I worked at Indymac Bank for a little over 4 years till July 2008 when - after the FDIC took management control of the Bank after a “run on the Bank” was (unfortunately) triggered by Senator Schumer’s leaked WSJ letter (discussed in a prior blog) - I resigned from my position as Chief Administrative Officer. My role had put me in charge of the “People” and “Expense/Cost” functions of the Company…but thankfully (I guess – given the massive blame game going on against anyone involved in the lending industry) I was not involved in any way with making loans.

Headquartered in Pasadena, my Indymac was a performance focused/driven but family friendly place which was discrimination free at the highest levels (certainly, no “discriminating” CEO would have ever hired me, given all the minority categories I fall into). All that mattered at work was “output” (i.e., what you got done) not politics. In fact, my Indymac experience included more “head” and “heart” than I’d personally expected to find in Corporate America (where I’ve been walking Executive hallways at “Fortune 1000” companies for about 12 years since I graduated from college).

I do believe fraud was a key contributing factor to the housing bubble that we have realized too late was both national and huge, and also believe we must find and punish those that perpetrated it because personal accountability is critical to the stable/smooth go forward functioning of the market. However based on my own personal experience at Indymac I have a strong instinct that the government is focusing its limited fraud resources in the wrong places, and working in bureaucratic and inefficient ways. In particular, I believe the government has an excessive focus and has over-allocated resources to search for fraud by senior management, but is not pursuing the most efficient ways (e.g., interviewing managers/employees of the firms they're investigating) to quickly find/punish any such “bad managers”. On the other side, the effort to investigate/prosecute perpetrators of individual fraud (i.e., at the transaction level) is woefully under-resourced (See this article on mortgage fraud and note the FBI was only able to investigate 2.6% of the over 46,000 suspicious activity reports submitted in 2007: http://www.consumeraffairs.com/news04/2008/05/mortgage_fraud_fbi.html).

What makes me think this? Well, I can tell you I didn’t see anything that looked or felt like fraud around me at Indymac (except where expected, in individual situations which were addressed appropriately consistent with company policy and existing laws/regulations). I say this as a member of Indymac’s Executive Committee (comprised of roughly the top 25 managers at the company) since late 2006, prior to which I was the CEO’s Chief of Staff (in which role I attended most of his meetings and reviewed most of his emails and other communications).

You’d think as a key member of management, I would have been interviewed after the FDIC took control of Indymac. It certainly looks like they are investing significant resources in investigating Indymac. For example, during the 48 hours after the FDIC takeover of Indymac, millions of pieces of paper were taken from Indymac’s Corporate Offices for review/investigation. I walked into my office on July 12th, the day after the FDIC took over Indymac, to find my office (and my Assistant’s filing cabinets) stripped of every piece of paper I had accumulated over the course of my 4 years at Indymac (and I can tell you I am highly organized…so there was lots of it).

No-one really explained what was being investigated or why…just that conducting a detailed investigation was “standard protocol”. Given I had a lot of exposure to top management’s activities in the years preceding the companies’ failure I thought I would try to help, so mentioned to one of the top FDIC managers that they were welcome to interview me as I had spent a lot of time with the CEO (who was no longer at the Bank as part of the government takeover) and had read a lot (perhaps even most) of his communications for roughly a 2 year period (from fall 2004 to fall 2006). He nodded, but nothing happened.

To cut a long story short, I decided shortly thereafter to resign from the company...as the "head" and "heart" of the company was gone and I just couldn’t sit and watch the FDIC create a massive loss by fire-selling the company’s assets into the worst market for mortgage assets in 80 years. Before departing the company about a week later (with no ‘golden parachute’ or severance, I should note), I repeated my offer one more time. To this day, no one from the FDIC or any other governmental organization has called me to take me up on my offer.

So my hypothesis – based on my own personal experience – is that people’s ire and the government’s dollars are misdirected in the fraud category. I believe it is unlikely there was widespread fraud at the top levels of the (recently or currently distressed) financial institutions…and that in fact mortgage fraud was largely perpetrated at lower levels within companies and by individuals outside the financial institutions who were independent. As a result, I believe the government should speed up/resolve the management blame game by interviewing all the executives (remaining and departed) at the various distressed financial institutions. This process would take weeks, not years….and would be more effective at identifying management fraud than reviewing millions if not billions of pieces of paper. Then shift the resources currently deployed to read/review the millions of pages collected from these companies largely over to investigating and prosecuting individual fraud.

In late June this summer, about 2 weeks before the “failure” (i.e., inability to continue to be in business without third party support) of my ethical and well run employer Indymac Bank, I – then a Senior Executive at the Company - read in horror a letter that New York Senator Charles Schumer had sent to two key regulatory bodies - the Office of Thrift Supervision (Indymac’s primary regulator) and the FDIC - and that his office had “leaked” to the Wall Street Journal. We had been fighting hard to adapt/save our business and as many jobs as possible for 12 hard months since the capital markets froze up in the summer of 2007....and this Schumer letter looked like a possible death warrant for our business. "When it rains, it really pours", I thought.

Within hours the letter was all over other media outlets. It (the letter) essentially made public this New York Senator’s concerns about the financial condition of Indymac (a California Thrift), and triggered a “run on the Bank” which ultimately (2 tough and painful weeks later) led to the company’s takeover by the government.

The truth is that financial services companies survive and operate based on “confidence”, and no Bank in the country (or really the world) can survive a run on the Bank. In fact, Runs on Banks were virtually unheard of in modern times until….recently they have become quite widespread (more on why in a future post), and have been the “triggering mechanism” for most if not all of the financial institution failures you have read about in the media (in the US and abroad).

At the time it happened, me and those around me wondered what a US Senator who was also a longtime member of the Senate Banking Committee was doing taking such a public action which he knew (or should have known) could (and probably would) result in the failure of a (regulated) US Bank. Not to mention the question of why a New York Senator was so focused on a (relatively small) California Thrift….when there was plenty to worry about right in his own backyard i.e., on Wall Street.

But too many lives and jobs were at stake…and we got totally consumed first trying to fight this huge “fire” (to try to save the company)….and when the "fire" consumed the company, trying to deal with the aftermath of this disaster on our jobs and lives, and the jobs and lives of those around us.

Then, today, I saw the below article in the news…and it brought the events of the summer right back.

Wasn’t it irresponsible of Senator Schumer to basically trigger Indymac's failure? Why raise a public concern about any financial institution, knowing the possible consequences of such an action? And why Indymac instead of Washington Mutual or Wachovia or some Wall Street firm....all of whom really ultimately faced very similar problems?

Here are some articles on this issue:

Article 1:
Schumer Ripped IndyMac as Democratic Donors Probed Books
New York Sen. Charles Schumer's public criticism of IndyMac Bancorp last summer, which critics say helped spark a run on deposits that took under the troubled thrift, came while IndyMac's assets were being eyed by investors who are major donors to the Democratic Senate campaign committee the senator chairs.

http://online.wsj.com/article/SB122428567636046459.html?mod=rss_Politics_And_Policy

Article 2:
The OTS press release on Indymac...the day it was taken over by the government:

http://www.ots.treas.gov/index.cfm?p=PressReleases&ContentRecord_id=37f10b00-1e0b-8562-ebdd-d5d38f67934c&ContentType_id=4c12f337-b5b6-4c87-b45c-838958422bf3&MonthDisplay=7&YearDisplay=2008

And here is an excerpt from the release: “The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors’ demands in the normal course of business and is therefore in an unsafe and unsound condition. The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.