Worried depositors in California lined up to withdraw their money, despite repeated assurances from federal regulators that all deposits up to $100,000 are safe.
Rumors about IndyMac's troubles before the government seizure on Friday night aggravated the situation by causing a run on the bank, the second largest financial institution to fail in the United States after Continental Illinois in 1984.
On Wall Street, investors nervously eyed other banks that, like IndyMac, have been hit hard by defaulting mortgages. They include First Horizon National, Washington Mutual, Zions, Citibank and Lehman Brothers. Even relatively healthy banks like Wachovia, Wells Fargo and Bank of America took a drubbing from stock investors.
The worries were renewed despite the Treasury's extraordinary rescue of Fannie Mae and Freddie Mac over the weekend, which helped to ensure a smooth sale of Freddie Mac securities Monday morning.
"The government can't bail out the whole industry," said Jack A. Ablin, chief investment officer at Harris Private Bank.
"Any institution can be hurt by a run on the bank," said Adam Scheider of Deloitte Consulting, even if the bank is relatively sound. The massive rush to withdraw money can quickly put the bank in dire straits, he said.
The Federal Deposit Insurance Corp. (FDIC) and Office of Thrift Supervision blamed erroneous media reports and inflammatory remarks by a member of Congress for accelerating IndyMac's demise.
IndyMac, with $18 billion in insured deposits and $1 billion in uninsured deposits, specialized in providing risky and exotic loans and bank accounts in California, one of the states hit hardest by the mortgage crisis.
FDIC Chairman Sheila C. Bair said she was concerned about "needless worry and angst among bank depositors throughout the country." She said the vast majority of IndyMac's 200,000 customers are "fully protected." Even the few customers holding deposits that exceed the $100,000 insurance threshold are likely to get most of their money back, she said.
"The overwhelming majority of banks in this country are safe and sound. The chance that your own bank will be taken over by the FDIC is extremely remote," she said, noting that IndyMac's deposits represent 0.2 percent of bank assets nationwide. The FDIC insures up to $100,000 of bank deposits and an additional $250,000 in individual retirement accounts held at banks.
The government's pleas for calm had little effect on some depositors. In Pasadena outside of Los Angeles, hundreds lined up before IndyMac's opening at 9 a.m. to withdraw their money, the Associated Press reported.
Charles Tengeri, a retired schoolteacher, was the first customer to emerge from the Pasadena headquarters. He held a check for $171,000 - an amount that he said represented most of his savings.
"I didn't think this could happen," he told AP. "But I'm glad to get anything out." He said he hopes to get the remainder of his savings from the bank under FDIC procedures. "I'm keeping my fingers crossed."
Customer Harvey Solvan said he had more than $100,000 in the bank and spent Sunday night at a hotel nearby so he could be at the door more than three hours before the opening. "It's a question of how much we can get and how soon," he said while waiting in line.
Meanwhile, Wall Street ruminated over the Treasury's announcement that it planned to bolster Fannie Mae and Freddie Mac. The most vehement objections were levied at a proposal that would enable the Treasury to invest in Fannie and Freddie stock.
Hedge fund investor Jim Rogers, in an interview with Bloomberg News, called the plan an "unmitigated disaster."
"I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae," he said. "So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation."
Other analysts said the action was needed to prevent the mortgage giants' stock from tumbling and to restore confidence in their ability to support the U.S. housing market.
Tim Ryan, president of the Securities Industry and Financial Markets Association, called the Treasury plan "very sensible and responsible" and said it would preserve the health of the housing market and economy. "They should be applauded for their quick, innovative work at a critical time, and Congress should act with equal speed," he said.