Response Paper 2: Bank Failures

Please respond in about 500 words to the following prompt. Please double-space your response using 11-point Times New Roman font. Where appropriate, please properly cite courses according to the Chicago Manual of Style author-date convention; sample citations are available at The Chicago Manual of Style Online. Prompt. On July 11, 2008, IndyMac Bank failed.[1] IndyMac was a California bank that had grown into one of the nation's largest mortgage lenders. Even though most money in the bank was protected by the FDIC, the government agency that insures bank deposits, customers formed long lines outside IndyMac locations trying to withdraw their cash. You are a senior examination specialist for the FDIC reporting to then Chairperson Sheila Bair, who has asked you for your assessment on the following aspects ahead of her appearance before the Senate Banking Committee on the matter. In each of your assessments, please carefully defend your reasoning. Chairperson Bair stated that “regulators knew well before July 2008 that IndyMac would probably fail. (Bair) thought that was months away. But when some members of Congress raised questions about the bank's future, it sparked a rush by the bank's larger customers to withdraw their money, causing a cash crunch that sped IndyMac's demise.”[2] What did IndyMac report was the effect on deposits following Senator Charles Shumer’s publicly released letter on IndyMac’s perceived condition? Do you believe this described withdrawal of funds was a bank run? If so, what government safety net was in place to safeguard against a run on deposits, and why did or didn’t it work? Failed bank closures typically occur at 5pm on a Friday, but IndyMac was closed early in the afternoon on Friday, July 11, 2008. Did this early closing have a positive or negative effect to the situation? What method of resolution did the FDIC use to resolve IndyMac’s failure? (Did the FDIC pay off depositors or did the FDIC arrange a purchase and assumption when the FDIC was appointed receiver of IndyMac?) Based on Chairperson Bair’s statements to CNN, why do you think the FDIC elected that method for receivership? Finally, what was the cost to the Deposit Insurance Fund to resolve the IndyMac failure, and how does that compare to other bank failures before or since then?