US seizes mortgage lender giant Indy Mac as troubles spread

American banking regulators swooped in to seize mortgage lender Indy Mac Bancorp Inc. on Friday after withdrawals by panicked depositors led to the third-largest banking failure in US history.

California-based Indy Mac, which specialised in a type of mortgage that often required minimal documents from borrowers, became the fifth US bank to fail this year as a housing bust and credit crunch strain financial institutions.

The federal takeover of Indy Mac capped a tumultuous day for US markets that saw stocks slide on a surging oil price and renewed fears about the stability of the top two home financing providers, Fannie Mae and Freddie Mac.

Indy Mac will reopen fully tomorrow as Indy Mac Federal Bank under Federal Deposit Insurance Corp. (FDIC) supervision, but tensions ran high as customers at a branch at its Los Angeles-area headquarters read a notice in the window saying it was closed.

At another branch down the road, a man who said he had more than $200,000 in an account - twice what is normally FDIC guaranteed - argued with a security guard who was closing up.

The FDIC, which will seek a buyer for Indy Mac, estimated the cost of the bank's failure to its $53 billion insurance fund at between $4 billion and $8 billion.

"IndyMac is a company that was pretty much 100 per cent invested in mortgage assets, and we're in a bad mortgage market, and it had no capital. It's not complicated," said Adam Compton, co-head of global financial stock research at RCM in San Francisco, which manages about $150 billion.

Indy Mac joins top bank failures headed by the 1984 collapse of Continental Illinois National Bank & Trust Co.

The Office of Thrift Supervision (OTS) insisted Indy Mac's failure was the second-largest bank failure based on FDIC figures. But the FDIC said its data showed it was third behind the collapse of First Republic Bank Corp. in 1988.

The OTS, Indy Mac's primary regulator, blamed comments by New York Democratic Senator Charles Schumer for causing a run on deposits at the largest independent publicly traded US mortgage lender.

Schumer responded quickly on Friday, blaming the OTS for not doing its job and allowing Indy Mac's loose lending practices. "OTS should start doing its job to prevent future Indy Macs," he said in a statement.

Schumer questioned Indy Mac's ability to survive the housing crisis in late June, and over the next 11 business days, depositors withdrew more than $1.3 billion, the OTS said.

"This institution failed today due to a liquidity crisis," OTS director John Reich said. "Although this institution was already in distress, I am troubled by any interference in the regulatory process."

Indy Mac was founded in 1985 by David Loeb and Angelo Mozilo, who also founded Countrywide, another big mortgage lender whose loans helped fuel the housing boom. Countrywide was taken over last week by Bank of America Corp.

FDIC spokesman David Barr said agency officials arrived at Indy Mac's headquarters in Pasadena at 3 p.m.

Over the weekend, depositors have access to their funds by ATM, other debit card transactions, or by writing cheques, but no access via online banking and phone services until tomorrow.

Indy Mac had said earlier in the week it was unable to raise new capital, would slash staff by 60 per cent and had stopped giving home loans. Its stock then tumbled, last trading at 28 cents on the New York Stock Exchange, down 95 per cent in 2008.

The FDIC insures up to $100,000 per deposit and up to $250,000 per retirement account at insured banks.

At the time of closing, Indy Mac had about $1 billion of potentially uninsured deposits held by about 10,000 depositors. The FDIC said it would pay those depositors an advance dividend equal to 50 per cent of the uninsured amount.

The OTS told reporters that it did not expect significant market impact from Indy Mac's closure as the firm is not a systemic institution and does not have numerous counterparties. Reich also said he did not expect a larger thrift to fail.

Four small banks have already been closed this year and the FDIC is hiring more staff in preparation for more failures. The agency has boosted its list of troubled banks to 90 and has said an increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending. Last year, just three banks failed.