IndyMac Bank Failure is a Clear Warning

Hard times are on the way as evidenced by the collapse of IndyMac. In what will probably turn out to be the most expensive bank failure ever, troubled mortgage lender IndyMac Bank was taken over by federal regulators on Friday, July 11, 2008.

All operations of the Pasadena, Calif.-based bank, once one of America's largest home lenders, were shut down at 3 p.m. by the Office of Thrift Supervision and transferred to the Federal Deposit Insurance Corp ( FDIC). It is estimated that with the takeover the FDIC will incur costs of up to $8 billion.

"It's possible this will be the most costly bank failure in history, but it's too soon to say," FDIC Chairman Sheila Bair said in a conference call Friday evening. She added that the IndyMac failure could also affect premiums paid by all banks for deposit insurance.

According to FDIC records IndyMac marks the largest bank collapse since 1984, when Continental Illinois Bank, which had $40 billion in assets, failed.

When a FDIC bank shuts down, traditional bank accounts are insured to at least $100,000. Some accounts such as annuities and mutual funds are not insured at all. Individual Retirement Account funds are insured to $250,000. According to the FDIC, 10,000 IndyMac customers could lose as much as $500 million in uninsured deposits.

If you are a large depositor it is a very good idea to spread your deposits over several banks. In addition, it is an excellent idea to hold some important percentage of your assets in gold. No one knows for sure what financial carnage is on the way but you can bet that it likely will not be pleasant.

The fractional reserve banking system that we usually think of as a sound banking and financial system is looking more and more shaky. Regulators never expected a run of black swan events as we are now experiencing. If Fannie Mae and Freddie Mac fail and are taken over by the government the stress that would cause in financial markets would be difficult to control.

Certainly there is a high risk for additional high profile bank failures this year and next. Since the FDIC only has a relatively small amount of funds to cover a huge amount of deposits even with an insured account you can not completely rely on the FDIC to make you whole in the event of widespread bank failures. The FDIC could run out of funding.

Do not assume that the federal government can control events. The dominoes have started falling. Black Swan events that are statistically not supposed to occur in a hundred thousand years are spinning out of control.

We live in an age of financial linkage all across the world so one disasterous event occurring can set off additional black swan events that can cause a financial system meltdown.
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