The Federal Deposit Insurance Corp will run a successor institution, IndyMac Federal Bank, starting next week, the Office of Thrift Supervision said in an e-mailed statement today.
Customers will have access to funds this weekend via automated teller machines (ATMs). Regulators intend to eventually sell the company.
The Pasadena, California-based lender specialised in so- called Alt-A mortgages, which didn't require borrowers to provide documentation on their incomes. IndyMac's home state, where Countrywide Financial Corp was also located before it was bought last week, has been among the hardest hit by foreclosures.
"Given their focus on Alt-A and a heavy concentration in California, they would have suffered meaningful losses in almost any scenario," Brian Horey, president of Aurelian Management in New York, said before the seizure was announced. Aurelian is short-selling IndyMac shares to gain from declines.
Had IndyMac "applied some common sense and changed their approach to underwriting as the housing market peaked, they might have lived to see the next cycle," Horey said.
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IndyMac came under fire last month from U S Senator Charles Schumer, who said lax lending standards and deposits purchased from third parties left it on the brink of failure. In the 11 business days after Schumer explained his concerns in a June 26 letter, depositors withdrew more than $1.3 billion, the OTS said.
"This institution failed 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."
Schumer blamed IndyMac's own actions and regulatory failures for the seizure.
"If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today," Schumer, a New York Democrat, said. "Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs."
IndyMac becomes the largest OTS-regulated savings and loan to fail and second-biggest financial institution to close behind Continental Illinois in 1984, according to the FDIC. Lehman Brothers Holdings advised the regulator in the transaction.
The lender racked up almost $900 million in losses as home prices tumbled and foreclosures climbed to a record. California ranked second among U S states, with one foreclosure filing for every 192 households in June, 2.6 times the national average.
After peaking at $50.11 on May 8, 2006, IndyMac shares lost 87 per cent of their value in 2007 and another 95 per cent this year. The stock fell 3 cents to 28 cents at 4 p.m. New York time on today.
IndyMac's shutdown may mean regulators will have to raise more money to support the federal deposit insurance program that repays customers when a bank fails, Reich said during a press conference. The failure will cost the fund about $4 billion to $8 billion, the FDIC said in a statement.
About $1 billion of uninsured deposits are held by about 10,000 customers, the FDIC said. Those depositors will get an "advance dividend" equal to half the uninsured amount, according to the statement.
The FDIC insures $100,000 per depositor per insured bank, according to the agency's Web site. Customers may qualify for more coverage depending on the type of accounts they own, and some retirement accounts have a $250,000 limit.
IndyMac announced on July 7 that it was firing half its employees. The lender agreed to sell most of its retail mortgage branches to Prospect Mortgage, giving the Northbrook, Illinois based-company more than 60 branch offices with 750 employees. IndyMac also has a retail network with 33 branches and $18 billion in deposits, mostly insured by the FDIC.
The company was started in 1985 by Countrywide founders Angelo Mozilo and David Loeb under the name Countrywide Mortgage Investments. In 1999, it converted into a savings institution from a real estate investment trust. That year, Michael Perry replaced Mozilo as chief executive officer.
Under Perry's leadership, profit more than doubled from $118 million in 2000 to $343 million in 2006 amid the housing boom. The stock more than tripled over that stretch.
Closure may hit Indian companies
IndyMac had signed contracts with three Indian service providers -- Cognizant Technology Solutions, WNS Global Services and EXLService Holdings. The bank accounted for about 5 per cent of EXLService's revenue for the year ended December 31, 2007.
WNS, too, in its SEC filing had mentioned that IndyMac was expected to contribute to less than 1.5 per cent of the gross revenue of WNS in fiscal 2009.
The BPO, however, does not anticipate the need to update its guidance for FY09, based on this event. IT services provider Cognizant, too, was providing IT and software development to IndyMac. The impact on the company is yet to be assessed.