Inside the FDIC E-Book

John F. Bovenzi

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 376

Veröffentlichungsjahr: 2015

Beschreibung

Witness how the FDIC manages your money during financial crises Inside the FDIC tells the real stories behind bank failures and financial crises to provide a direct account of the Federal Deposit Insurance Corporation and other bank regulators. Author John Bovenzi served in senior level positions within the FDIC for over twenty years, including a decade as the Deputy to the Chairman and Chief Operating Officer. This book describes what he witnessed as the person in charge of day-to-day operations, as a nearly invisible agency grew to become a major, highly independent force impacting US financial markets. Readers will learn how the FDIC and other bank regulators use the power of the federal government, spend other people's money, and approach decision-making. This book takes readers inside the FDIC to showcase: * The FDIC's emergence as a major market influence * How ten FDIC chairmen helped shape the US financial regulatory system * Internal conflicts between the FDIC and other bank regulatory agencies * Pressures and challenges presented by financial crises Since the early 1980s, over 3,400 banks have failed. These failures weren't steady, regular, and easily predictable events; periods of tranquility were followed by turmoil, booms led to busts, and peaceful complacency often turned to sudden devastation. Inside the FDIC chronicles it all, from the perspective of a first hand witness inside the agency responsible for calming the storm.

Leseprobe

Table of Contents

Title Page

Copyright

Dedication

Acknowledgments

Introduction

Chapter 1: IndyMac

Chapter 2: The 1980s: Booms, Busts, and Bailouts

Chapter 3: Liquidation

Chapter 4: Credit Crunch

Chapter 5: Foreclosure Prevention

Chapter 6: “Is This the Moron Who Closed Meritor?”

Chapter 7: Transition and the Power of the Federal Government

Chapter 8: Subprime Behavior

Chapter 9: Leadership Matters

Chapter 10: Save Money, Live Better

Chapter 11: Too Big to Fail

Chapter 12: “I Thought We Were All in This Together”

Chapter 13: Going Forward

Independence

Checks and Balances

A Career Perspective

About the Author

Index

Supplemental Images

End User License Agreement

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Guide

Cover

Table of Contents

Introduction

Begin Reading

Inside the FDIC

Thirty Years of Bank Failures, Bailouts, and Regulatory Battles

John F. Bovenzi

Cover image: Lock © iStock.com/tomasdipagi

Cover design: C. Wallace

Copyright © 2015 by John Bovenzi. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Bovenzi, John F.

Inside the FDIC : thirty years of bank failures, bailouts, and regulatory battles / John F. Bovenzi.

1 online resource.

Includes index.

ISBN 978-1-118-99412-2 (pdf) – ISBN 978-1-118-99410-8 (epub) – ISBN 978-1-118-99408-5 (hardback) 1. Federal Deposit Insurance Corporation. 2. Deposit insurance-United States. 3. Bank failures-United States. 4. Banks and banking-Government policy-United States. 5. Banks and banking-State supervision-United States. I. Title.

HG1662.U5

368.8 '5400973–dc23

For Erica—the love of my life

Acknowledgments

First and foremost I'd like to thank my wife, Erica, who reviewed every word many times over. Without her insights and support, this book would not have been possible.

I'd also like to give particular thanks to my former colleagues and friends, Art Murton, Maureen Sweeney, and Jim Wigand, each of whom reviewed the entire manuscript and provided me with critically important comments and suggestions.

Others important contributors include April Breslaw, Diane Ellis, and Gary Hindes. A great many other former colleagues and friends spent their personal time reviewing specific chapters, helping me remember events, and ensuring that I got my facts straight.

Thanks to Annie Moffett and Matt Rees for great editorial assistance, to Oliver Wyman, and in particular Steve Szaraz, for supporting my efforts, and to Tula Batanchiev and her staff at Wiley for their support in publishing this book.

I'd like to thank my cousin, Adrian Nicole LeBlanc, an exceptionally talented and accomplished writer, who helped guide me through the book publishing process.

I'd also like to thank my three sons, Adam, Eric, and Greg, who lent moral support throughout the process.

Any mistakes that remain are my own.

Introduction

We have heard little from the behind-the-scenes people who were on the front lines as the events of 2008 unfolded. Their actions can calm the storm and bring fair treatment to inherently unfair situations, or they can compound the problems. These often-maligned bureaucrats can either display courage, integrity, and fair play or contribute to an environment of fear, anger, and chaos.

This book doesn't focus on the arcane and mind-numbing details of capital, liquidity, and the other technical parts of a bank regulator's job. Instead, it puts human faces on the causes and effects of financial crises. These are personal stories of real people grappling with complicated issues while under enormous pressure, of individuals trying to ensure that they and others are treated fairly by our government, and of individuals misusing the system to serve their personal interests.

I spent 28 years as a bank regulator at the Federal Deposit Insurance Corporation (FDIC). During my career, I worked directly with ten FDIC chairmen and with many other senior government officials.

I was the highest-level FDIC career executive during the two biggest financial crises in the United States since the Great Depression. During the banking and S&L crisis of the 1980s and early 1990s, I assisted with the creation of the Resolution Trust Corporation (RTC) and personally had to explain to President George H. W. Bush that the FDIC's deposit insurance fund was running out of money. During the 2008 financial crisis, I helped develop the agency's policy and operational initiatives and served as chief executive officer at IndyMac Federal Savings Bank, the first large bank in over 20 years to be shut down and then reopened under government ownership.

Thus, I come to the topic with a perspective that's often absent from the financial-sector debates that play out on the airwaves and in the opinion pages. This book provides a different view of the FDIC and other bank regulators. Readers will see:

How an agency that had become almost invisible would emerge as a major and highly independent force impacting U.S. financial markets.

How 10 FDIC chairmen helped shape the FDIC and the U.S. financial regulatory system.

How conflicts between the FDIC and other financial regulatory agencies unfolded amid the pressures and challenges associated with bank failures and financial crises.

I hope this book engages a different kind of discussion about the longer-term strategies needed to prevent repeating cycles of booms, busts, and bailouts. I also hope to encourage others to write about their experiences, so the historical perspective of long-term government employees can be added to policy debates in other regulatory arenas as well.

Chapter 1IndyMac

I flew into Burbank, California, Thursday evening, July 10, 2008; drove a rental car the short distance to Pasadena; and checked into the Hilton Pasadena on South Los Robles Avenue. Dozens of my colleagues from the Federal Deposit Insurance Corporation (FDIC) were also checking into hotels throughout the city. We used our personal credit cards rather than our government cards. Why? Because if anyone learned that the FDIC had descended on Pasadena, they might conclude (correctly) that a bank was about to be closed.

Bank closings are carefully planned events, and they are usually handled quietly, smoothly, and uneventfully. The bank's depositors hardly know that anything has happened. For the vast majority, their money is safely protected by the FDIC's deposit insurance system. A bank is typically closed on a Friday afternoon and reopened under new ownership the following Saturday or Monday morning. Customers generally see the same bank employees at the same branch offices; only the name of the bank has changed. This well-rehearsed pattern is designed to maintain public confidence in the U.S. financial system and to prevent banks' depositors from trying to withdraw all of their funds at the same time.

But IndyMac was no ordinary bank, and this would be no ordinary closing.

IndyMac was a poster child for how home mortgage lending had spiraled out of control during the preceding boom years. The bank had been launched in 1985 as a division of Countrywide, a California mortgage lender that encountered its own troubles in 2007. IndyMac became independent of Countrywide in 1997, and it gradually came to specialize in something called Alt-A mortgages, which were typically offered to borrowers whose credit profiles were better than subprime but not strong enough to qualify for prime loans. In the case of IndyMac, borrowers could obtain home mortgage loans without going through a formal credit review process—they simply stated to loan officers their income, asset, and debt levels. After the crash, these arrangements became known as “liar loans” or “ninja loans” (no income, no job, and no assets).

IndyMac did not keep most of the mortgages it originated. They were packaged together, sold, and used as collateral for mortgage-backed securities. This originate-to-sell model also was not unique to IndyMac. Many banks found that they could increase their profits by selling mortgage loans soon after they made them. The sales proceeds could then be used to make new loans, which could create a steady stream of income. As long as there was an appetite in the market for mortgage-backed securities, there would be a need to create new home mortgages. This would create additional pressure to further weaken lending standards in order to find new customers.

With housing prices rising throughout the United States, IndyMac found many willing borrowers. The bank's profits tripled from 2001 to 2006, according to the New York Times. During 2006 alone, IndyMac originated $90 billion in new mortgages, and racked up $342.9 million in profits. The bank had established 182 loan production offices around the country to help it find new customers, and at its peak it was the nation's 10th-largest mortgage lender.

To help finance its mortgage lending, IndyMac had raised $20 billion in deposits through the Internet, deposits placed at its 33 branches in Southern California, and from the brokered-deposit market. The bank offered higher interest rates than anyone else so it was easily able to attract rate-chasing deposits. The bank had also borrowed $10 billion in high-cost money from the Federal Home Loan Bank of San Francisco (FHLB-SF).

This toxic cocktail of high-cost funding, weak lending standards, and a constant churning of new loan originations left IndyMac highly vulnerable in the event of a downturn in the housing market. Predictably, problems for IndyMac started once housing prices began to fall in 2006 and 2007. Borrowers who never had the income or assets to support their mortgages began to understand how overextended they were and started defaulting on their monthly payments. As home values dropped below the amount owed on the mortgages, there were even some strategic defaulters who stopped making their mortgage payments even though they still could afford them. They simply didn't want to own a house that was worth less than their outstanding mortgage balance, known as “upside down” in the mortgage business.

IndyMac had not focused its lending activities on the subprime market. Most of its mortgage loans were made to middle- to high-income families, who were interested in the convenience, leverage, and favorable rates they could obtain from the bank. IndyMac's difficulties were a clear indication that the problems in the mortgage market had extended well beyond subprime loans.

IndyMac had also ramped up its lending to home builders, who were squeezed by the downturn in the housing market. At the end of the first quarter of 2008, IndyMac had $1.06 billion in loans outstanding to home builders—more than half of which had been categorized as “nonperforming.” By the spring of 2008, IndyMac officials knew the bank was in serious trouble. It had lost nearly $615 million the year before, and the company's share price had fallen to $6. Conditions worsened in the first quarter, with IndyMac reporting $184 million in losses. The bank's chief executive, Michael Perry, acknowledged that it would not return to profitability “until the current decline in homes prices decelerates.” Around this time, IndyMac was talking to private equity firms about acquiring the institution. When no buyers could be found, the bank started planning to shutter its mortgage lending business.

At the FDIC we had long been aware that IndyMac was dangerously exposed to the downturn in the real estate market. By the late spring, our concern was growing, so we set up a meeting with senior officials at the Office of Thrift Supervision (OTS), the federal regulator responsible for supervising IndyMac. FDIC Chairman Sheila Bair and I, and two senior officials from the Federal Reserve, met with John Reich, who was the Director of OTS, and Scott Polakoff, a former FDIC regional director who was now serving as the OTS deputy. Polakoff suggested that the OTS could supervise a gradual reduction in the size of the bank until its problems were more manageable. My colleagues and I from the FDIC didn't think it was a good idea to leave the people who had created the problems at the bank in charge of a gradual wind-down of its operations. I told the group that IndyMac was going to be the most expensive bank failure since the FDIC was created in 1934.

The FDIC had dodged a bullet earlier, in January 2008, when Bank of America purchased Countrywide, a troubled bank like IndyMac, except that it was much larger. If Countrywide had failed, the public disruption could have been tremendous and the losses to the FDIC's deposit insurance fund enormous. Bank of America was less fortunate, incurring over $40 billion in losses associated with its purchase of Countrywide and its subprime mortgage loans.

After our meeting at OTS, we anticipated an August closing, which would have given us time to quietly market the bank to prospective buyers. But our already-tight timeline was altered by an unexpected development.

On June 26, Senator Charles Schumer (D-NY) sent a letter to banking regulators highlighting the weakened condition of the bank. The letter stated: “There are clear indications that IndyMac…could face a failure if prescriptive measures are not taken quickly.” While the letter didn't say anything we didn't already know, Senator Schumer took the unorthodox step of publicly disclosing his concerns to the Wall Street Journal, which published an article about the IndyMac letter the following day. One day after that, on June 28, the Pasadena Star-News, which served many of the communities in which IndyMac operated, published an article with the headline “IndyMac Appears Close to Collapse.”

Panic quickly set in. Customer withdrawals quickly reached $100 million per day, and there were extremely long lines of bank customers waiting to get their money—a scenario rarely seen since the bank failures of the Great Depression.

IndyMac's customers withdrew $1.3 billion in the 11 days following release of the Schumer letter, according to OTS. John Reich, the OTS head, said that Schumer's letter gave the bank a “heart attack” and “undermined the public confidence essential for a financial institution.” Indeed, an OTS press release said that “the immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to OTS and the FDIC from Senator Charles Schumer of New York.”1

Because of the accelerated timeline, there was no time to carefully prepare for the bank's closing. Within days of Senator Schumer's letter being released, IndyMac was on the verge of running out of money. The week after the Schumer letter, the bank announced plans to reduce its workforce from 7,200 to 3,400, and to close its wholesale and retail new loan divisions. But that didn't stop the hemorrhaging. The bank's stock price, which had been $50 in 2006, fell to just 28 cents on July 11.

We knew IndyMac had to be closed immediately. Without a ready buyer there were only two choices: we could shut the bank down completely or we could take it over and run it ourselves. Both options were (in the polite terminology of economists) suboptimal.

IndyMac was the seventh-largest savings and loan in the country, with over $32 billion in assets. More importantly, it also managed a $184 billion mortgage-servicing operation. Closing the bank could mean disrupting service on all of the bank's mortgages. Customers might not be able to make their monthly payments or pay off their mortgages. Payments wouldn't be sent to the investors who had purchased securities backed by those mortgages. There would be great uncertainty and disruption in the market. The value of those loans would quickly dissipate, and the losses to the FDIC's deposit insurance fund would grow significantly.

There was only one real choice. IndyMac would have to be placed into a conservatorship, which meant closing the bank, then reopening it as a new bank under the ownership and control of the FDIC, until it could be sold back into the private sector. IndyMac would, in other words, have to be nationalized.

I reflected on these developments the evening I arrived in Pasadena. IndyMac would be closed the following afternoon, on Friday, July 11, 2008. It would be the largest single bank the FDIC had ever closed. The following Monday morning it would be reopened as a new bank under FDIC ownership. I would be responsible for managing the newly constituted “bridge” bank.

Sheila Bair and I had discussed the possibility of my running the bank a few days earlier. While bankers with private-sector experience are typically recruited by the FDIC to manage failed banks, we didn't have enough time to find anyone. Moreover, we thought it would be beneficial to have someone running the bank who possessed an understanding of issues related to deposit insurance. There were thousands of uninsured depositors who would be angry when they found out that they were going to lose some of their money as a result of the closing; that anger could spill over into broader public concern about the safety of deposits at other banks; and there were important policy issues surrounding the creation and management of a government-owned bank.

At 9 A.M. on Friday, July 11, about 60 FDIC employees and contractors gathered in a conference room at the Sheraton Pasadena on East Cordova Street, using a fictitious company name, to review our final preparations for the bank closing. As the financial crisis unfolded in the months ahead, most of the people in that room would move from one bank closing to another, staying in one place just long enough to ensure a successful transition of a closed bank to its new owners. In this case, some of the people in the room would remain behind to help me run the bank.

Rick Hoffman was a bank-closing veteran. He had closed hundreds of banks over the course of his career. He reminded the assembled group that this would be a traumatic event for the people who lived and worked in the local community. We had a job to do, but we had to be sensitive to what the bank's employees and their customers would be experiencing.

I told the group that we were at a critical point in time. The public had grown accustomed to a world where banks did not fail, particularly larger banks. This would be a wake-up call that the problems in the financial sector were getting worse. The world would be watching how we handled this situation. We knew the events of that day would be historic, but none of us could have predicted the extent of the financial crisis that would follow.

As I looked around the room, I saw many people whom I had worked with over the years. Most of them had been through the banking and savings-and-loan (S&L) crisis of the 1980s and early 1990s. I could see the confidence in their eyes. Closing banks is an unusual profession, with unique challenges, but they knew what they needed to do.

After the one-hour meeting, several of us drove over to the bank's headquarters on Walnut Street. From the outside it didn't seem as if there were anything special about the bank's six-story building. Everything seemed pretty quiet. We went down to the basement of the building next door, which the bank also leased. Bank examiners from the OTS were already combing through IndyMac records, and doing so in the least desirable space in the building, something examiners are accustomed to when they go on bank examinations. In a couple of hours, we would begin a weekend of nonstop activity, but for now we just grabbed a few chairs, sat, and waited.

Just before 2 P.M., we walked over to the main building and took the elevator to the sixth floor boardroom. IndyMac's senior managers had gathered there to meet with us. The bank's chief executive officer, Michael Perry, was seated at the head of the long board table that filled much of the room. His senior managers were on each side of him. The OTS examiners sat opposite us. Without much explanation they quickly told the assembled group that IndyMac was being closed and the FDIC was taking control. The bank's senior officials knew that this day was coming, but we still could see their stunned looks. It's one thing to know that something traumatic is going to happen; it's quite another when it actually does.

The OTS examiners turned the meeting over to us. We took a little more time and told the group that a new bank, IndyMac Federal Bank, would be established under the FDIC's ownership to continue the bank's operations until it could be sold. We explained how this would impact the bank's operations, what our immediate needs were, and what our plans were going forward. We let them know that most of them still had jobs and that we would need their help in contacting the bank's employees.

Following the one-hour meeting, Rick Hoffman and I walked down the hall with Michael Perry to his corner office. Wall-to-wall windows provided a spectacular view of the San Gabriel Mountains. The desk at one end of the room overlooked a large black conference table with six chairs around it at the other end. A large flat-screen TV covered most of the wall behind that table. Looking around, it was clear to see that Perry already had removed his belongings from the office.

We sat down at the conference table and confirmed to Perry that he would not have a job with the new bank. This was standard practice. We never retained the CEO of a failed bank. Perry understood and offered to provide us help and answer any questions. He asked if he could send one final e-mail to the bank's employees. He read the seven sentences to us. “I gave everything I had to keep IndyMac Bank safe and sound, and preserve as many jobs as possible.” He asked that the employees “work as hard, smart, and courageously for the regulators as you did for me.” It was a very emotional moment for the youthful-looking Perry (described as “baby faced” by the Washington Post), and he had difficultly reading his message to us.

We let Perry send his e-mail to the bank's employees and told him that he would need to speak with the FDIC's investigative staff before he left the building. Having the bank's senior officials speak with the FDIC's investigators also is a standard part of the bank-closing process. The investigation at IndyMac later would determine that there were more than adequate grounds to sue Perry and some of the other senior managers at IndyMac for damages due to their mismanagement. Perry eventually settled with the FDIC by paying $1 million from his own funds, agreeing to be banned from ever working again in the banking industry, and allowing the FDIC to pursue collections of up to $11 million from his liability insurance coverage.

IndyMac was officially closed at 5 P.M. Central Time. The closing set off a series of prearranged notifications and activity. The branch offices were contacted, as were other employees. A press release announcing the closing was sent out from the FDIC's Washington, D.C., office. That press release was sent to key senators and congressmen as well as every member of California's congressional delegation. The mayor of Pasadena also was notified. A few hours earlier, Sheila Bair had called Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke to alert them. That evening, Sheila held a press conference for local and national media to explain what had happened and to answer their questions.

Generally, banks are closed at the end of normal business hours on a Friday, usually at 5 P.M. This provides the FDIC with enough time to contact the bank's employees and explain to them what was happening, whether they still had jobs, and if we would need their help over the weekend. IndyMac had thousands of employees all across the country in multiple time zones and locations ranging from Pasadena, California, to Kalamazoo, Michigan, to Austin, Texas. And we did need their help. So the OTS closed the bank at 5 p.m. Central Time, which facilitated our being able to contact the bank's employees before they all went home for the weekend. However, the bank's deposit-taking branches were all in southern California, and it was only 3 p.m. there, which meant that some of the bank's customers who had planned to get into their local branch before their usual 5 p.m. closing time couldn't do so.

News cameras photographed these customers reading the closing notices that had been posted on the doors of the bank's branches. Some customers began banging on the doors to get in. Those photographs were in newspapers across the country the next morning. The closing of IndyMac became a major national news story. The only story that drew more attention that weekend was the birth of twins to Angelina Jolie and Brad Pitt.

Some observers later would say it was a mistake to close the bank that early. Perhaps, but I think the real issue was that unlike most bank failures, this was a much larger bank, with a significant number of uninsured depositors who were going to be unhappy about losing some of their money.

With the bank closed we now had only two full days to get ready to reopen it on Monday. There was a lot to do. Inside the bank, a couple hundred people began working around the clock.

There were a number of time-sensitive challenges. First and foremost, we needed to determine which deposits were insured and which were not, in order to sort out who was entitled to withdraw money when the bank reopened. The vast majority of bank deposits are insured, but determining which specific accounts are insured is not as simple as it may sound.

The deposit insurance coverage rules are complicated. Individual accounts, joint accounts, trust accounts, and retirement accounts all have separate insurance coverage. Trust accounts coverage depended on the relationship between the trust owner and his or her designated beneficiaries. Immediate family members were qualified beneficiaries who received insurance coverage, while more distant relatives and nonrelatives were not. Given these complications, banks do not even attempt to keep track of which accounts are insured and which are not.

The bank's deposit records would have to be sorted by each account holder's name and address along with other identifying characteristics. Similar types of accounts with the same owner would have to be grouped together to see if they were within the insurance limits. Most of this work can be done relatively quickly through automated systems. Problems could arise, though, if the bank's electronic records didn't have all of the relevant information.

But even with automation, this was an enormous task, given that there were nearly 300,000 deposit accounts at IndyMac. The FDIC had never had to sort through this many accounts over a closing weekend. But we had to get it done on time. We did not want to delay the reopening of the bank. Public confidence was fragile enough. With hundreds of people facing a massive workload, and 48 hours to get through it, the environment was extraordinarily intense.

Another pressing challenge was finding and analyzing what are known under regulation as qualified financial contracts (QFCs) to determine which of them should remain in place and which should be cancelled. QFCs contain some of a bank's more complex contractual arrangements. They include contracts for transactions scheduled to take place at a future date and contingent contracts, such as credit default swaps, which are triggered only in the event of certain circumstances. QFCs also include other derivative contracts, such as interest rate swaps or currency swaps, which banks use to hedge or protect themselves against certain risks.

Finding and analyzing these contracts over a single weekend was a challenging, but critical, assignment. If we did not make a decision within one business day on what to do with each of IndyMac's QFC contracts, the bank's business counterparties would have the right to cancel those contracts, which could be very disruptive and very expensive.

The importance of these types of decisions would become clear in September 2008 when Lehman Brothers declared bankruptcy. Unlike the FDIC's authority when a commercial bank or S&L fails, the bankruptcy process, which handled the failure of investment banks like Lehman Brothers, has no authority to preserve such contracts. As a result, Lehman's counterparties rushed to cancel their contracts and sell the collateral that they held on those contracts. As this collateral flooded an already weak market, values plummeted, and the losses to Lehman's creditors and business counterparties grew enormously.

We were more fortunate at IndyMac. The bank had relatively few QFCs, and once we explained to the bank's management what we were looking for, they showed us the key contracts that needed to be analyzed. IndyMac had a number of contracts that allowed it to sell its newly created mortgages to third-party buyers for a fixed price at a future date. If these contracts had not been identified, analyzed, and transferred from the failed bank to the bridge bank over that initial weekend, the counterparties to those contractual commitments would have canceled them. This would have left us with a large volume of additional mortgage loans. Given the decline in the mortgage market, these mortgages would have been sold at a later date for far less than the price stated in the contract already in place. Because we were able to identify these contracts, analyze IndyMac's exposure, and take the necessary steps to keep them in place, we saved the FDIC's deposit insurance fund millions of dollars.

In addition to our progress on QFCs, we also managed to complete the automated calculations that segregated insured from uninsured deposits by late Sunday night—an achievement that would enable us to reopen the bank the next morning knowing the insurance status of most of the bank's deposit accounts. We had identified about $17 billion that was insured and $400 million that was uninsured.

But we hadn't determined everyone's deposit insurance status. There was about $1.7 billion in deposit accounts where the bank's records did not have the information we needed to determine whether the accounts qualified for deposit insurance coverage. We would have to talk directly to the owners of those accounts, and that could take weeks. We were about to reopen the bank the next morning knowing that there still were 48,000 accounts that held over $2 billion that was either uninsured or might not be insured. We would not be able to make this money available to as many as 30,000 of the bank's customers. This was going to cause problems. There had never been a bank failure with this many uninsured or potentially uninsured depositors.

Given the bank run that had occurred at IndyMac prior to its closing, the seemingly round-the-clock media coverage during the closing weekend, and the large number of uninsured and potentially uninsured deposits, it was more important than ever for the FDIC to provide a clear and reassuring public message. We decided an important part of getting the message out would be for me to hold a press conference before the bank reopened.

The press conference was held Sunday evening in the bank's boardroom, the only room at the bank that was large enough to hold the audience we anticipated. When I entered, there were cameras spanning the entire length of the boardroom. I moved to a seat at the middle of the long board table on the opposite side from the cameras. A dozen or so microphones had been set up in front of my seat. I read a statement that explained what had happened to the bank and what our plans were going forward. I said that the bank would be reopened as a “strong and safe institution” and that it would be “business as usual for all insured customers.” I ended the statement with an assurance to everyone that no FDIC-insured depositor had ever lost any money in a bank failure.

The assembled reporters immediately began peppering me with questions. Why did the bank fail? What was going to happen to the bank's stockholders? Would they get any of their money back? What would happen to the bank's senior managers? How would uninsured depositors fare? How much of their deposits should they eventually expect to get back? I answered all of the questions as best as I could. As the questions slowed, I ended the press conference about 45 minutes after it had begun.

I then moved to an office down the hall that CNN had set up for me to be interviewed long distance by Rick Sanchez. He had heard the press conference and asked me a series of follow-up questions. He wanted to know if IndyMac had been on the FDIC's official problem bank list. I told him that it wasn't on the list. What I didn't add was that there had been a difference of opinion between the FDIC and the OTS as to when the bank should be added to the list, with the OTS only recently agreeing with the FDIC that it should be classified as a problem bank. When the press conference and the interview ended, I felt that they had gone well and hopefully had provided some measure of reassurance to the bank's customers and to insured bank depositors across the country.

There wasn't much more left to do before reopening the bank the next morning. We had set up an entirely new governance structure for IndyMac over the weekend, starting with a board of directors. Five senior FDIC officials with different areas of expertise were selected to comprise the new board. I would serve as the board's chairman, and Rick Hoffman would be vice chairman and also the chief operating officer and president of the new bank. Our new board of directors already had met for several hours over the weekend to address a variety of issues. Interest rates were set for new deposits, at a lower level than what the bank had previously paid. Existing delegations of authority had been ratified so the bank's employees would have the authority to continue to do their jobs.

We also had ensured that the bank's call center was ready for the onslaught of phone calls that would begin Monday morning. Question-and-answer forms had been prepared to help the bank's employees respond to the most likely questions. By the time I went to bed Sunday night, following very little sleep the previous two nights, I felt that we had done everything we could to get ready for the bank's reopening. But we hadn't.

Early the next morning, lines of people started to form at each of the bank's 33 branches. Television cameras were there to capture it all. The camera crews' trucks extended far down the street outside of the bank's headquarters. Local, national, and international-based reporters began interviewing the people waiting in line at the branch office located on the first floor of the headquarters building.

I went outside to talk with some of the people who were waiting in line. A few of them were angry, but most were not. Each person I talked with wanted to have a chance to explain his or her situation. I listened to as many people as I could and then tried to explain to them that they did not need to wait in line but, for the most part, to no avail. They wanted to get their money back. Reporters came over to interview me throughout the day. I also walked up and down the street with David Barr from the FDIC's press office so we could talk with each waiting reporter. As soon as one round of interviews was complete, another round started. This was fine with us because we wanted to take every opportunity to reassure the bank's customers and the general public that there was nothing to worry about.

We also wanted to help everyone get into the bank's branches as quickly as possible, but that wasn't easy. The branches were fairly small and could accommodate only a few people at one time. We brought in some local FDIC bank examiners to help work inside the branches. Volunteers from the bank's staff also came to help as well.

As the day went on, it became much hotter outside. A few of the people waiting in line had anticipated the summer heat and brought lawn chairs with them. Others stood. One woman standing near me while I was being interviewed fainted and fell to the ground. I didn't see her fall; I only heard her head hit the cement. (The reporter and I promptly ended our interview, assisted the woman, and called 911). Some of the camera crews started to film the woman as she was lying on the ground. Other people waiting in line came over to shield her from the cameras. Soon an ambulance arrived and took her to a local hospital, where she was treated and released the same day.

After that unfortunate event, we set up canopies over the people in line to provide them with some protection from the midday sun. We also brought out food and water. The media remained, continuing to interview the bank's customers and me, sometimes at the same time. CNN aired new interviews every half-hour.

Late in the afternoon, we put a numbering system in place for the people still in line. Everyone was told when they could get into the bank, depending on their number. This made a real difference. The people in line left once they knew they had a designated time when they could get into the bank, even if that time was sometime the next day.

In retrospect, I wish we had thought of the numbering system earlier or that we had made separate arrangements for the uninsured depositors. If we had rented conference rooms for the uninsured depositors at hotels (away from the bank's branches), we would have been able to better address their questions and might have avoided the long lines that formed outside of the bank's branches that day.

A few hours after the bank's branches closed for the day, I went to the hotel to get some sleep. I had a live interview scheduled with CBS Morning News for their 6 A.M. show, which was 3 A.M. on the West Coast. I had my wake-up call set for 2 a.m.

I arrived outside the bank a little before the scheduled interview time. The person interviewing me was in New York, so I would be hearing his questions through earphones. It was pitch black outside, and bright camera lights were shining on me, so I couldn't see the camera lens. The cameraman put a piece of light-colored masking tape on the bottom of the lens. That worked. I could see where I was supposed to be looking. But all I remember about that interview was that I did my best to have an intelligent conversation with a piece of masking tape.

Two FDIC employees, David Barr and Rickey McCullough, were with me that morning. Both had been talking with the press the day before from morning through nightfall. Now what we really wanted was some coffee. But before walking off the bank's premises, we saw someone waiting alone in front of the branch door. It wasn't even 4 a.m. Rickey went over to talk with him to let him know that he didn't need to be there. He thanked Rickey and said that he understood, but he couldn't sleep, so he was going to stay.

We hoped that the numbering system we had put in place would mean there would be no lines of people that morning. We did not need another day of news stories featuring a run on the bank. The public already was on edge. Their concerns extended well beyond IndyMac. Many weren't sure if their money was safe in other banks as well. It was important that we calmed the situation as soon as possible.

Federal deposit insurance was designed to prevent this type of panic. But the more people I had talked with, the more I realized how little many people understood deposit insurance. Many of the people waiting in the lines had total deposits that were far less than the $100,000 deposit insurance coverage limit, yet they were worried. I realized we needed to do a far better job of educating everyone about deposit insurance.

The media didn't help. We wanted them to educate their audiences that if you had $100,000 or less in any bank, then your money was completely safe. While some in the media were helpful in that regard, a majority seemed to prefer emphasizing the more sensational scenes that only added fuel to the fire.

When we opened for business Tuesday morning, I was pleased to see that no one was waiting in line in front of the branch door at the bank's main building. I stood in front of that branch door for a televised interview so everyone could see how quiet it was at the bank. I felt we had turned the corner.

My pleasure was short-lived. After the interview, the reporter told me that no other reporters were there because they were at one branch in Encino where a small riot was under way (the bank's 32 other branches were peaceful). Apparently, two sets of numbers had been handed out the day before. A third set was given out that morning. As a result, there were three groups of people trying to get into the branch, leading to some fairly heated arguments.

One of the bank's managers visited that branch to restore order. Despite taking more than a slight amount of abuse, he settled the crowd within half an hour. There were no more lines after that. Nevertheless, we now had one more day of worldwide news coverage that showed agitated depositors waiting to withdraw their money.