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A Prelude to the Financial Crisis, Part 2: The Failure of IndyMac Bank

Experts fear that we are in the early stages of a banking crisis, making it an ideal time to look back at the origins of the last banking crisis.

The failure of IndyMac Bank in 2008 was one of the largest bank failures in US history. The collapse of IndyMac Bank was also a significant event in the lead up to the financial crisis, and like Bear Stearns, it was the result of a series of bad decisions made by the firm.

IndyMac Bank was heavily exposed to the housing market, which was in a bubble at the time. The bank had a large portfolio of mortgage-backed securities, which were highly risky assets that had been packaged together and sold to investors. As with Bear Stearns, the bank’s exposure to the subprime mortgage market was a significant factor in its collapse. When the housing market began to decline and many of these mortgages began to default, IndyMac Bank suffered significant losses.


One of the key bad decisions made by IndyMac Bank was its aggressive lending practices. The bank had a reputation for providing loans to borrowers who would not have qualified for mortgages from traditional lenders. IndyMac Bank was willing to lend to borrowers with poor credit histories and little or no down payment, making it easy for borrowers to purchase homes that they could not afford. This strategy led to a significant increase in the number of risky loans on the bank’s balance sheet.

Another bad decision made by IndyMac Bank was its over-reliance on short-term funding to finance its operations. Like Bear Stearns, IndyMac Bank relied heavily on short-term borrowing to finance its investments, which left the bank vulnerable to liquidity crises. When the housing market began to decline and borrowers began to default on their loans, investors began to withdraw their money from the bank, leading to a liquidity crisis that ultimately forced the bank to file for bankruptcy.

In addition to these bad decisions, IndyMac Bank also had poor risk management practices. The bank did not have adequate risk management systems in place to monitor its investments and assess the risks associated with its portfolio. This lack of oversight allowed the bank to continue taking on excessive risk, which ultimately contributed to its collapse.

In conclusion, the failure of IndyMac Bank was not an isolated incident, but rather the result of a series of bad decisions made by the firm in the years leading up to the financial crisis. Its exposure to the housing bubble, aggressive lending practices, reliance on short-term funding, and poor risk management practices were all contributing factors to its collapse. The lessons that could have been learned from the collapse of Bear Stearns were not heeded, and the financial system continued to take on excessive risk, ultimately leading to the financial crisis of 2008.