Cost of IndyMac bailout: Worse than the worst-case scenario

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When the federal government seized IndyMac in July, it estimated the failure would cost the FDIC’s insurance fund somewhere between $4 billion and $8 billion. Yesterday the FDIC said the cost will be even worse than its previous worst-case-scenario estimate: $8.9 billion.

That’s pretty significant -- banks and thrifts are regulated, they are not supposed to be mysterious; and now we learn the IndyMac failure will be even more expensive than the government’s most pessimistic estimate, which was made just six weeks ago.

From this morning’s L.A. Times: ‘That figure increased after the agency, which now runs the bank, performed its own valuation of IndyMac’s assets and also discovered that more deposits than initially estimated were covered by insurance, said Diane Ellis, the FDIC’s associate director of financial-risk management.’

The IndyMac news is contained in a larger story, the FDIC’s report that ‘the number of troubled U.S. banks shot up 30% in just three months.’

Analysis: The news flow on banks, bad loans, and the availability of mortgages remains very negative. It is hard to cobble together a case for a stabilizing housing market during a time of continued deterioration in the financial industry. In three words, money is tight. True, it is always darkest just before the dawn, but sometimes it is dark because it is the middle of the night. I think Sheila Bair, the head of the FDIC, is correct: ‘We don’t think this credit cycle’s bottomed out yet.’

-- Peter Viles
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Photo credit: Associated Press