Sushi Money

Is it possible for a politician to help cause a bank failure?  That would not be good, for the economy or the bank obviously.  More importantly for the bank’s customers.  But it looks like Senator Charles Schumer did just that.  And can the SEC stem the tide of rumors on Wall Street?   Much more than just rumors with the Fannie Mae and Freddie Mac news this week but both companies are receiving full support from U.S. government agencies.

In the locked partisan battles of Washington D.C. the ground rules seem to be ”blame the other guy first.” Like many politicians, Senator Schumer, a Democrat, is known for targeting blame for all kinds of issues with the current Republican administration. 

Apparently with a letter published June 26th, he raised substantial concerns about Indy-Mac bank’s solvency that subsequently led to depositors withdrawing billions of dollars, shutting off liquidity and forcing U.S. government regulators to take over the bank. 

 ”…a letter he sent to the Office of Thrift Supervision and the Federal Deposit Insurance Corp., saying he was “concerned that IndyMac’s financial deterioration poses significant risks to both taxpayers and borrowers.”

Schumer’s decision to go public with those comments triggered a firestorm in Washington. Regulators on July 2 said he was contributing to “rumors and innuendo” about the bank that could hasten its demise.

On Friday, regulators specifically fingered Schumer for IndyMac’s failure. The Office of Thrift Supervision said in its statement announcing the seizure that “the immediate cause of the closing was a deposit run that began and continued” after Schumer went public with his concerns.

“This institution failed due to a liquidity crisis,” OTS Director John Reich said Friday. “Although this institution was already in distress, I am troubled by any interference in the regulatory process,” a reference to Schumer.

 In my view it’s a shame that any politician would make political hay out of economic issues while specifically targeting a banking institution, and forcing a response by both regulators and concerned customers.   If Senator Schumer was really concerned, he might have met with regulators to see what he could do to help. 

Naturally Senator Schumer doesn’t see it that way. 

“The regulator here was asleep at the switch,” Schumer said. “The administration is doing what they always do, blaming the fire on the person who called 9-1-1.”

Really?  It’s a Senator’s job to “call 911″ and say the bank isn’t sound,  and instill such public fear that money is withdrawn to the tune of billions of dollars?   You would think a Senator’s job would be better spent working with regulators instead of making their job harder. 

Instead, Senator Schumer simply pointed fingers, as usual, calling attention to challenges and instilling fear across the nation.  Hmmm… What’s next on the list?   Undermining the U.S. Treasury?  Now that taxpayers will spend between $4 and $8 billion dollars to back up Indy-Mac bank, you’ve got to wonder how a politician could make such a mistake.  Perhaps some politicians are so used to blowing their own horn and blaming the other guy that they forget there are real people behind the fingers they point. 

In some ways it’s like rumor-mongering to find political advantage.  Now wait a minute.  Isn’t that how rumors spread and lead to stock price manipulation?   The SEC just opened up a new investigation into rumors being spread in financial markets. 

SEC Chairman Christopher Cox said the investigation is aimed at “ensuring investors continue to get reliable, accurate information about public companies in the marketplace.”

Cox said the probe will provide an opportunity to make sure brokers and investment advisers have “appropriate training for their employees and sturdy controls in place to prevent intentionally false information from harming investors.”

The probe is separate from SEC’s investigations, already under way, into alleged intentional manipulation of securities prices through “rumor-mongering and abusive short selling,” the agency said in a statement.

Looks like Senator Schumer could use a sit down with Treasury regulators.  But what he did was not just spreading rumors.  Whether accurate or not, he basically told anyone who would listen that Indy-Mac bank was in big trouble and they better get their money out while they could. 

A look at the IndyMac Bank website is a cold reminder about what happens when a bank fails.  Our thoughts are not only with the customers but also the countless employees who worked for the bank.   More specific information for IndyMac Bank closing can be found at the FDIC website.  The bank opens this week with a new name:  IndyMac Federal Bank.

If a bank run is not enough, Fannie Mae and Freddie Mac are both in the hot seat this week. The Federal Reserve and the Treasury have both made supportive statements to calm investors, increasing credit and possibly even buying equity in one or both companies.  The U.S. government will stand behind these mortgage giants, but it’s not a pretty situation.  

Don’t know where we’re going this week, but recent news has changed the short term dramatically.   Regulators are supporting financial institutions, but are still playing catch-up to current market dynamics.  Huge hurdles for the financial services sector ahead and with the DOW falling below 11,000 last week the market has some tough work ahead.

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