The Spark

“The emancipation of the working class will only be achieved by the working class itself.” — Karl Marx

Mortgage crisis:
The collapse of a big bank

Jul 14, 2008

Last Friday evening, the federal government seized IndyMac Bank, one of the biggest mortgage lenders in the country. With assets worth 32 billion dollars, IndyMac is the third-largest U.S. bank to fail – the other two having collapsed in the 1980s – and the biggest mortgage lender to go under so far.

IndyMac’s rise and fall reflect the development of what has been called the “housing bubble.” The bank started as a spin-off of Countrywide, which collapsed last spring. IndyMac grew very fast, specializing in so-called Alt-A mortgage loans, which were considered less risky than subprime loans.

But then the bubble started to burst, and IndyMac reported its first annual loss last February. The stock price of the company started to drop, from 45 dollars in early 2007 to less than 7 dollars at the end of 2007, and 28 cents last week.

Then came a panic run on the bank by depositors. On June 26, New York Senator Charles Schumer publicly said that IndyMac was in bad shape. Within less than two weeks, depositors withdrew 1.3 billion dollars from the bank.

The Federal Deposit Insurance Corporation (FDIC) will now run IndyMac until it finds a buyer for it. The endeavor is expected to cost the FDIC between four and eight billion dollars – that is, up to 15% of the FDIC’s entire capital of 53 billion dollars. This fund is meant to cover loss of deposits, but it certainly won’t be enough if there are more runs on big banks – a run on the FDIC itself, in other words – in the near future.

The federal government says it won’t let its own system fail – meaning it will back the FDIC. Fine, but it shouldn’t expect workers to pay for any of it. For years, IndyMac and other banks made easy and huge profits, taking advantage of the housing bubble. Their shareholders and officials pocketed all that money. If their bubble is bursting now, they should face the consequences and pay up – not the families of workers and home owners.