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Banking on Oedipus

Before his birth, it was prophesied that Oedipus would murder his father, the king of Thebes, and marry his queen mother. To avoid this catastrophe, the baby was abandoned for death, only to be adopted and raised elsewhere.  Once an adult, Oedipus left home and along his journey, he killed a man in a roadside scuffle.  It was later discovered that Oedipus had killed the Theban king, so he was named the new king, married the widowed queen, and therefore fulfilled the prophecy of his birth.
 
Though not nearly as melodramatic, but perhaps just as perturbing, bank runs can also be seen as a self-fulfilling prophecy.  Starting with rumors that a bank is performing poorly, hundreds of customers will withdraw their money, and the bank will consequently be pronounced dead.
 
The recent failure of IndyMac Bank, FSB can be considered an example of this phenomenon.  Though IndyMac reported consistent losses in the year before its demise, it was the public release of letters written by the Chairman of Congress’ Joint Economic Committee that sent IndyMac customers into a flurry of panic.  The Senator’s letters, released June 26, 2008, opined that the collapse of IndyMac was a possibility.  In the two weeks to follow, IndyMac customers withdrew more than a billion dollars in deposits, sending the bank into a liquidity crisis.  With that, the FDIC overtook the bank, and on August 1, 2008, IndyMac filed for bankruptcy.
 
Could IndyMac’s collapse have been avoided?  If the Senator’s letters had remained private, would the bank still stand?  There’s no doubt that the bank would still have to deal with a slew of problems, but I’m sure that the day before the letters were revealed, government takeover and bankruptcy seemed like a fat chance.

 

PondelWilkinson, investor@pondel.com