Loose Lips Sink Banks

When I was young, I used to spend a couple of weeks every summer at my Grandparent’s farm. In one of the buildings I remember a small sign that read simply, “Loose Lips, Sink Ships” and I was always confused as to its meaning until my grandfather – a World War II vet – explained that it was a warning to always be mindful of what you say in public. As I grew older of course, I understood the war-time significance of the sign, but saying too much in public can still result in a sinking – just ask Senator Charles Schumer.

By now of course, everyone is aware of the Indymac Bank failure and the controversial comments made by Schumer regarding the bank’s solvency. On June 27th, Schumer’s office made public the details of a letter that Schumer sent to U.S. regulatory bodies questioning Indymac’s ability to continue without federal assistance. Once Schumer’s letters were released, Indymac deposit holders – clearly worrying about the safety of their capital – withdrew more than $1.3 billion in a classic “bank run” that lasted just over a week.

In fairness, Indymac was in trouble before Schumer’s comments thanks largely to its participation in various Alt A lending practices, but as a member of both the Senate Finance Committee and the Senate Banking, Housing, and Urban Affairs Committee, Schumer had to know that his comments would cause panic within a population already skittish. Finally, on Friday, July 11th, the Office of Thrift Supervision was forced to place Indymac under the control of the Federal Deposit Insurance Corporation (FDIC) over fears that Indymac could no longer meet its demand deposit thresholds.

For his part, Senator Schumer denies that his comments had anything to do with Indymac’s failure and that he was merely bringing the bank’s problems to the attention of the relevant authorities. This would be easier to accept if Schumer’s letter had not been made public. In so doing, Schumer – according to John Reich of The Office of Thrift Supervision – caused the bank to suffer a “heart attack” as depositors prompted by the Senator’s warnings, withdraw funds leaving the bank with insufficient liquidity to conduct its business.[1]

Jerry Bowyer, Chief Economist of Benchmark Financial Network, was equally blunt with his remarks when he commented to CNBC that “federal officials aren’t supposed to cause bank runs”.[2] Bower even suggests that Schumer deliberately set about to contribute to Indymac’s demise as part of a coordinated attack from the “hard left” and in conjunction with a group known as The Center for Responsible Lending which – on June 20th – levied charges of unfair lending practices targeting minority borrowers against Indymac.[3]

Whether or not there is any basis to Bowyer’s claim is a debate best left to more politically-minded commentaries; but suffice to say, Schumer had a duty to act in the best interest of the investors and employees of Indymac. I’ll let you decide if he did so or if he carelessly sacrificed the savings and livelihoods of thousands simply to further his political stance.


References

  1. ↑ Google News – July 14th, 2008
  2. ↑ How Chuck Schumer Caused the Second largest Bank Failure in US History – Jerry Bowyer, CNBC
  3. ↑ How Chuck Schumer Caused the Second largest Bank Failure in US History – Jerry Bowyer, CNBC


About the Author

Scott Boyd has been working in and writing about the financial industry since the early 1990s. As a technical writer and project manager with several of Canada’s leading financial institutions, Scott has produced educational materials for investment system end-users including portfolio managers and traders. Scott now administers and contributes to OANDA FXPedia and regularly provides commentaries for the OANDA FXTrade website.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.