IndyMac Harbinger of Things to Come

For some time I have been saying that the real concern of the current crisis in credit and financial markets is one of solvency, not liquidity. The failure of IndyMac is a harninger of many more bank failures to come in the next couple of years. From Bloomberg:

IndyMac Seized by U.S. Regulators Amid Cash Crunch

IndyMac Bancorp Inc. became the second-biggest federally insured financial company to be seized by U.S. regulators after a run by depositors left the California mortgage lender short on cash.

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. Regulators intend to eventually sell the company.

The Pasadena, California-based lender specialized 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 LLC 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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