July 15, 2008


REVIEW & OUTLOOK


DOW JONES REPRINTS



The $4 Billion Senator
July 15, 2008; Page A18

The federal takeover of IndyMac Bank over the weekend could cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion. But Senator Chuck Schumer, who helped to precipitate the collapse by publicizing a letter to the bank's regulator last month, has no remorse.

He was, he says, just doing his job in telling regulators that the bank "could face a collapse," a prophecy that quickly proved to be self-fulfilling. "It's what legislators are supposed to do," the New York Democrat told the Journal. Depositors who spent Monday trying to recover some of their money might beg to differ.


The Office of Thrift Supervision (OTS), whose job it actually was to regulate IndyMac, took a different view. "The immediate cause of the closing," the OTS wrote in a press release, "was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York." The OTS added: "In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts."

Mr. Schumer now argues that OTS was asleep at the switch, and that blaming him is like blaming "the fire on the guy who called 911." In fact, it's blaming the guy who poured on the gasoline. Very few banks, if any, would remain standing for long in the current tense financial environment after a Senator, in effect, told its depositors to run for the exits. In the 1930s, such tipsters were derided as rumormongers and often faced indictment for encouraging depositors to stampede banks.

Only last week, the Securities and Exchange Commission announced an investigation into the role of rumor-peddlers in the run on Bear Stearns. We somehow doubt that Mr. Schumer will receive similar SEC scrutiny for his very similar role in bringing about a liquidity crisis at IndyMac. But he may be more deserving.

Last week, Mr. Schumer's Senate colleague Chris Dodd took the spotlight to insist that everything was fine, just fine, at Fannie Mae and Freddie Mac. For how that turned out, see here1. In its own way, Mr. Dodd's declaration was as irresponsible as Mr. Schumer's, given that its goal was to protect the companies from greater regulatory scrutiny of the kind long proposed by the Bush Administration.

Of course, it is much easier to talk a bank out of existence, as Mr. Schumer has now done, than to talk Fannie and Freddie into solvency. And no one is pretending that IndyMac was untroubled before Mr. Schumer wrote his letter. The bank had suffered heavy losses in its mortgage portfolio and was openly seeking new private capital to shore up its balance sheet.

But Mr. Schumer was not content merely to share his profound concern with regulators. He also leaked the June 26 letter to the press – which is more like shouting "fire" in a crowded bank than dialing 911.

See all of today's editorials and op-eds, plus video commentary, on Opinion Journal2.


Way to go, Chuck. You sure scored political points against the evil Bush administration. A paragon of virtue. Good man.
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gwb72tii

Whenever you find you are on the side of the majority, it is time to pause and reflect.
Mark Twain [Samuel Langhornne Clemens] (1835-1910)