Banking Stocks Take a Lashing

'Hot Money' Tactic to Raise Funds Creates Risk

Banking stocks suffered some of their worst losses in a generation yesterday as investors' confidence in the U.S. financial system continued to erode despite the dramatic initiative by the federal government Sunday evening to bolster mortgage giants Fannie Mae and Freddie Mac.

Some banks have become increasingly vulnerable because of the risky approach they have used to raise money after traditional sources of finance on the credit markets evaporated last summer, according to banking executives and regulators.

Outside branches of California-based IndyMac Bancorp, people lined up as early as 4 a.m. yesterday to withdraw money after the bank shuttered its doors last week, becoming the third-largest bank in U.S. history to fail.

Federal regulators said yesterday that IndyMac's predicament was not widespread and that most banks remained financially stable.

The concerted effort to calm the public came as shares of Washington Mutual, the country's largest savings and loan, tumbled 35 percent, its biggest decline ever. Trading in National City, a large, Ohio-based bank, was briefly suspended during a panicked sell-off, its shares sinking to a 24-year low even as it issued an urgent statement that it was experiencing no unusual activity by depositors or creditors.

Concerns about the health of the country's financial firms spiked Friday after federal regulators seized IndyMac, which had relied on brokered deposit accounts -- high interest rate paying accounts, normally certificates of deposit, that are offered by a bank to brokers who represent large investors.

Some banks are keeping themselves afloat by turning to such "hot money" sources, in which a cash-hungry bank quickly raises large sums of money by promising to pay depositors a high interest rate. But such funds can disappear just as rapidly in a crisis.

At IndyMac, $1.3 billion in deposits vanished during the days before the bank failed. Bank branches closed hours earlier than usual Friday to prevent more withdrawals.

"The IndyMac situation was unique and does not signal a direction for the industry as a whole," said John M. Reich, director of the Office of Thrift Supervision.

But before IndyMac failed, it was not even on a list of troubled banks closely watched by the Federal Deposit Insurance Corp. That list includes 90 firms, a relatively small number within the U.S. banking system. FDIC officials acknowledged yesterday that other banks could also fail.

FDIC Chairman Sheila Bair warned recently that new banks that rely on hot money from brokered accounts would be examined more carefully. The agency is also exploring ways to restrict banks from offering these accounts.

These accounts are not necessarily illegal or unwise, federal regulators said. They can help small rural or regional banks rapidly raise money to pay depositors who want to withdraw their money.