Congress retroactively raises FDIC deposit insurance limits, aiding IndyMac account holders
Lawmakers completing a sweeping overhaul of financial regulations have given 8,700 former account holders at failed IndyMac Bank a surprise gift, retroactively increasing government-backed deposit insurance limits that would allow them to recover some of their lost money.
The move came Tuesday as House and Senate negotiators agreed to permanently increase to $250,000 the Federal Deposit Insurance Corp. coverage for individual accounts and to make it retroactive to Jan. 1, 2008.
Congress temporarily boosted the coverage from $100,000 per account during the financial crisis in October 2008 — three months after federal regulators seized the Pasadena savings and loan.
The increase, originally set to expire at the end of 2009 but later extended through 2013, would be made permanent as part of proposed financial regulatory reform legislation making its way through Congress. A joint conference committee is attempting to reconcile differences between separate bills approved by the House and Senate.
The final version of the legislation is expected to pass by July 4, and the decision Tuesday by House and Senate members of the committee essentially guarantees that the increase in the industry-paid deposit insurance fund will become law.
Although there was broad agreement on the committee for the higher insurance limit, House Republicans strongly opposed making the increase retroactive. That move largely benefits account holders at IndyMac, which failed in July 2008 when the maximum government insurance coverage for individual accounts was $100,000.
Lawmakers estimated the retroactivity would funnel about $170 million in deposit insurance to IndyMac accountholders, with an additional $10 million to depositors at four small banks that also failed in 2008 before the limit was raised.
Rep. Scott Garrett (R-N.J.) said the higher limit would help only wealthy account holders.
“This retroactive reward puts a new spin on the ‘too big to fail’ problem,” Garrett said. “This committee would say there are some people in the country who are too rich to lose.”
Many former IndyMac customers have complained that the bank’s employees misled them about deposit insurance limits in setting up multiple accounts and trust accounts to increase insurance coverage.
Craig and Terry Phinney of Cerritos, who recently retired, said they lost $23,948 because an IndyMac employee erroneously told them that their deposits were completely insured.
“It’s nothing to the U.S. government,” Craig Phinney said of the retroactive coverage, “but it will help keep my wife and I slightly above poverty level for a couple more years.”
The Whittier Public Library Foundation lost about $40,000 because an IndyMac branch manager said two separate accounts would be fully insured, said Raymond L. Schmidt, the foundation’s treasurer.
“The IndyMac branch management’s advice was wrong,” Schmidt said. “They did not understand the details of the FDIC rules.”
After IndyMac failed, the FDIC paid depositors 50 cents on the dollar for any of their funds determined to be above the insurance limit of $100,000 per depositor. That meant they lost half of any deposits determined to be uninsured.
Congress raised the deposit insurance limit to $250,000 shortly thereafter.
The proposal to make the higher limit permanent and retroactive was sponsored by Reps. David Dreier (R-San Dimas) and Jane Harman (D-Venice).
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said the FDIC was asked about the retroactive change and “felt that was a reasonable thing to do.”
FDIC spokesman David Barr said Congress sets deposit insurance limits and applying the $250,000 limit retroactively “would provide a more even treatment of uninsured depositors since the onset of the crisis.”
Many IndyMac depositors had invested far more than $250,000, so the measure would only partially restore the losses of people such as Cheryl Hodgson of Mission Viejo.
Hodgson so far has recovered $230,000 of the $360,000 she had deposited — $100,000 in insured funds and half the $260,000 that was uninsured. That makes her eligible for just $20,000 more as a result of raising the insurance limit to $250,000, and leaves her $110,000 short of full recovery.
Hodgson, a police officer and single mother, said it was a fluke that she had opened an IndyMac account just two weeks before it failed. The $360,000 was the proceeds from the sale of a house, she said — money she needed to make a down payment on another home “closer to my brother for family support.”
Hodgson said she explained the need to safeguard the funds to the IndyMac branch manager, who nonetheless advised her to put the entire $360,000 in a single account.
“I trusted this woman and paid dearly,” she said. “Two weeks later I was out $130,000.”
Hodgson also blames her losses on lax oversight by federal bank regulators, citing a critical report on IndyMac issued last year by the Treasury Department’s inspector general.
The report said the bank’s main regulator, the U.S. Office of Thrift Supervision, ignored repeated warning signs about the bank’s risky mortgage lending and should have acted to curb the risks two years before IndyMac failed.
“If the FDIC and OTS would have done their jobs, I wouldn’t have lost a dime,” Hodgson said.
