IndyMac: Not Such 'A Wonderful Life'
The thing about a bank run is that it can happen to a bank that is in perfectly good financial shape: all it takes is a bit of a panic. So when Mr Potter makes a public announcement that he knows the Bailey S&L is in trouble, if he's able to get it publicized, and people believe him, the resulting bank run can ruin a perfectly good bank. Even more so, if the bank is in some trouble -- missing some cash through a cashier’s error, let’s say -- but not actually insolvent, a bank run can force the bank into insolvency because now they don't have a chance to do anything else like sell stock or look for a buyer before that cash reserve runs out. That's a bank run. Unlike in the 30's, now we have government deposit insurance, so most of the depositors won't be hurt -- they'll get their money back, their ATM cards will work, their checks will continue to clear. The few that are hurt are the really big depositors, the ones who had more than the $100,000 limit in the one bank.
IndyMac was a classic bank run. The bank certainly had balance sheet troubles. Like a lot of banks, they had some mortgages on property that wasn't worth as much as they had loaned against it, so their real-estate mortgages were over-valued. In the normal course of things, a bank in this position can do a number of things as long as they can continue operating. And they can continue operating as long as they have enough cash on hand to satisfy their depositors' normal demands. But when Senator Potter started to publicly question the bank's solvency, from his position as a Senator, depositors started withdrawing their money, and before too long, they didn't have even $2 in cash; they were forced to close their doors.
Why would Mr Potter want to start a bank run? Well, maybe he doesn't like the competition. Maybe he wants the Bailey's assets, knowing that if he can force them out of business, he can buy the mortgages cheaply. Maybe he's running for re-election as the Senator from Bedford Falls, against George Bailey, the popular upstart. If he bankrupts Bailey S&L and ruins George Bailey, that has to hurt him. If the police start to investigate as well, why, he's a shoo-in for the election, isn't he?
Article printed from PJ Media: http://pjmedia.com/
URL to article: http://pjmedia.com/blog/indymac-not-such-a-wonderful-life