Legislation to retroactively extend deposit insurance coverage of $250,000 per account at all banks that failed in 2008 is gaining ground, and could even be folded into the financial reform bill.
The measure is designed to help depositors of IndyMac Bank recover some of the money they lost when the Pasadena, Calif., thrift failed nearly two years ago.
The California lawmakers behind the bill — Reps. Jane Harman, a Democrat, and David Dreier, a Republican — have won the support of both House Financial Services Committee Chairman Barney Frank and the Federal Deposit Insurance Corp.
"It does provide more even treatment of insured deposits," FDIC Chairman Sheila Bair said in an interview. "There's some justification for it."
The $30 billion-asset company was the first large institution to collapse as a result of the crisis. Its failure, in July 2008, came three months before Congress temporarily extended the deposit insurance limit to $250,000 from $100,000 to ease depositor fears. (The higher limit is set to expire at yearend 2013.)
The Harman-Dreier bill, titled the Investor Deposit Yardstick — or InDY Act — would make that increase effective for all banks that were seized by the government after Jan. 1, 2008. In addition to IndyMac, the change would benefit the five other institutions with uninsured deposits that failed before October that year.
As the wave of bank failures has persisted, uninsured customers have routinely been covered by acquirers willing to assume all of a bank's deposits. But in early and mid-2008, when the crisis was just beginning, depositor losses were still somewhat common.
A coalition of former IndyMac customers pushing for coverage of their uninsured claims estimates 8,700 depositors of the failed thrift would benefit from the legislation.
"There were people who deposited money the day before the bank closed, and they were assured that their bank funds were safe," said Lisa Marshall, a flight instructor from Manhattan Beach spearheading the group, called IndyMac Depositors.
"When people sold a home and took all the equity from the home, they said, 'I need somewhere to put this check.' There are people who specifically sold a business and a home … two weeks before, and then all of a sudden their net loss is $127,000."
Including the five other institutions that failed between January and October 2008 at which depositors took losses — ANB Financial in Bentonville, Ark., Columbian Bank and Trust in Topeka, Kan., First Priority Bank in Bradenton, Fla., Hume Bank in Missouri and Silver State Bank in Henderson, Nev. — the bill would provide an estimated $280 million in additional coverage from the Deposit Insurance Fund.
"The bill is about fairness and affording the same protections to those who suffered losses throughout the financial crisis in 2008, not just late in the year," said Jo Maney, a spokeswoman for Dreier, whose district includes IndyMac branches.
Maney said supporters of the legislation, who had attempted to include it in the House version of the regulatory overhaul bill, have not given up on its being added to the final reform package. The conference committee to reconcile the House and Senate versions of regulatory reform is set to begin Thursday.
"They tried once before and they may try again. They're going to keep working on it," Maney said.
A spokesman for Frank, the Massachusetts Democrat who will chair the conference committee, pointed to both the FDIC's support and the fact that institutions in multiple regions would benefit.
"He is supporting it," said Steve Adamske, the Frank spokesman. "There are some other institutions around the country" besides IndyMac, "and the FDIC has also given their blessing to making this change. With the FDIC on board, he feels more comfortable."
But, Adamske added, whether the provision can be "woven into" regulatory reform, "that's an open question."
Industry representatives said it is bank premiums that will have to cover the bill's costs.
"It's basically trying to take money out of one person's pocket to pay for somebody else," said Wayne Abernathy, the executive director of financial institutions policy and regulatory affairs at the American Bankers Association.
"There's a real unfairness in saying, 'I didn't have any coverage, but I want you to treat me as if I did, and I want you to pay me for it,' " Abernathy said. "You certainly feel for people who lost some of their deposits, but they shouldn't have been surprised. They knew what their coverage was."
Indeed, in the case of IndyMac, there were warnings the thrift was about to fail.
Almost a month before IndyMac's collapse, Sen. Charles Schumer, D-N.Y., wrote to regulators worried about its possible collapse. While failures are usually a closely guarded secret, several local newspapers and American Banker said at the time that IndyMac was on the verge of closure.
Some industry observers said the impact of retroactive deposit insurance on the fund — and therefore banks' premiums — would be small.
"In virtually any bank failure, 99% of the deposits are going to be covered anyway. It's a relatively small sliver of deposits that aren't covered," said John Douglas, a partner at Davis Polk & Wardwell and a former FDIC general counsel.
Still, he added, there is a rationale behind having a deposit insurance limit that stays unchanged.
"There at least was some theory at some point that having uninsured depositors would impose some discipline on institutions," he said.
"It does seem a bit funny to go back retroactively and say, 'We were just kidding.'"