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Will IndyMac's Takeover Work for Large Banks?

IndyMac & Large Banks
There are talks that nationalization of banks can salvage the real estate industry and IndyMac’s case is a strong example.

The recent post on Time about IndyMac’s return to private control is sparking interest among readers. It’s a lengthy piece about the bank’s successful nationalized period that included overhauling its management and without a doubt, costing the government a hefty $11 billion.

The article states, “The success of IndyMac, though, shows that the government can accomplish its goal in a relatively short period of time… Here’s how it worked. The FDIC decided to run the bank itself rather than rely on the bank’s past managers or hire new ones. So almost immediately after the agency took over IndyMac last July, it sent over two of its top officials, chief operating officer John Bovenzi and Dallas-based assistant director Rick Hoffman, to Pasadena, Calif., to run the bank. Bovenzi became IndyMac’s CEO. Hoffman took on the role of president… But the FDIC also has a public-policy mission with IndyMac, which had made many risky mortgages. Many of those loans went to borrowers in California, where home prices have fallen sharply. The FDIC tried to show it could keep many of those borrowers in their homes and still turn the bank around. In all, IndyMac modified the loans of more than 10,000 of its borrowers in less than eight months, in many cases eliminating the chance that those borrowers would face foreclosure.”

But what keeps most economists and analysts from advocating the FDIC’s control? First, the success of IndyMac doesn’t guarantee a repeat for large banks and financial institutions. IndyMac suffered large losses but the costs are comparatively lower than Fannie Mae and Freddie Mac’s separate losses. Second, it would take more than 8 months unlike in IndyMac to bring back large banks back to private management. This is due to the amount of toxic loans that will be inherited by the government (think: Citigroup). Third, it would scare investors into putting their funds in a state-controlled institution. Last month, Citigroup’s stock price plunged by 22 percent. That could be a precaution for any attempts to take over the large banks.

If IndyMac’s plan worked, then its proponents should avoid any hasty generalization.

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