Bank failures evoke memories of IndyMac’s 2008 collapse

The failure of Silicon Valley Bank and New York City-based Signature Bank has likely triggered grim memories among area investors of the July 11, 2008 collapse of IndyMac Bank.

The Pasadena-based mortgage lender’s downfall — the sixth-largest bank failure in U.S. history — had little in common with the recent bank closures. But some investors will still try to connect the dots, according to Michael Imerman, an assistant professor of teaching in finance at the Paul Merage School of Business at UC Irvine.

“When events like these occur, it naturally leads some people to find parallels, no matter how close or far away those parallels are,” he said.

If there is a common thread to be found, Imerman said, it might be the “too many eggs in one basket” syndrome.

Silicon Valley Bank’s demise — deemed the nation’s second largest bank failure with $209 billion in assets — came largely as a result of rising interest rates. As rates rose, the value of the bank’s investment portfolio fell, raising concerns about its solvency and leading depositors to yank their funds. (Associated Press)

Silicon Valley Bank’s demise — deemed the nation’s second-largest bank failure with $209 billion in assets — came largely as a result of rising interest rates. As rates rose, the value of the bank’s investment portfolio fell, raising concerns about its solvency and leading depositors to yank their funds.

The bank, with local branches in Santa Monica and Irvine, received a massive influx of deposits from venture capitalists and startups that were either founded or entering into a high-growth period during the COVID-19 pandemic, according to Imerman.

“The bank put a lot of that money into long-term treasury bonds, which are more sensitive to interest rate risks,” he said. ” They took a loss on the sale of those bonds.”

The bank disclosed a $1.8 billion loss on low-yielding bonds that were purchased before interest rates began to spike last year, prompting a run on the bank’s deposits.

A class action lawsuit has been filed against the parent company of Silicon Valley Bank, its CEO and its chief financial officer, claiming the company didn’t disclose the risks future interest rate hikes would have on its business.

In the case of Signature Bank, its heavy connections with cryptocurrency and the fact that regulators lost faith in the bank’s management spooked investors after Silicon Valley’s collapse over the weekend, prompting depositors to pull their money out.

IndyMac, by contrast, was caught in the crossfire of a protracted downturn in the nation’s housing and mortgage markets. The bank’s failure — with $32 billion in assets, or $40 billion adjusted for inflation — was fueled by plummeting home prices, tightened credit standards, waves of home foreclosures and the subsequent collapse of the subprime mortgage market.

The trustee of IndyMac Bancorp sued the bank’s former CEO and directors of its board, claiming they recklessly mismanaged it even when they had chances to save it from failing.

IndyMac’s collapse occurred amid predatory lending that targeted low-income homebuyers, excessive risk-taking by global financial institutions and the bursting of the U.S. housing bubble.

Mortgage-backed securities tied to real estate, as well as a vast web of derivatives linked to those investments, collapse. Financial institutions worldwide suffered severe damage, culminating with the bankruptcy of Lehman Brothers on Sept. 15, 2008.

Those factors fueled an international banking crisis that ultimately sparked the Great Recession.

“Every banking crisis is always slightly different than the last one,” Imerman said. “But for people who had exposure to Indymac’s failure … it might bring up some traumatic memories.”

IndyMac’s downfall

Less than 5% of IndyMac’s loan portfolio had been comprised of subprime loans, company officials said, but many of the alternative or “Alt-A” loans the bank specialized in defaulted as mortgage rates reset at higher payment levels.

Alt-A loans require little documentation from the borrower, including proof of stated income. The loans also allow for 100% financing of a property.

The initial cause of IndyMac’s slide was a deposit run that began and continued after the public release of a June 26, 2008 letter to federal regulators from Sen. Charles Schumer, D-N.Y.

In his letter, Schumer said he was concerned the bank “may have serious problems with its current loan holdings and could face a failure if prescriptive measures are not taken quickly.”

In the 11 days that followed, depositors withdrew more than $1.3 billion from their IndyMac accounts, according to the Office of Thrift Supervision.

On July 11, 2008, federal regulators assumed control of parent company IndyMac Bancorp Inc. and put the bank under control of the Federal Deposit Insurance Corp.

The Office of Thrift Supervision, IndyMac’s primary regulator, revoked the bank’s charter and named the FDIC conservator of the bank.

It operated as IndyMac Federal Bank FSB until March 19, 2009, when it was bought for $13.6 billion by IMB Holdco, a seven-member investor group led by Steven Mnuchin, who later served as U.S. treasury secretary under President Donald Trump.

It later rose from the ashes as One West Bank and now operates more than 60 retail branches throughout Southern California. OneWest Bank specializes in consumer deposit and lending including personal checking and savings accounts, Money Market accounts, CDs and home loan products.

Are more bank failures coming?

Speaking Monday, March 13, President Joe Biden assured the nation that all depositors at Silicon Valley Bank and Signature Bank would be able to access their money, even if deposits are above the FDIC’s $250,000 limit. The money, he said, will come from a special fund set up by the nation’s banks and from the sale of the banks’ assets — not from taxpayers.

“Americans can rest assured that our banking system is safe,” the president said. “Your deposits are safe. Let me also assure you, we will not stop at this. We’ll do whatever is needed.”

Will more banks topple in the coming weeks?

“Honestly, your guess is as good as mine,” Imerman said. “If you would have asked me last week if Silicon Valley Bank was going to fail, I would have said no. I’d be surprised if we see more.”

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