Tuesday, July 15, 2008


When that sign on the bank says FDIC insured deposits up to $100,000, they aren't kidding.

Federal regulators seized Pasadena-based IndyMac on Friday and reopened the bank Monday under the control of the Federal Deposit Insurance Corporation. Deposits to $100,000 are fully insured by the FDIC.

Worried customers with deposits in excess of insured limits flooded IndyMac Bank branches on Monday, demanding to withdraw as much money as they could or get answers about the fate of their funds.

When it was clear some wouldn't get in before closing, FDIC employees apparently took down names and told them to return Tuesday.

Other customers began lining up at 1:30 a.m. Tuesday, and by dawn, tensions escalated because people on the list were getting priority.

By 8 a.m., about 50 people on the list waited in one line and many more waited in another. Five people were allowed in at a time.

Customers became infuriated, and police told them they could be arrested if they didn't remain calm.

They are allowed to get half now:

At the time of closing, IndyMac Bank, F.S.B. had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors. The FDIC will begin contacting customers with uninsured deposits to arrange an appointment with an FDIC claims agent on Monday. Customers can contact the FDIC for an appointment using the toll-free number above. The FDIC will pay uninsured depositors an advance dividend equal to 50 percent of the uninsured amount.

Based on preliminary analysis, the estimated cost of the resolution to the Deposit Insurance Fund is between $4 and $8 billion.
Mish has much more and points out Netbank went through the same 50% rule last September. There have been in fact others. Used to be, FDIC would brag that no depositor, insured or not, ever lost a dime on a bank closure but FDICIA, an act passed in 1991, changed the rules so that these depositors had to bear some of the risk of the bank's behavior (and require a higher interest rate in turn, which would limit the troubled bank's expansion.) The law forbids helping uninsured depositors if it increases the losses expected by FDIC. (c.f., Furlong and Kwan.) Instead, like other creditors, uninsured deposits take a haircut. Potentially, then, if DIF is going to lose $4-$8 billion, $0.5 billion is being recaptured from those depositors.

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