Federal Deposit Insurance Corp. (FDIC) officials defended the agency yesterday against charges it has improperly handled the failure of IndyMac Bancorp, stirring concerns among depositors nationwide.


The agency has acknowledged it was not prepared to handle the 1,000-plus customers who lined up outside IndyMac branches early this week, but officials blamed the problem on extensive television coverage, which heightened anxiety last weekend that depositors would not have access to their money.


"Nobody anticipated the kind of media that was going to get played — and frankly in an inflammatory way with some of the networks," FDIC Chairman Sheila Bair said in an interview. "This has been pretty nonstop since Friday. My plea to the media is: get the facts in your reporting."


An agency spokesman said the agency was particularly concerned with CNN reports, among other television broadcasts, that dramatized the failure over the weekend. A spokeswoman for CNN did not comment by deadline.


Local media this week also portrayed an at times chaotic situation at the thrift's 33 branches, where depositors had long waits on several days as they tried to withdraw money. Some customers also reported inaccurate account balances and said they were unable to cash checks drawn on IndyMac at other financial institutions.


Though agency officials acknowledged they were caught off guard Monday, they said the situation is now in hand.


"It was a $30 billion bank closing that was closed on Friday and reopened on Monday with all its systems up and operating," said John Bovenzi, the FDIC's chief operating officer, who on Friday was appointed the chief executive of IndyMac Federal, the new charter for IndyMac Bancorp. "From an operational point of view of getting it up and running, getting insured deposits ready, it was a very effective process."


The institution's failure was unusual for another reason. Though the thrift failed in part due to a bank run, that run continued after the collapse had occurred and IndyMac had been taken over by the FDIC. Some observers said they were unaware that has ever happened before.


"This has got to have caught the FDIC by surprise," said John Douglas, a former FDIC general counsel, now a partner in Paul, Hastings, Janofsky & Walker.


On Monday, the agency was plagued with long lines at several branches. By Tuesday, the agency contracted out to hire an additional 100 tellers, and most of those branches had returned to normal, though at least a few reported trouble through Wednesday. Local media reported that police were called out Tuesday in an effort to keep order at one branch as customers fought with each other over spots in line.


On Thursday, Bovenzi said "the situation is normalized now." The FDIC sent a letter late Thursday to all insured institutions instructing them to honor official checks from IndyMac "to the same extent that your bank honors any other bank's official checks."


"The first day, there were lines at all 33 branches," he said. "By the second day, an orderly system was put in place at all the branches, except the one at Encino still had lines. By the end of the second day, we had put in place a more orderly process there as well."


Observers, however, varied in analyzing the agency's response to the largest failure in more than 20 years.


"Given all their circumstances, I think the FDIC has done an OK job," said state Assemblyman Ted Lieu, a Democrat whose district in the South Bay includes several IndyMac branches. "They certainly could have done better, but this was also just a very large thrift failure … . There were a lot of anxious people, and there were a lot of rumors spawning over the weekend."


Others were more critical. James Barth, a finance professor at Auburn University, said the FDIC has not adequately met the challenge of explaining deposit insurance to everyday bank consumers.


"It's a total lack of coordination and information that's being provided to people," said Barth, a senior fellow at the Milken Institute in Santa Monica, Calif.


He said simply hearing that deposits below the standard $100,000 limit are insured is not helpful to a couple that is concerned about whether their $200,000 in a joint account is also covered, and the agency could do a better job of explaining such details. "It's the FDIC's obligation to clarify news reports on exactly how much is covered," he said. "The FDIC has not done so far a particularly good job of perhaps reassuring people with respect to exactly what is covered."


Bert Ely, an independent banking consultant in Alexandria, Va., said regulators were caught flat-footed. The rapid withdrawals in the days leading up to the failure — sparked, according to the Office of Thrift Supervision, by Sen. Charles Schumer's letters raising concerns about the thrift — forced regulators to act faster than they had anticipated, he said.


"They botched it," Ely said. "First of all, the FDIC and the OTS were very slow to understand how bad the problems were at IndyMac. They still seem to have been unprepared to deal with the situation. In their defense, it may be they were in the process of trying to sell branches and had to go to this bridge bank at the last moment. Nonetheless, they may not have been prepared for all eventualities. … A run could have happened independent of Schumer."


This was tame compared to some local criticism thrown at the agency. Peter Viles, a blogger for the Los Angeles Times' LA Land blog, wrote Wednesday that "on day three of the financial hostage drama otherwise known as IndyMac Federal, someone needs to say it: The government's takeover of IndyMac has been a stunning display of cluelessness and incompetence and has given bank customers every reason to feel anxious and angry."

 

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