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Official calls bank system secure

However, IndyMac won't be the last to fail, Treasury's Paulson adds. He says overall stability is the priority.

July 21, 2008|Ken Bensinger and E. Scott Reckard | Times Staff Writers

Seeking to reassure a worried public, Treasury Secretary Henry M. Paulson Jr. said Sunday that the U.S. banking system was secure but other bank failures could follow the recent collapse of Pasadena-based IndyMac before the situation stabilized.

Beset by defaults on mortgages and a run on deposits beginning in late June, IndyMac was taken over by federal regulators 10 days ago, marking the second-largest financial institution failure in U.S. history.

Last week, thousands of depositors waited in line at local branches, some for several days, in panicked attempts to withdraw their funds. Many complained of problems with their records and confusions over which deposits were insured and for how much.

On Sunday, Paulson strove to assure consumers that their deposits were safe under Federal Deposit Insurance Corp. guarantees of up to $100,000 per account. "If you have an insured deposit, you're not going to lose a penny," said Paulson, who appeared on CNN's "Late Edition With Wolf Blitzer" and CBS' "Face the Nation."

Several thousand IndyMac depositors, though, apparently had accounts exceeding $100,000, and they may not have been fully insured depending on how the accounts were structured. The FDIC has said it would pay such customers 50% of the value of their uninsured deposits.

IndyMac was the fifth FDIC-insured institution to fail this year, and officials estimate its collapse will cost the FDIC $4 billion to $8 billion. The secretary said that future bank failures were a strong possibility.

"Of course, the list is going to grow longer given the stresses we have in the marketplace, given the housing correction," Paulson saidHe emphasized, though, that he expected only a small percentage of the 8,500 banks in the country to shut down.

Federal regulators keep a list of potentially troubled banks, but the file is not public. As for local institutions, banking sector analysts have expressed concern about Downey Savings, based in Newport Beach, and First Federal Bank of California, based near Playa Vista, because of their high proportions of defaulting and foreclosed loans.

As for the economy as a whole, Paulson pointed to three factors darkening the increasingly dire picture: declining home prices, troubled capital markets and soaring oil prices.

"We're going to be in a period of slow growth for a while. There's no doubt about that," Paulson said. "But our first priority today is the stability of the capital markets, the stability of the system."

The secretary said he expected the administration's plan to aid mortgage guarantors Freddie Mac and Fannie Mae to be approved by Congress.

Fearful about loan defaults, investors have in recent weeks rapidly sold off shares in Freddie Mac and Fannie Mae, which together own or guarantee nearly half of the nation's $12 trillion in mortgage debt.

That led Paulson to step forward with a plan to bolster the companies by significantly increasing their ability to borrow from the government and allowing the Treasury Department to acquire stakes in both.

"We need to make sure that they have access to adequate capital to get through this period and get through this period in a way which is going to help us return to a stable housing market," Paulson said.

Even less clear was the fate of distressed banks such as IndyMac.

IndyMac's downward spiral begun in August, when Wall Street lost interest in buying the home lender's specialty product -- jumbo-sized "alt-A" mortgages made to borrowers who didn't fully document their earnings or assets. With those faltering loans stuck on IndyMac's books, regulators told the institution it would need a bigger cash cushion to offset any extra losses that might ensue.

But with IndyMac losing more than $709 million in the final two quarters of last year, the Office of Thrift Supervision and the FDIC began a complete evaluation of its Icondition in January .

"We were not pleased with what we saw," said Scott M. Polakoff, senior deputy director of the OTS, the Treasury Department agency that serves as chief regulator for S&Ls such as IndyMac.

That led IndyMac to try to scale back, firing thousands of employees and making more traditional loans. But its ratio of nonperforming to healthy assets kept growing, forcing it to set aside huge allowances for losses -- $483 million as of March 31, up from $68 million a year earlier. It lost $184 million in the first quarter of this year.

Regulators were encouraged in the second quarter, when IndyMac reported that other firms had expressed interest in investing in or buying the thrift and were on site to review its books and be briefed on its businesses.

The bank "was clearly distressed," said the OTS' Polakoff. "And they were looking for someone to come forward to help it."

But despite IndyMac's efforts to remain solvent, starting in late June depositors withdrew $1.3 billion in 11 days. Federal regulators began to fear the bank could run out of cash and decided to take it over.

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