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