Troubles at Indymac Bank

Note: This should have zero effect on your CDs at Indymac Bank as long as they are insured by the FDIC. If you have CDs above the FDIC limits, then you may want to consider cashing them out and moving them to a bank that is not having "operating liquidity" issues. (Personally, I would NEVER have CDs without FDIC insurance. There are better options for fixed income without FDIC that I list on page 9 of Kirk Lindstrom's Investment Newsletter.)

Michael Perry, CEO at Indymac Bank, explained in paragraph four of his Monday blog post:

In addition to needing to shrink our assets to improve our capital ratios, we also need to do so to ensure that we maintain prudent operating liquidity. A consequence of falling below well-capitalized is that we are no longer permitted to accept new brokered deposits or renew or roll over existing ones, unless we get a waiver from the FDIC. While we have submitted a waiver application, it is uncertain as to whether such a waiver will be granted.

Translation:

• Losses from making bad loans in the subprime market are so large that they are below FDIC capitalization requirements to issue new CDs that get FDIC insurance!
  

In a May 12, 2008 financial update, Indymac Bank said it was working with investment bankers to raise capital. On Monday, July 7 Indymac announced it has not been successful raising capital at terms good for shareholders. In addition, continued losses in the housing market has caused their capital ratios to decline to the point operating liquidity is threatened. As a result, Indymack has stopped accupting new loan applications and is looking to sell their loan portfolio.

Michael Perry, CEO at Indymac Bank, explained in a blog post Monday their decision. Here is the key paragraph:

... (We) have made the difficult decision, effective July 7, 2008, that we will no longer accept any new loan submissions or rate locks in our retail and wholesale forward mortgage lending channels, except for our servicing retention channel. We plan to honor all of our existing rate-locked loans and will continue to fund these loans in the coming weeks. While the managers and employees in these units have worked incredibly hard, these units are not currently profitable due to the continuing erosion of the housing and mortgage markets. At the same time, these operations take up significant balance sheet capacity and "feed" growth in the servicing asset, an asset we need to shrink given its size relative to our existing capital.

Translation

• Indymac is not accepting new loan applications.
• If you have submitted an application and have a rate lock, then they will fund your loan. (I expect they will look extra hard to see if there were any errors or untruths to allow them to cancel the loan compared to the "old bubble days" when you got loans even if you lied as long as you could fog a mirror with your breath.)
• Since this part of their business is losing money, they will look to sell the loans to a third party rather than try to raise capital that would dilute shareholder value.

This should have zero effect on you if you have CDs at Indymac Bank as long as they are insured by the FDIC and you are not over the FDIC limits.

Indymac Bank has been near the top of our CD Rate Survey as they have tried to raise capital at the retail level rather than from investors who often want better terms since they do not get FDIC insurance. I expect Indymac Bank will lower their rates when they have sold assets and have enough capital to meet reserve requirements.

Remember: This should have zero effect on your CDs at Indymac Bank as long as they are insured by the FDIC. If you have CDs above the FDIC limits, then you may want to consider cashing them out and moving them to a bank that is not having "operating liquidity" issues. (Personally, I would NEVER have CDs without FDIC insurance. There are better options for fixed income without FDIC that I list on page 9 of Kirk Lindstrom's Investment Newsletter.)

Current Indymac Bank CD Rates

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