How Chuck Schumer Set Off a Bank Panic

Jerry Bowyer
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Posted: Jul 15, 2008 8:25 AM
How Chuck Schumer Set Off a Bank Panic

The founding fathers gave us a legislative branch divided into two ‘houses’. The lower house is the House of Representatives, modeled to some degree on the British House of Commons. That’s where the firebrands were supposed to go. Some would be responsible populists, and some would be reckless demagogues, but spread out over a large number of reckless demagogues of opposing views, their damage would be mitigated.

The upper house, the Senate, on the other hand was supposed to be deliberative. If the House of Representatives was the hot cup of coffee, the Senate was the saucer in which the coffee cooled. Our founders intended that the Senate would be the chamber which would house the statesman of our legislative body. But, then again, our founding fathers never met Chuck Schumer.

Bob Dole once said the most dangerous spot in Washington was between Chuck Schumer and a TV camera. That may be true. But it might be even more dangerous to be a shareholder in, depositor in, or employee of a bank which Schumer decides to attack. Indymac Bank was having trouble, of course, before, but nothing as serious as a bank run. Bank runs, after all, are very rare in modern history. Common enough during the great depression, they largely disappeared in response to FDR’s creation of a system of safety nets such as FDIC.

So why a 30s style bank panic now? Why Indymac?

Because the left hated them. Indymac has been in the crosshairs for some time. The trial lawyers started going after them about a month ago. Not long after that, Schumer started sending letters to regulators attacking Indymac, questioning the financial viability of a bank which he had never examined. Neither Schumer, nor any of his staff even bothered to contact Indymac with any questions. Unsatisfied with the response, Schumer leaked his letters to the press. The local paper in Pasadena (where the bank is located) played along, and ran the story with a headline strongly suggesting insolvency. Of course, the next day depositors lined up at the door and started withdrawing money. Over the next 11 days, $1.3 billion came out. Indymac, just a regional bank, could not stand that kind of tsunami and it was forced to close its doors. So far about half their workforce has been laid off; and roughly 10,000 depositors are without full insurance coverage for their lost deposits. The shareholders have lost nearly everything.

While Schumer was writing his letters, a left of center ‘community’ group named the Committee for Responsible Lending was preparing its own attack on the bank. The same week as Schumer’s leak, they released material to the press accusing Indy of mistreatment of minority applicants. There are literally hundreds of small activist ‘public interest’ law firms, ‘community’ activists, think tanks and advocacy groups around the country that make their living attacking mortgage lenders. These groups label bankers racist if they hesitate to lend in neighborhoods in decline or to minority applicants with spotty credit histories. If the banks then decided to approve the loans, but charge a higher level of interest to compensate for the higher level of risk, then these groups accuse them of ‘predatory lending’. If the banks are proven right, and the borrowers refuses to repay the borrowed money, then the banks are smeared for their ‘greed’ in making the loans in the first place. The Committee for Responsible Lending is a sort of umbrella organization for these groups. Large donors can donate to the cause by donating to CRL and letting them spread the money around.

Well, they went after Indymac, and the result is the second largest bank failure in US history. Of course, we’ll hear a lot about ‘greed’ this week, and we should. But whose greed? Schumer’s greed for power? Community activists' greed for shakedown money? Trial lawyers greedy for huge class action settlements? Hedge fund managers who write big checks to these groups and the Democratic Party (including Schumer’s Democratic Senatorial Campaign Committee) and then turn around and make mountains of money shorting mortgage paper? No, we’ll hear about none of the above from most in the media. The real culprits will have gotten away with it, and the victims will bear the blame.