In fact, investigations have backed up Schumer's claim that IndyMac's deteriorating financial condition was a consequence of lax federal oversight, and federal officials stated that the bank "was already on a course for probable failure" when Schumer expressed his concerns.

Limbaugh: Schumer "Tr[ied] to Destroy" IndyMac

Limbaugh: Schumer "Tr[ied] To Destroy" IndyMac And "Started A Panic That Probably Started The Financial Collapse That Led To The Great Recession." From a segment of Limbaugh's October 4 radio show in which he was reacting to Sen. Dick Durbin's (D-IL) criticism of Bank of America's proposed $5 monthly fee for use of debit cards:

LIMBAUGH: So if you object to this new $5 fee, your real target should be to send Dick Durbin home. Your real target should be Dick Durbin. You live in Illinois? Dick Durbin deserves to be defeated. He's the problem here, not Bank of America or any other bank. Maybe Durbin is competing with Chuck U. Schumer by trying to destroy another bank. Schumer did this, as you'll recall, when he caused a run on the IndyMac Bank in California, and thereby started a panic that probably started the financial collapse that led to the Great Recession. [Premiere Radio Networks, The Rush Limbaugh Show, 10/4/11]

Limbaugh: Schumer "Start[ed] A Run" On IndyMac, Which Was "Was One Of The Things That Led To The 2008 Financial Meltdown." From Limbaugh's October 5 radio show:

LIMBAUGH: So then Durbin goes to the floor of the Senate, and he wants to be the hero. And he wants to tell you these banks are screwing you and they're trying to defy our consumer protection efforts and our wonderful financial regulatory reform bill. And his solution is to actually tell you to leave Bank of America, which could cause a run on that bank. And if you doubt me, check Chuck Schumer and the Indy Bank -- IndyMac Bank out in California. He did start a run on that bank, and that was one of the things that led to the 2008 financial meltdown. That was part of it. [Premiere Radio Networks, The Rush Limbaugh Show, 10/5/11]

Schumer Questioned Regulators' Oversight Of IndyMac

Schumer: "I Am Concerned That ... The Regulatory Community May Not Be Prepared To Take Measures That Would Help Prevent The Collapse Of IndyMac." American Banker reported:

Sen. Charles Schumer is seeking information from federal regulators and the Federal Home Loan Bank of San Francisco on the financial condition of IndyMac Bancorp Inc., saying he is concerned about the agencies' ability to deal with its possible failure.

The Pasadena, Calif., company "may have serious problems with its current loan holdings, and could face a failure if prescriptive measures are not taken quickly," the New York Democrat wrote in letters to the Federal Deposit Insurance Corp., the Office of Thrift Supervision, the Federal Housing Finance Board, and the San Francisco bank.

"I am concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers, and that 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," Sen. Schumer wrote in letters dated June 26.

[...]

Sen. Schumer expressed particular concern about IndyMac's reliance on brokered deposits. He asked the FDIC whether it had ordered IndyMac to reduce its reliance on such liabilities.

The senator cited statistics that said IndyMac's overall deposits doubled between December 2006 and March 2008, with over 64% of that growth coming from brokered deposits. Such deposits make up over 37% of IndyMac's overall deposits, he said. "I am concerned that a significant move by IndyMac's depositors to redeem their deposits could leave the firm in a disastrous financial situation," Sen. Schumer wrote in his letters to the FDIC and OTS.

Regulators of late have conducted much stronger scrutiny of institutions that have increased their reliance on brokered deposits, citing concern that the funding source can be used to make risky loans. Four of the last five failed institutions held significant amounts of brokered funds.

Sen. Schumer specifically asked whether the FDIC had verified that IndyMac's loans meet regulatory guidelines demonstrating borrowers' ability to repay and income documentation.

He also asked the OTS to outline what steps it has taken in response to IndyMac's deteriorating performance.

On Tuesday, Moody's Investors Service Inc. downgraded IndyMac. The agency cited the thrift company's lowering of servicer stability assessment from average to below average as the factor driving the downgrade. [American Banker, 6/27/08, via Nexis]

Regulatory Agency, Schumer Trade Accusations Over IndyMac's Failure

OTS Blamed Schumer For Bank's "Liquidity Crisis," But Also Said Bank Was In "Precarious Financial Condition." From a press release on the Federal Deposit Insurance Corp.'s takeover of IndyMac Bank, issued by the Office of Thrift Supervision (OTS). OTS was a Treasury Department regulatory agency that has since been merged with the Office of the Comptroller of the Currency:

The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors' demands in the normal course of business and is therefore in an unsafe and unsound condition. The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac's viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.

"This institution failed today due to a liquidity crisis," OTS Director John Reich said. "Although this institution was already in distress, I am troubled by any interference in the regulatory process."

IndyMac is the largest OTS-regulated thrift ever to fail and, according to FDIC data, the second largest financial institution to close in U.S. history.

IndyMac had been in a precarious financial situation that was caused, in part, by an 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.

As a result of an OTS examination that began in January 2008, the OTS deemed IndyMac to be in troubled condition. [Office of Thrift Supervision, 7/11/08]

Schumer: Information On IndyMac Was Already Public, Bush Administration "Blam[ed] The Fire On The Person Who Calls 911." From a CNN.com article:

Schumer, a member of the Senate Banking Committee, chairman of Congress' Joint Economic Committee and the third-ranking Democrat in the Senate, rejected any suggestions of responsibility for IndyMac's collapse

"OTS ought to stop pointing false fingers of blame and start doing its job to protect the future of the banking system, so that there won't be other IndyMacs," he said.

Schumer's June 26 letter said he was "concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers."

In a Sunday news conference, he said everything in his letter was already known to the public.

"IndyMac was one of the most poorly run and reckless of all the banks," he said. "It was a spinoff from the old Countrywide, and like Countrywide, it did all kinds of profligate activities that it never should have. Both IndyMac and Countrywide helped cause the housing crisis we're now in."

The embattled Countrywide Financial Corp. was recently purchased by Bank of America.

Schumer argued that the "breadth and depth" of the problems at IndyMac were "apparent for years, and they accelerated in the last six months." But OTS, he said, "was asleep at the switch and allowed things to happen without restraint.

"And now they are doing what the Bush administration always does: Blame the fire on the person who calls 911."

The White House had no immediate response.

Schumer said OTS is "known as a weak regulator," and added, "my job was to try and toughen them up and that's what I tried to do." [CNN.com, 7/13/08]

Treasury Dept. Investigation Found Wrongdoing By OTS In Overseeing IndyMac

Wash. Post: OTS Official Let IndyMac Falsify Financial Report. From a Washington Post article headlined "Regulator Let IndyMac Bank Falsify Report":

A senior federal banking regulator approved a plan by IndyMac Bank to exaggerate its financial health in a May federal filing, allowing the California company to avoid regulatory restrictions only two months before it collapsed, a federal inquiry has found.

The same regulatory agency, the Office of Thrift Supervision, allowed similar legerdemain by other banks, according to a letter sent yesterday to members of Congress by the Treasury Department's inspector general, Eric Thorson. The letter did not provide details about the other incidents.

The finding that OTS on several occasions "blessed a fiction," in the words of one congressional staffer, renews questions about the agency's relationship with the companies it regulates and about its complicity in the collapse this year of several of the nation's largest thrifts, including Washington Mutual and Countrywide Financial. [The Washington Post, 12/23/08]

Wash. Post: OTS Official Was Removed From Job In Wake Of Treasury IG's Letter To Congress. From the Washington Post article:

The regulator named in Thorson's letter, Darrel Dochow, was removed from his position yesterday as director of OTS's west division, which supervised Washington Mutual, Countrywide, IndyMac and Downey Savings and Loan, among other banks that have been seized or sold this year.

It is the second time Dochow has been removed from a position as a senior thrift regulator. He was demoted in the early 1990s after federal investigators found that he had delayed and impeded proper regulation of Charles Keating's failed Lincoln Savings and Loan.

Dochow did not return calls to his office and home. An OTS spokesman also did not return calls. In a letter to the inspector general, OTS director John M. Reich described Dochow's actions as a "relatively small factor in the events leading to the failure of IndyMac." Dochow has been reassigned to work in Washington on "special projects" and as head of human resources, pending completion of the inquiry, according to a memo sent to OTS staff yesterday. [The Washington Post, 12/23/08]

Wash. Post: IndyMac Included Inaccurate Financial Data In Its Earnings Report. From the Washington Post article:

Banks are required to file a report with regulators every three months detailing their financial condition, in addition to the reports filed by all publicly traded companies. IndyMac's initial filing for the first quarter showed that the amount of money it had on hand to cover potential losses was just large enough to meet regulatory requirements. But days after it submitted the filing, IndyMac was told by Ernst & Young that some numbers needed to be adjusted. The changes would drop the company below the capital threshold. Instead of "well capitalized," IndyMac would be categorized as "adequately capitalized," according to Thorson's letter.

Such a downgrade would threaten IndyMac's survival. Thrifts classified as "adequately capitalized" need special permission from regulators to gather deposits through brokers who funnel money from investors around the country. The use of brokers is restricted to healthy institutions because the money is seen as "hot," meaning that investors are quick to move money around, which can destabilize a weak institution.

At the end of March, 36 percent of IndyMac's $18.7 billion deposit base came through brokers, according to the company's regulatory filings.

IndyMac executives, who learned about the problem in early May, wanted permission to inject $18 million into the company's capital cushion. But that would solve the problem only if the bank could pretend the money was injected at the end of March.

Thorson wrote that Dochow gave his permission during a May 9 conference call, and the company submitted the new numbers.

The company's first-quarter earnings report, filed on May 12, includes the same numbers sent to banking regulators, apparently repeating the overstatement of the company's actual capital cushion as of March 31. The filing goes on to describe the company as "well capitalized."

Securities experts said the filing could raise legal issues because it is a crime to knowingly make false statements in the financial records of a public company.

The new numbers also averted an intervention by the Federal Deposit Insurance Corp., which could have acted to limit the eventual cost of IndyMac's failure. The FDIC now estimates the cost at about $8.9 billion. The agency is funded by the banking industry. [The Washington Post, 12/23/08]

Treasury Investigation Contradicted OTS' Account, Said Action Should Have Been Taken Before Schumer Letter

Treasury IG Found Facts Contradicted OTS Account Of Schumer's Impact. From a section of the Treasury inspector general's report on the failure of IndyMac that is titled "Impact of Senator Schumer's Letter on the Thrift":

In an interview, OTS's Deputy Director, Examinations, Supervision and Consumer Protection, stated that IndyMac was a distressed institution with a high probability of failure, but the immediate cause of IndyMac's failure was a liquidity crisis resulting from deposit outflows of $1.55 billion (the deposit outflows occurred following the public release of a June 26, 2008, letter from Senator Charles Schumer). The Senator's letter described problems with the thrift that the regulators needed to be aware of and take actions to correct. The letter suggested the thrift was on the verge of failure.

According to the West Region Director, there were investors who were interested in investing in IndyMac around this time. However, he told us that this interest waned after the Senator's letter was published precipitating depositor withdrawals. The OTS official cited one investment firm in particular that had discussed with IndyMac's CEO the possibility of investing about $1 billion in the thrift. In our review of OTS e-mails related to its supervision of IndyMac, we found a June 18, 2008, e-mail from IndyMac's CEO to the West Region Director, the West Region Assistant Director, and the examiner-in-charge for IndyMac which stated that the investment firm was very impressed with IndyMac's team and was interested in investing in the thrift. The e-mail further stated the firm had completed on-site due diligence with IndyMac's management team regarding the thrift's balance sheet, off-balance sheet, and business model prospects.

This is inconsistent with another e-mail we read from IndyMac's CEO dated May 21, 2008, to OTS's West Region Director, Assistant Director, and examiner-in-charge, that he thought that firms contemplating investing in IndyMac would need assurances from OTS and FDIC about what regulatory actions were being considered and the possible impact on the thrift.

With this information, we interviewed the managing principal of the investment firm to determine the firm's level of interest in investing in IndyMac. The managing principal said that the firm had explored investing in IndyMac, as part of its normal business process, but never reached a point of serious interest. Also, the principal clarified that the firm based its decision not to invest on its own analysis of IndyMac. Contrary to what OTS's West Region Director told us, the principal said that Senator Schumer's letter did not affect the firm's investment decision.

Furthermore, an analysis performed by FDIC identified the liquidity problem at IndyMac months before the letter came to light. Specifically, in a March 2008 liquidity analysis FDIC identified the need for an investment of $2 billion to $3.5 billion to keep the thrift from failing. Another FDIC analysis, prepared in April 2008, showed that IndyMac was at a high risk of being downgraded to "less than well capitalized." In that analysis FDIC described IndyMac's dependence on brokered deposits to pay off FHLB advances and increase liquidity (brokered deposits at that time totaled nearly $6.9 billion). The analysis also noted that while IndyMac had approximately $3.5 billion in its lines of credit with the FHLB and Federal Reserve, it also had $12 billion in certificates of deposits that would mature within 6 months and be subject to withdrawal. [Department of the Treasury's Office of the Inspector General, "SAFETY AND SOUNDNESS: Material Loss Review of IndyMac Bank, FSB," 3/4/09 (emphasis added)]

Treasury IG: IndyMac "Was Already On A Course For Probable Failure" When Schumer's Letter Was Released. From the Treasury inspector general's report on the failure of IndyMac:

When we asked OTS's West Region officials and examiners about their supervisory efforts, they believed their supervision was adequate. We disagree. The West Region Director, as well as the examiners, believed that the collapse of both the real estate market and the secondary market for mortgage backed securities were responsible for the failure of the thrift. OTS regional officials also attributed the failure to a liquidity crisis brought on by a letter from Senator Schumer questioning the financial health of the thrift. While these were factors, we believe IndyMac's business strategy of aggressive growth and high-risk products was fundamentally flawed. Also, the thrift was already on a course for probable failure by the time Senator Schumer's letter was made public. [Department of the Treasury's Office of the Inspector General, "SAFETY AND SOUNDNESS: Material Loss Review of IndyMac Bank, FSB," 3/4/09]

Treasury IG: OTS Should Have Taken Action On IndyMac In May 2008, Before Schumer's Letter Was Released. From the Treasury inspector general's report on the failure of IndyMac:

The purpose of PCA [prompt corrective action] is to resolve the problems of insured depository institutions at the least possible long-term loss to the Deposit Insurance Fund. PCA provides federal banking agencies with the authority to take certain actions when an institution's capital drops to certain levels. PCA also gives regulators flexibility to discipline institutions based on criteria other than capital to help reduce deposit insurance losses caused by unsafe and unsound practices.

As noted above, OTS implemented provisions under PCA through its supervisory directive dated July 1, 2008. This action was taken immediately after OTS issued its ROE on June 30, 2008, concluding IndyMac's capital level had declined from well capitalized to adequately capitalized.

We believe, however, that OTS should have taken PCA in May 2008 based on information in IndyMac's 10-Q filing for the quarter ending March 31, 2008. In that 10-Q, IndyMac reported that its total risk-based capital was 10.26 percent at the end of the quarter, which was above the 10 percent threshold for well capitalized. However, IndyMac included a disclosure that during April 2008, Moody's Investor Service and Standard & Poor's downgraded the thrift's ratings on a significant number of mortgage backed securities including certain of those issued by IndyMac and for which IndyMac retained interest. IndyMac also stated that had the downgraded ratings been applied to the balance sheet as of March 31, 2008, its total risk based capital would have been reduced to 9.27 percent, which is below the 10 percent well capitalized threshold. OTS, therefore, could have used this information to downgrade the thrift to the lower capital level and implemented PCA. [Department of the Treasury's Office of the Inspector General, "SAFETY AND SOUNDNESS: Material Loss Review of IndyMac Bank, FSB," 3/4/09]

SEC, FDIC Later Charged IndyMac Executives With Fraud, Negligence

L.A. Times: SEC Filed Fraud Charges Against IndyMac Execs In February. From a Los Angeles Times article:

The Securities and Exchange Commission has accused former executives of the housing boom's biggest stated-income lender, IndyMac Bancorp, of defrauding investors at the failed Pasadena savings and loan.

The civil lawsuit, filed Friday in federal court in Los Angeles, contends that former Chief Executive Michael W. Perry and former CFOs A. Scott Keys and S. Blair Abernathy misled investors about the crumbling financial condition of IndyMac and its IndyMac Bank operating unit by filing false disclosures with the SEC.

"The three executives regularly received internal reports about IndyMac's deteriorating capital and liquidity positions in 2007 and 2008, but failed to ensure adequate disclosure of that information to investors as IndyMac sold millions of dollars in new stock," the SEC said in a news release.

Through their attorneys, Perry and Keys said they would contest the lawsuit.

Abernathy settled the suit without admitting or denying the allegations. He agreed to pay more than $125,000 and be suspended for two years from doing accountant work that would go before the SEC. [Los Angeles Times, 2/12/11]

L.A. Times: In July, FDIC Charged IndyMac CEO With Negligence. From a Los Angeles Times article:

A Federal Deposit Insurance Corp. lawsuit against former IndyMac Bancorp Chief Executive Michael W. Perry is the agency's second-largest attempt to recover money from bank officials whose approval of risky home loans during the housing boom allegedly caused the institutions to fail.

The negligence suit, filed Wednesday in federal court in Los Angeles, seeks $600 million, a fraction of the $13 billion the deposit-insurance fund lost because of IndyMac Bank's collapse in July 2008. With the FDIC bearing most of the losses, the Pasadena lender that is now owned by hedge-fund billionaires is operating profitably as OneWest Bank.

IndyMac, a publicly traded savings and loan, had been the nation's largest supplier of stated-income mortgages, also known as "liar loans," which allowed borrowers to qualify with little or no documentation of their ability to repay.

Perry's lawyers denied that he had any liability. In a statement, they said the FDIC officials are trying to deflect blame from themselves for failing to address the looming financial crisis before it was too late.

"Perry was a prudent, effective CEO who led IndyMac in good faith," said attorney Jean Veta of Washington, D.C. "His sound business judgment is confirmed by the fact that the federal banking regulators consistently praised Mr. Perry's leadership of IndyMac during the very same time period at issue in the new meritless lawsuit." [Los Angeles Times, 7/8/11]

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