On the Spot (CNSNews.com) - IndyMac Bancorp Inc. and the federal government’s Office of Thrift Supervision (OTS) have accused Sen. Charles Schumer (D-N.Y.), chairman of the Joint Economic Committee, of sparking a $1.3 billion run on IndyMac by releasing a letter predicting its failure.
 
The run by depositors resulted in one of the costliest bank failures in American history and a federal takeover of the loan giant on Monday.
 
Schumer, however, denied wrongdoing in a press conference in New York on Sunday and blamed IndyMac for “irresponsible” action that led to its demise. He also suggested that the OTS be dissolved into another federal agency for its lax regulatory policies, which he said allowed IndyMac to act irresponsibly.
 
Experts told Cybercast News Service on Monday that Schumer’s letter sparked the run on IndyMac, but they disagreed on whether its release was an appropriate action for a U.S. senator.
 
The letter, addressed to the Federal Housing Finance Board, OTS, and the Federal Deposit Insurance Corp., which Schumer released to The Wall Street Journal on June 26, expressed concerns about the stability of IndyMac. Citing falling stock price and climbing repayment delinquency rates, Schumer warned that IndyMac “could face failure if prescriptive measures are not taken quickly.”
 
In the 11 days following the letter’s release investors withdrew over $1.3 billion from their IndyMac accounts.
 
At a press conference last Friday, John Reich, director of OTS, called Schumer’s release of the letter “an unprecedented act” and accused the senator of pushing the bank “over the edge.”
 
“The institution failed today due to a liquidity crisis," said Reich. "Although this institution was already in distress, I am troubled by any interference in the regulatory process.”
 
On July 1, IndyMac released a statement claiming that Schumer’s letter had “elevated customer inquiries and withdrawals.”
 
In Sunday’s news conference Schumer defended his release of the letter stating that everything included in it was already public information.
 
“IndyMac was one of the most poorly run and reckless of all the banks,” Schumer said. “It was a spin-off from the old Countrywide, and like Countrywide it did all kinds of profligate activities that it never should have. Both IndyMac and Countrywide helped cause the housing crisis we’re now in."
 
Schumer also criticized the Bush administration and the Department of Treasury, within which the OTS is a department. “Clearly what has happened here was the OTS, having the second biggest bank failure on their watch, sought to blame the messenger,” said Schumer. “In sum, it's sort of classically what this administration does. Blame the fire on the guy who called 911.”
 
Schumer also warned that he plans to contact Treasury Secretary Henry Paulson and request that the OTS be dissolved into the Office of the Comptroller of the Currency.
 
Bert Ely, who is a principal at Ely & Company Inc. and an expert on monetary policy, told Cybercast News Service there is little doubt that Schumer’s letter was to blame for the bank run and Schumer knew what he was doing.
 
“This was an intentional action,” Ely said. “Schumer knew what he was doing. He has been around for many years, and he is a very smart man. He is bright. I won’t speculate on why he did it, but it was intentional.”
 
Ely added that he thinks the action was inappropriate for a U.S. senator. “Releasing the letter was not appropriate,” said Ely. “He should have communicated his concern privately. Instead he publicly threatened them.”
 
But while Hans Bader, counsel for special projects at the conservative Competitive Enterprise Institute, agreed – it is “clear” that Schumer’s letter predicated the bank’s collapse – he said he does not think the senator’s actions were inappropriate.