Tracking IndyMac's Downfall

After his mortgage company nearly crashed a decade ago, Michael W. Perry set a new course. He bought a bank so the company, soon rechristened IndyMac Bank, would never run short of money again.

The financial world now knows how this story ended. Just before 3 p.m. on July 11, federal regulators arrived at Mr. Perry’s headquarters here and seized IndyMac, which was buckling under its burden of bad loans. The debacle, one of the biggest bank failures in American history, could cost the Federal Deposit Insurance Corporation as much as $8 billion. Shareholders have been all but wiped out.

The collapse of IndyMac, one of the nation’s largest mortgage lenders, was the most vivid example to date of the dangers now confronting the nation’s banks and their investors. Two more lenders, both of them relatively small, were taken over by the government last Friday, and many analysts believe more banks will fail as home prices weaken and loan defaults mount.

Fears about the banking industry continue to haunt the stock market. The Standard & Poor’s 500-stock index fell 1.9 percent on Monday, and financial stocks tumbled 4.6 percent.

The F.D.I.C. is still trying to unravel the mess at IndyMac. The tableau of the collapse was shocking, replete with a run on the bank, snaking lines of anxious customers and sober assurances from Washington. Not since the 1980s has an American bank failed so spectacularly.

How could this happen? There has been a lot of finger-pointing. The Office of Thrift Supervision, the federal regulator that oversaw IndyMac, contends that Senator Charles E. Schumer, Democrat of New York, caused a panic among customers by issuing dire warnings about the bank.

Mr. Schumer maintains that the Office of Thrift Supervision was slow to spot the problems at IndyMac, an offshoot of the Countrywide Financial Corporation, the giant mortgage company that has come to symbolize many of the excesses of the subprime era.

But behind the political pyrotechnics is a simple truth: Executives at IndyMac, like many people on both Wall Street and Main Street, apparently never dreamed that home prices might fall. To the contrary, IndyMac made many loans on terms that implicitly assumed prices would keep rising.

Since 2000, IndyMac collected deposits from customers and used the money to make lucrative — and, it turns out, perilous — mortgages a rung above subprime. The bank also let people borrow money without their providing documentation to verify their income and assets.

As long as home prices continued to go up, the company’s strategy was very lucrative for executives, employees and shareholders. Analysts say the boom perpetuated an insatiable hunger for mortgages and a complacency about the risks they posed.

“The sales culture took over, and the sales division really drove the company,” said Paul J. Miller Jr., an analyst at Friedman, Billings, Ramsey.

Mr. Perry, whom friends and co-workers described as a hands-on manager who sometimes personally weighed in on mortgage applications, pushed the boundaries of his trade. But apparently not even Mr. Perry, who spent much of his career at IndyMac and its predecessor companies, saw the trouble until it was too late. He was predicting as recently as February that the bank would not only weather the downturn in the housing market but that it would even turn a profit this year.

Through a spokesman, Mr. Perry declined to comment for this article on the advice of his lawyers.

Formed in 1985 as a small division of Countrywide, IndyMac started making loans in the 1990s and became fully independent in 1997. The company nearly went under when the credit markets seized up in 1998, but Mr. Perry steered the company through that crisis by reducing its reliance on Wall Street financing. In July 2000, he acquired a savings bank to gain access to what was widely presumed to be a more stable source of financing: customers’ deposits.

“He certainly never forgot that experience,” Thomas K. Brown, chief executive of Second Curve Capital, said of IndyMac’s troubles in 1998. Mr. Brown, whose hedge fund had owned 5 percent of IndyMac late last year, described Mr. Perry as an “eternal optimist.”

Mr. Brown said Mr. Perry often referred to IndyMac’s previous hardships by saying, “We have made tough decisions in the past.”

Most of this decade was a golden era for IndyMac, whose profits grew threefold from 2001 to 2006. The company specialized in alternative-A, or alt-A, mortgages, which are made to borrowers with good credit but are not quite as conservative as the prime loans eligible to be bought by Fannie Mae and Freddie Mac, the mortgage giants.

For a long time, Mr. Perry disputed the growing belief that the problems in subprime mortgages would infect alt-A loans.

CONTINUED

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