On Friday, July 11, Michael Perry sat quietly at his desk, even as many of his colleagues packed their belongings and cleared out their offices.
As chief executive of IndyMac Bancorp and the driving force behind its ascension into the ranks of the country's elite mortgage lenders, Perry had held out hope his company could pull itself out of an increasingly tight spot a prospect that had dimmed with each passing day.
Earlier in the week, Perry had called the Office of Thrift Supervision to discuss IndyMac's rapidly deteriorating finances and was given what amounted to a kiss of death. "We'll talk to you on Friday," an official told him.
Friday afternoon, bank executives know, is when regulators typically seize failed banks. It gives time to gear up for a Monday reopening and to calm anxious depositors.
Indeed, as Perry sat there, about 130 employees of the Federal Deposit Insurance Corp.'s bank failure division loaded into rental cars and made beelines for IndyMac's Pasadena headquarters and its regional network of branches.
Only two larger institutions have ever failed in the nation's history, and it showed: More than one-third of the FDIC division was on the ground in Los Angeles and another one-third was helping remotely via a computer network.
When they arrived at IndyMac's offices on East Walnut Street, Perry had hardly packed a thing.
"In the last couple days, he was emotional. This guy's life creation, this company that he had grown from four people to 10,000-plus, was crashing down," said Evan Wagner, the vice president of communications for the company, who has stayed on with the federal bank.
"At the moment that it all came crashing down, he wasn't casting blame on other people, he wasn't wallowing in pity, he wasn't leaving with a golden parachute. He said that he was going to be the last one out. He stayed there until they told him he couldn't be."
Until recently, IndyMac had been one of Los Angeles County's biggest business success stories. In just two decades, the thrift had grown into one of the largest mortgage originators in the country and a marquee Southern California institution.
Today, the company is a pariah.
Depositors have lost hundreds of millions of dollars. IndyMac's stock is essentially worthless, costing investors billions. The FDIC, which is trying to sell IndyMac's assets to another bank, estimates the debacle will cost the FDIC $9 billion.
Few companies have made it through the collapse of the housing and credit markets unscathed. In just two months since IndyMac was seized, six banks have failed and the FDIC recently increased the number of troubled banks on its watch list to 117. Just over a week ago, the federal government took over Fannie Mae and Freddie Mac, far bigger failed institutions that display just how deep the mortgage market's troubles run.
But with the possible exception of Countrywide Financial Corp. which was founded and run by Perry's mentor, Angelo Mozilo, before being acquired in July at a steep discount by Bank of America Corp. few of the mortgage market debacles have been as tied to one man as IndyMac has been to Perry.
The Business Journal examined hundreds of pages of internal e-mails, reports and other documents and attempted to contact dozens of current and former IndyMac employees to determine the driving forces behind the institution's rise, fall and ultimate failure. Many of the employees did not wish to speak, but those who did painted a detailed picture of a company colored by an aggressive and sometimes boorish chief executive who created a corporate culture that gave the company little chance of surviving a major market downturn.
"The seeds were planted long ago," said David Balsam, former chief financial officer of IndyMac's mortgage bank, who left in 2006. "What happened in the industry, while significant and dramatic, should not have bankrupted a well-run institution."
A rising tide
Spun out of Countrywide, IndyMac was little more than an afterthought until Perry took over in 1993.
The unit, then known as Countrywide Mortgage Investment, existed to buy jumbo loans originated by its parent. But when he was handpicked by Mozilo from relative obscurity to help run the unit, Perry brought unmistakable enthusiasm and ambition.
Perry, who had been chief financial officer of a small Sacramento bank, oversaw IndyMac's transition into the mortgage origination business, focusing on jumbo and so-called nonconforming loans.
By the end of the year, it had doubled its assets and would never look back. Perry did not know it at the time, but the company had set out on a growth path that would eventually lead to its downfall.
"Mike was the vision and the engine behind their growth," said Andy Wilson, managing partner of Pasadena-based Momentum Venture Management LLC.
Wilson calls himself a casual acquaintance of Perry, who in 2001 offered him a senior management position at IndyMac an offer he declined.
"Mike was a very driven, very entrepreneurial guy. He's probably a chip off the old block coming up under Angelo Mozilo," Wilson said.
Mozilo, the son of a Bronx butcher, founded Countrywide in 1969 and built it into the nation's largest independent mortgage company. Countrywide, however, suffered huge losses as a result of its subprime lending and was acquired for less than $3 billion. At its height in early 2007, Countrywide had a market capitalization of more than $25 billion.
Mozilo, who was vice chairman and president of IndyMac until 1999, has described Perry as "like my son."
In 1997, IndyMac parted ways with its parent, purchasing all of its outstanding stock and striking out on its own. Within IndyMac, this was heralded as a landmark moment, one that helped create a culture valuing independence. "Self-management is liberating," blared a headline on one of the first pages of IndyMac's 1997 annual report.
Perry, meanwhile, championed the growth potential of the newly independent company.
"They had an aggressive growth strategy," said Bart Narter, a senior analyst with consulting firm Celent.
Through a variety of product lines, the company began eating up market share, and the gains snowballed. "Mortgages are a scale business so success begets success," Narter said.
IndyMac's timing was perfect. With home prices rising at an unprecedented rate, it had little trouble growing its portfolio and finding buyers for even low-quality loans. The company specialized in Alt-A mortgage loans for borrowers who could not qualify for prime loans or who could not provide full documentation of income or assets. Though the loans are considered higher quality than subprime, Alt-As have defaulted at far higher rates during the housing market bust than virtually anyone predicted.
But IndyMac executives, who had never experienced a significant market downturn, were lulled into a false sense of security during the boom, observers said.
"The pure underlying factor that made the house fall down was that it was predicated on the view that home prices would continue to rise perpetually," said Jason Arnold, an analyst with RBC Capital Markets Corp. "When that didn't work out was when the cracks started to emerge."
'Friends' and enemies
Perry, still baby-faced at 45, was a polarizing leader. More than a few employees were put off by his frankness, but many said they liked his hands-on style.
Perry's fingerprints were all over IndyMac, all the way down to a multipart, SAT-style test that employees had to pass before being hired. He personally responded to customer complaints and tried to build a rapport with even low-level employees.
"Mike Perry was very approachable," said Jack Hill, an assistant vice president in the corporate legal department who has stayed on board since the FDIC took over. "He would respond to the lowest level employee in the farthest reaches who was only making one or two loans a year."
Perry also was plainspoken, sometimes to a fault. In one quarterly earnings conference call, he derided some of the loans made by his own company as "stupid" and called another mortgage company "crappy."
Perry's strong personality, however, created a schism in the company. A number of employees, including some senior managers, left because they could not get along with Perry.
"Mike was basically a bully," said a former IndyMac manager who requested anonymity because he maintains professional relationships with former IndyMac executives. "He was conceited and cocky to a point that he had no interest in learning from people who had much more experience than him."
Several employees said Perry surrounded himself with friends and edged out dissenters even when that meant putting lawyers, accountants or others with little mortgage industry experience in high-level positions. A number of employees referenced "Friends of Mike" or "FOM" a running joke some IndyMac employees used to describe the cronyism they believed ran through upper management.
The lack of dissent left IndyMac as a sort of corporate dictatorship: "All the strategic direction of IndyMac was Mike dictating it," said the former IndyMac manager.
Perry, who rarely grants media interviews, did not answer telephone calls placed to his home and IndyMac. A spokesman said Perry declined to comment on the advice of his lawyers.
Passing the test
In late 1998, IndyMac suffered its first ever quarterly loss amid the Asian financial crisis, which tightened worldwide credit markets. Perry, knowing IndyMac needed alternative funding sources to ensure it had capital, made a bold move.
He went out and bought First Federal Savings and Loan Association of San Gabriel Valley, and turned IndyMac into a depository institution. Almost overnight, the company had an infusion of $400 million, and Perry was flying high again.
Perry used the company's new thrift status as an engine for making more loans rather than building a stable deposit base of local customers with checking and savings accounts. He chose to offer high interest rates to quickly attract deposits from investors who employ independent brokers to find the best rates on certificates of deposit anywhere in the country.
"He did not value deposit gathering period," said Balsam, formerly of the mortgage bank. "He said, 'Deposit gathering is a commodity business and asset gathering is where the money is.'"
By buying brokered deposits, the company was able to fund rapid growth. In 2000, IndyMac was the 22nd largest mortgage originator in the country. By 2003, it was the 20th, and by 2004 it had climbed all the way to No. 12. Perry had said many times he wanted to build IndyMac into the eighth largest mortgage originator by 2008 it became the seventh.
But that growth strategy came at a cost. In the first quarter of 2008, IndyMac boasted $19 billion in deposits, but only about $3 billion were in core deposits from steady customers who tend to leave their money where it is. For many banks, core deposits can account for more than 50 percent of a deposit base.
"The more you have in core deposits the better grounded the institution is," said Wade Francis, president of Long Beach-based bank consultant Unicon Financial Services Inc. "Anytime you see an institution that is growing through noncore deposits, it is one of the big red flags that should alert either the regulators or the public that the institution may be engaged in some kind of higher-risk, higher-reward activity."
Indeed, the company put considerable pressure on ground-level employees to originate as many loans as possible. Employees had to meet benchmarks and were ranked based on productivity. The worst performers were in danger of being laid off. In other words, the emphasis was on quantity, not necessarily quality.
"What happened in this market was a lot of lenders gave up on common-sense underwriting. It became a race to the bottom," said Michael Hudson, a researcher for the nonpartisan Center for Responsible Lending who authored a report titled "IndyMac: What Went Wrong?" "The attitude was: If you're not going to make this loan, some other lender down the street is going to make this loan."
Still, as long as housing prices continued to increase, IndyMac's growth did not raise much concern. But by 2005 and 2006 as there were signs the market had hit its peak and some lenders began to make fewer loans, IndyMac increased its lending volume by 50 percent.
"Other people, meaning Wells Fargo and so on, they pulled back. When Mike thought he was winning market share, he wasn't really winning market share they were relinquishing market share to him," said Balsam. "In their busy-ness to grow, they took on a lot of loans, in some cases very thin-margin loans that were lower quality."
And even as the secondary market for many loans began to dry up in the middle of 2007, IndyMac forged ahead. The company even used that as a selling point in a pitch.
"We continue to see very good performance on high-quality Alt-A loans," the company said in an Aug. 15, 2007, e-mail to certain customers. "In fact, while almost all of the Alt-A lenders have discontinued their Alt-A programs, we have continued to provide liquidity for higher-quality Alt-A loans."
But IndyMac's lack of restraint had begun to raise eyebrows among its competitors
"IndyMac was willing to buy anything," said Joanne Kim, chief executive of Wilshire Bancorp Inc., the Los Angeles-based parent of Wilshire State Bank, a $2.4 billion-asset institution that sold as much as 80 percent of its loans to IndyMac and Countrywide. (See sidebar, page 28.)
In retrospect, co-workers said that Perry's underlying and seemingly eternal optimism may have contributed to him underestimating the severity of the market's troubles.
On May 12, less than two months before IndyMac would be seized by the FDIC, Perry sent an e-mail to senior managers saying, "I strongly believe we have turned a corner and will see consistent improvement from here."
'The Last Mohican'
Those who knew Perry at the time say that inherent in his relentless optimism was an overriding desire to remain independent. Since parting ways with Countrywide, Perry helped engender a sense of pride in IndyMac's independence, and he fiercely resisted a merger or sale.
Even the name of the company was a nod to independence. The company adopted the moniker Independent National Mortgage Co. after splitting from Countrywide and later retained the "Indy" as a reminder.
"People at IndyMac were proud of the name," said Wagner, who is now director of communications for IndyMac Federal Bank. "Management retained a silly name a name that wasn't really brand-friendly because it meant something to them."
And when it became clear that Bank of America intended to acquire Countrywide, the other major independent mortgage originator, Perry saw it as a reaffirmation of the thrift's strength. In a Feb. 14, 2008, e-mail sent to senior managers, Perry defended IndyMac's performance in the down market, saying, "If we had not done a decent job through this crisis period, why is IndyMac 'The Last Mohican' ... the largest, surviving independent home lender?"
Though the culture instilled a sense of pride among many employees, some say it also hurt the company because it led management to resist overtures from other institutions that could have bought a stake and improved IndyMac's capital levels.
Perry had rejected numerous offers to sell some or all of the company, according to executives familiar with various talks.
Perry would often couch discussion of a sale in the language of independence. He said in an e-mail to an IndyMac branch manager that if the housing market did not recover, "we may at some point have to look at giving up our independence."
One of the company's most sought-after assets the reverse mortgage unit known as Financial Freedom could have garnered the company as much as a half-billion dollars had it been sold just a year or two ago, said Arnold of RBC Capital. Today, despite its relatively strong performance, Financial Freedom might not even snag $100 million.
"Early on, they didn't pursue capital. They scoffed at it, saying, 'We don't really need it; we don't want it,'" Arnold said. "If they would have tried sooner to raise new capital, they may have gotten an investor to give them some."
Things fall apart
Still, despite the optimism, some at IndyMac began to realize by late 2007 that the company needed to do something.
IndyMac was essentially a middleman in the wholesale lending business, selling loans into the secondary market. But by the end of 2007, the secondary market had seized up, leaving IndyMac with a huge portfolio of loans it was unable to sell. In the fourth quarter of that year, the company moved $10.7 billion in loans held for sale to its "held for investment" portfolio, meaning that IndyMac was forced to hold them.
In the mortgage market version of musical chairs, IndyMac got caught with too many loans when the music stopped. At the same time, Wall Street and the media were abuzz with speculation on IndyMac's financial troubles, leading to a slow run on the company.
"Over the months, we had been seeing more withdrawals, but we were working with it," said Wagner.
Meanwhile, the company's stock price plummeted. Shares topped $50 as recently as May 2006, but were trading well under $10 in early 2008. It didn't help matters when the company reported a nearly $200 million loss in the first quarter of 2008. The company also announced at the time that it was taking new measures to preserve capital, including deferring some interest payments on its securities.
With capital hard to come by, IndyMac finally sought to stabilize its deposit base. The goal was to increase core deposits 22 percent and decrease brokered deposits by 66 percent.
What's more, in May, executives began seriously looking to raise capital by potentially selling a stake in the company. In an initiative known internally as Project Iron Man, the company pursued private equity firms such as Ares Management and Cerberus Capital Management in an effort to raise between $500 million and $1 billion, according to documents provided to the Business Journal.
According to an IndyMac executive familiar with the effort, the talks had been going well, but the walls came crashing down June 26. That day, while representatives of a number of the private equity firms were at IndyMac headquarters for a visit, letters written by New York Democratic Sen. Charles Schumer questioning IndyMac's financial viability were made public. The letters seemed to imply at least a number of depositors inferred that depositors could lose their money.
News outlets immediately seized on the letters, which discussed "the possible collapse" of the institution. IndyMac's stock dropped under $1 per share. Depositors rushed to IndyMac's branches, many with newspaper articles in hand, and pulled their deposits out of the bank.
IndyMac mobilized hundreds of employees, including senior executives, to go to the branches and help in any way they could. But it was mostly for naught. Within three days, depositors withdrew $100 million from the institution; after two weeks, $1.3 billion was gone. A liquidity crisis left the thrift unable to meet customer demands, regulators said, and the bank fell below the level considered "well capitalized," limiting its ability to use brokered deposits as a source of funding.
"They got caught on the wrong side of a tsunami," said Greg Garrabrants, who was senior vice president of IndyMac before leaving in October 2007 to become chief executive of B of I Holding Inc., the San Diego-based parent of Bank of Internet USA.
An institution that had fought for its independence proved in the end unable to maintain it. With mountains of unsold loans, rising defaults among borrowers, little cash left and no investors willing to help out, IndyMac's house of cards toppled.
The FDIC swarmed the headquarters and the branches July 11 to close the bank. The FDIC still has about a dozen employees at IndyMac's Pasadena offices with business cards taped to the doorframes of executive offices.
The government has enlisted the Lehman Brothers investment bank to help find a buyer, and several dozen companies have expressed interest. John Bovenzi, FDIC chief operating officer and chief executive of IndyMac Federal Bank, said a sale could be agreed to "sometime in October."
Meanwhile, many borrowers, investors and others have been looking for someone to blame. A group of former employees tried to sue Schumer, who the federal thrift supervision office has faulted for causing the run. Schumer, in turn, has pointed his finger at regulators, who he said were "asleep at the switch."
But Perry has endured as much wrath as anyone, with his name on dozens of lawsuits. On the Internet, entire forums give irate IndyMac customers a place to vent and many of the comments are directed squarely at the man who was in charge.
"Mike perry stole my hard earned money," wrote one commenter identified only as Justin in an error-filled outburst. "Indymac failed because mike perry is a lier and a swindler."
But not all believe that.
Several employees said Perry genuinely believed in the company to the bitter end. He had offered to cut his salary in half as the company's liquidity crisis worsened. And he refused to unload his stock as the share price dropped, even buying $2.6 million worth of stock in February as IndyMac's condition was worsening.
In short, he went down with the ship. On that Friday in July, Perry spent his last day talking with employees, telling them how proud he was of the work they had done.
"He didn't sell us out," said Hill, of the corporate legal department. "You've got to have some respect for that."
For reprint and licensing requests for this article, CLICK HERE.