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IndyMac Collapse Prompts Warning On Other Banks


It's MORNING EDITION from NPR News. I'm Steve Inskeep.


And I'm Deborah Amos.

When bank customers lined up at California's Indymac Bank this week, we were reminded that bank failure is on the rise this year - five so far, and more are expected. Analysts warn other banks are also struggling because of unpaid home loans and a sluggish economy. But the bank losses are a much bigger problem for investors than depositors whose money is typically insured by the federal government.

NPR's Scott Horsley reports.

SCOTT HORSLEY: Having your money insured isn't the same as having your money in hand, as frustrated Indymac customers have been learning this week. Customers lined up outside Indymac branches in Southern California yesterday for a second straight day after the federal government took over the bank late Friday. As tempers grew short outside a branch in the San Fernando Valley, police arrived to keep order.

And some of the customers spoke to KTLA television about the delay in getting their money out.

(Soundbite of KTLA News Broadcast)

Unidentified Woman #1: That's nonsense. There are people here who need money to pay their bills. I mean, there's one guy that's been here since 11:30 last night. I've been here since 5:30 this morning. This is badly managed.

Unidentified Woman #2: We were standing here yesterday for five hours, and he said go home. You're not going to get in. I was standing - I was in five hours, and I was almost right here on the line.

HORSLEY: The lines outside Indymac are the exception, though. Depositors elsewhere have been leaving their money alone for the most part. And Morningstar analyst Jaime Peters says that's a good thing, since a sudden rush to withdraw money can rattle even the soundest financial institution.

Ms. JAIME PETERS (Analyst, Morningstar): Right now banking is all about the confidence factor. And if you start creating rumors that aren't necessarily true, they can become true at this point if you have enough people who believe them.

HORSLEY: It was the sudden exodus of depositors that help sink Indymac last week, the third biggest bank failure in U.S. history. Frederick Cannon, who follows the industry for Keefe, Bruyette and Woods, says Indymac had a couple of strikes against it. Not only did the bank make a lot of risky home loans to people who couldn't document their income and now can't pay, but Indymac also had a fairly fickle base of depositors, since it offered few branches or other services to build loyalty.

That made the company less attractive as a takeover target once it got in trouble. And Cannon says it makes Indymac's multi-billion-dollar collapse something of a special case.

Mr. FREDERICK CANNON (Keefe, Bruyette and Woods): That doesn't mean we don't think there'll be a significant number of bank failures on an ongoing basis. But it's important for people to recognize there's 8,000 banks in the U.S., and most people haven't heard of 7,950 of those banks.

HORSLEY: Cannon says future failures are likely to occur at smaller banks, especially in those parts of the country where home prices are falling or jobs are drying up.

Mr. CANNON: It'll be in the regions that are hard hit by this downturn. I mean, as opposed to the 1980s, when we saw a massive number of failures in Texas, we think Texas will actually do pretty well this time, partly because of high oil prices. But we do expect some pain here in California, Arizona, Nevada, Florida, and then in some areas in the Midwest, such as Michigan, that are just facing tough economic times.

HORSLEY: Regulators say they're keeping a close eye on dozens of troubled banks, but they stress the scope of the problem is much smaller than during the savings and loan crisis two decades ago, and that depositors will be protected. Not so investors, who've seen the price of bank stocks tumble sharply. Morningstar's Peters says banks have begun setting aside more money as a cushion against bad loans, and that's cutting into their bottom lines.

Ms. PETERS: Banks tend to have emotions very much like the market, where they tend to overshoot in good times and overshoot in bad times. And so right now, I think that we are getting necessary provisions for loan offices that will probably be used.

HORSLEY: Some of the battered bank stocks rebounded yesterday after Federal Reserve Chairman Ben Bernanke offered some reassuring testimony during a Senate hearing.

Mr. BEN BERNANKE (Chairman, Federal Reserve): Of course, all banks are being challenged by credit conditions now. The good news is that the banking system did come into this episode extremely well capitalized, extremely profitable. We are watching the situation very carefully. My concerns have turned less on the solvency of these institutions and more on their ability to extend the credit that our economy needs to keep growing.

HORSLEY: Banks may be less willing to extend that credit now that they're worried about keeping their own business afloat.

Scott Horsley, NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.