IndyMac Bank's assets were seized by US federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures.
The bank is the largest government-regulated savings loan to fail and the second largest financial institution to close in US history, regulators said.
The Office of Thrift Supervision said it transferred IndyMac's operations to the Federal Deposit Insurance Corporation because it did not think the lender could meet its depositors' demands.
IndyMac customers with funds in the bank were limited to taking out money via cash machines over the weekend, debit card transactions or checks, regulators said.
Other bank services, such as online banking and phone banking, were scheduled to be made available on Monday.
The lender's failure came the same day that financial markets plunged when investors tried to gauge whether the government would have to save mortgage giants Fannie Mae and Freddie Mac.
Shares of Fannie and Freddie dropped to 17-year lows before the stocks recovered somewhat.
Wall Street is growing more convinced that the government will have to bail out the country's biggest mortgage financiers, whose failure could deal a tremendous blow to the already staggering economy.
The FDIC estimated that its takeover of IndyMac would cost up to eight (B) billion US dollars.
IndyMac's collapse is second only to that of Continental Illinois National Bank, which had nearly 40 billion dollars in assets when it failed in 1984, according to the FDIC.
A couple of dozen customers could be seen outside the building, reading fliers handed out by FDIC staff. The agency set up a toll-free number for bank customers to call.
Pasadena, California-based IndyMac Bancorp, the holding company for IndyMac Bank, has been struggling to raise capital as the housing slump deepens. IndyMac had 32.01 billion dollars in assets as of March 31. A spokesman for the lender referred media queries to the FDIC.
The banking regulator said it closed IndyMac after customers began a run on the lender following the June 26 release of a letter by Senator Charles Schumer of New York, urging several bank regulatory agencies that they take steps to prevent IndyMac's collapse.
In the 11 days that followed the letter's release, depositors took out more than 1.3 billion dollars, regulators said. In a statement on Friday, Schumer said IndyMac's failure was due to long-standing practices by the bank, not recent events.
The FDIC planned to reopen the bank on Monday as IndyMac Federal Bank, FSB. Deposits were insured up to 100-thousand dollars per depositor. As of March 31, IndyMac had total deposits of 19.06 billion dollars. Some 10-thousand depositors had funds in excess of the insured limit, for a total of one (B) billion dollars in potentially uninsured funds, the FDIC said.
Customers with uninsured deposits could begin making appointments to file a claim with the FDIC on Monday. The agency said it would pay unsecured depositors an advance dividend equal to half of the uninsured amount.
During a conference call with reporters, the FDIC's chairman said the agency would cover all insured deposits and then try to recover its costs by selling IndyMac's assets.
But holders of unsecured IndyMac debt may not fully recover their investment, she warned. IndyMac spent the last two weeks trying to reassure customers that it was not near default.
On Monday, IndyMac announced it had stopped accepting new loan submissions and planned to slash 38-hundred jobs, or more than half of its work force - the largest employee cuts in company history.
In the letter to shareholders, IndyMac's chairman and chief executive said the drastic measures were made in conjunction with banking regulators to improve the company's financial footing and "meet our mutual goal of keeping Indymac safe and sound through this crisis period".
The plan was supposed to generate roughly up to 10 (B) billion dolllars per year of new loans backed by government-sponsored mortgage companies, he said at the time.
But the run on its deposits ultimately short-circuited the strategy, prompting regulators to take action on Friday.