A matter of perspective

Posted By Cliff Tuttle | July 14, 2008

Posted by Cliff Tuttle

The FDIC took over IndyMac Bank in California on Friday afternoon and reopened its doors as IndyMac Federal this morning. It was the second or third largest bank failure in history, depending on whose press releases you read. It was the fifth federal take over this year and an FDIC official told NPR over the weekend that there will be others. In this era of deposit insurance, runs on insured institutions make no sense, since deposit funds are protected to the insurance limits and are available to depositors again very quickly.

The Office of Thrift Supervision (OTS) and Senator Charles Schumer of New York traded accusations over who caused the run on IndyMac. OTS blamed Schumer’s public remarks that IndyMac was perilously close to failure. Schumer replied that OTS had mismanaged the regulation of IndyMac, creating the situation.

Of course, they are both right and both wrong. Considering the timing and content of of Schumer’s remarks, wasn’t the run on IndyMac just as forseeable as IndyMac’s ultimate demise? On the other hand, how long could IndyMac have stood until the next ill wind blew it over? Whether we blame Schumer or OTS is a matter of perspective.

It is the mission of OTS and other banking regulators to promote safety and soundness in the financial institutions that they oversee, but regulation has its limits. Home mortgages, properly underwritten, have long been considered among the safest of investments in a world where risk is always present. The state of the residential mortgage market, which IndyMac was a major force in creating, is without precedent. Because OTS examination reports are secret, and rightly so, we the public may not be able to determine when the OTS became concerned about IndyMac’s lending practices and whether its response was appropriate. There are limits to regulation and the OTS was not the board of directors of IndyMac. In any case, it is doubtful that the OTS and its sister federal agencies could have headed off the current home lending crisis. The powers behind that movement were under-regulated mortgage brokers and mortgage bankers who would have effectively put the heavily-regulated state and federal depository institutions out of the mortgage business if they had not found ways to get into the game while regulators watched from the sidelines. Many of these under-regulated newcomers are gone now, leaving the rest of us to clean up.

The all-but-certain assortment of federal bail-outs will bring about another era of heavy regulation, the cost of which will fall upon survivor institutions who mostly didn’t create the problem. Home buyers will also pay a price. It will be harder, for many impossible, to qualify for a home loan. It will be a better environment in one sense and a worse one in another. It is a matter of perspective.

How will all of this affect Pittsburgh? We didn’t have the bubble and the bust. For that we can be thankful. But we are a national banking center. As a region, we aren’t safe but appear to be safer than many others.

CLT

Welcome

CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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