CASE STUDY

The fall of IndyMac Bancorp Inc



Table of Contents

Growth of IMB1

Fall of IMB2

Preventive Measures3

Regulatory Flaws in the US Banking System4

Many Rules4

Inadequate enforcements:4

Number of Financial Regulators:5

Exemptions from State Regulations:5

Conflicting Priorities:5

Conflicts Created by Financing Regulators:5

FDIC's Control over IMB's Operations6

Justification of Sales of IMB6

Lessons for the Banking System7

Changes in Regulatory Structure8

Conclusion8

The fall of IndyMac Bancorp Inc

Growth of IMB

IndyMac was founded in 1985 in the United States. Its strategy was to provide mortgage loans to customers and at the same time securitising them in the secondary market in order to generate cash flows. This strategy paid off during the home building and real estate boom. Its strategy was to provide loans to Alt-A customers who were asked to produce just a little evidence of their assets or income in order to get the loan to make the purchase. Since its focus was entirely on the Alt-A customers, any decline in their growth would lead to loses for the bank (Hudson, pp. 1-19).

As the prices of houses increased, if people could not afford to pay off their loans, the bank took control of their houses. In this way, the bank was the ultimate gainer as the prices of houses increased much more than their purchase price. These mortgages were later sold to investors. These mortgages were pooled into securities that were backed with the assurance of future payments (Taro, pp. 1-4).

This strategy took IndyMac to the top of the banking industry as their profits were soaring based on the boom in the home building and real estate market. Its profits were based entirely on the growth of this sector and any downfall in the sector could lead to loses. According to the financial statements, till 2006, the profitability of the bank was constantly on the rise. It was only in 2007, when the housing and real estate market collapsed that the bank faced huge losses and had to subsequently end its operations.

One of the reasons for its rapid growth is that is used to sell all its mortgage securities to investment companies and would lend the amount received to finance some more real estate mortgages. In this way, they were able to expand very quickly. The drawback of such an expansion was that after some time, its receivables grew to a huge amount while its cash inflows started reducing due to the economic downturn. This downturn highlighted the issues that had plagues the company since it tried to expand to quickly.

Fall of IMB

The growth of IndyMac was directly related to the growth of the housing sector. Apart from this, they main focus was on the Alt-a customers. In order to stay safe, every bank invests in various sectors of the economy so that if any one sector fails, the profits from the other sectors can cover up the loss from the unprofitable sectors. This strategy was very dangerous and the bank could easily collapse if this sector faced a downfall. This is exactly what happened in 2007 as the collapse of the real estate market ...