When she saw the people lined up outside IndyMac Bank in July, Joanne Kim’s mind went back to one thing: her signature.

A year earlier, when the mortgage market was in full swing, IndyMac was one of the first banks that Wilshire State Bank, where Kim is chief executive, tapped to sell its loans. IndyMac paid a high premium, and seemed willing to buy almost anything.

Wilshire didn’t sell IndyMac the poorly documented Alt-A loans that undermined the bank’s capital and ultimately caused it to collapse. But Kim knew that in the boom times, not all the loans she had signed off on loans destined for other banks’ portfolios had been thoroughly vetted.

And as the lines formed outside the bank with which she once did business, Kim couldn’t help but feel it was an indictment of questionable lending practices across L.A. County.

“Whatever customers said, we took it, accepted it as truth and we made millions and millions of dollars,” Kim said.

“In good times, I know I approved those loans. I put my signature on those loans, knowing they would be sold someplace else. But that was somewhat irresponsible, even though someone else would carry those loans on their books.”

In interviews, chief executives of local banks said if there is one lesson to be gleaned from the IndyMac debacle, it is that banks have to stick to responsible lending principles, even when the market tempts them to do otherwise.

That was what spelled the downfall of Pasadena-based IndyMac, once one of the largest savings and loans in the country with about $32 billion in assets.

Now, IndyMac is a cautionary tale, or a “very, very strong wake-up call,” as Kim described it, and one of the largest collapses of a financial institution in the nation’s history. It also served as a crash course to bank managers and customers on how quickly a bank’s assets can evaporate when its business practices are unsound.

It’s a lesson that some bank chief executives said they thought had already been learned during the savings and loans crisis of the 1980s and 1990s. During that period, more than 700 saving and loans failed, primarily stemming from risky real estate loans made during a real estate boom that started in the late 1970s.

“Unfortunately, some people have to relearn lessons of the past about overly aggressive, overly leveraged lending and borrowing,” said Russell Goldsmith, chairman and chief executive of City National Bank in Beverly Hills.

Failure foreshadowed

Weeks and even months before IndyMac fell apart, members of the L.A. banking community guessed it was in trouble. IndyMac had specialized in Alt-A loans, mortgages doled out to borrowers who don’t completely document their income or assets. As the housing market imploded, defaults of those loans rose.

“There were several banks out there that had kind of a shadow over them,” said Henry Walker, chief executive of Farmers & Merchants Bank in Long Beach. “IndyMac was one of them.”

Despite the warnings, the speed at which IndyMac collapsed still took Kim of Wilshire State Bank by surprise. She was shocked when she saw the lines outside IndyMac in mid-July.

“When I saw that, I thought, ‘Oh my goodness,'” she said. “I felt like, ‘Is this the U.S.? It’s not China or some place in Central America?’ I couldn’t believe this was happening in my backyard.”

The specific lessons each bank executive took from the saga varied. For Kim, it stoked a determination to protect her bank from being in a similar position. But it also highlighted the tightrope executives walk trying to distinguish between good and reckless risks.

“Taking risks is acceptable, but in good times maybe because of greediness or the idea that, ‘Everyone is making money, so I have to do it’ we end up taking undue risk in the name of growing the bank,” she said.

“We were too far away from good lending principles,” Kim said of the banking community. “When you ignore those principles too much, this is the result.”

For Goldsmith and Walker, who helm conservative banks that managed to largely steer clear of the mortgage crisis, IndyMac was a vindication of their sometimes unpopular decisions to avoid the lucrative subprime market that other banks exploited.

“It reaffirmed what we at City National already knew, that the basics of banking are to lend to people you know, lend to people that can reasonably afford to pay you back,” Goldsmith said.

Walker said he now hears customers approach banks that offer high interest rates with caution, knowing that those rates can come with greater risk.

“They’re getting a half-point more, and for what?” he said.

But while the debris of IndyMac’s fall is still fresh, it’s questionable how long it will last. Walker for one isn’t sure how long the lessons will stick. He recalled that when he was an assistant manager for Farmers & Merchants in the late 1980s, there was a run on a saving and loan across the street.

Walker was so fascinated by the line of people standing outside the bank that he crossed the road, grabbed a seat in the lobby and watched people patiently wait to withdraw all their money.

At the time, analysts thought the financial industry had been dealt a stern lesson about imprudent lending. Then in July, Walker saw the pictures of the lines outside IndyMac.

“People have a short memory,” he said. “They’ll remember IndyMac for a couple years. And then people will be driven by their level of greed for a higher rate of return.”