Banks on the edge - Bloomberg Market Magzine

Banks on the Edge As many as 100 regional lenders with assets totaling $800 billion are likely to fail in the next year. That would cost the FDIC $150 billion more than it has -- and taxpayers would again fund a government bailout. By David Evans Bloomberg Markets, November 2008 Deborah Horn tugs on the handle of the glass-paned entrance of the IndyMac Bancorp Inc. branch in Manhattan Beach, California. The door won't budge. The weekend is approaching, and Horn, 44, the sole breadwinner in a family of three, needs cash. A small notice taped to the window on this Friday afternoon in mid-July tells her why she's been locked out. IndyMac has failed, the single-spaced, letter-sized paper says; the bank is now in the hands of the Federal Deposit Insurance Corp. ``The Receiver is now taking possession of the Bank,'' the sign says. ``I'm physically shaking,'' says Horn, an academic tutor, as she peers into the bank. Inside, an FDIC examiner is talking to six stone-faced IndyMac employees. ``I don't know when I'm going to be able to get my money,'' Horn says. ``I'm a single mom. This is the money I live on.'' Don't worry about Horn. She'll be all right, as will most of Pasadena, California-based IndyMac's 200,000-plus customers. That's because the FDIC, created in 1934, insures all accounts up to $100,000 at its member banks, and it has never failed to honor a claim. The people to worry about are U.S. taxpayers. The IndyMac debacle is taking a large bite out of FDIC reserves, and if scores of other banks fail in the year ahead, the fund will be depleted. Taxpayers will have to step in. Worst Wave Americans have gotten used to the idea that bank failures were as rare as a category five hurricane. No banks went bust in 2005 or 2006. Seven collapsed in 2007 as the credit crisis began to exact a toll. So far in 2008, 12 more, with total assets of $42 billion, have fallen -- that's the worst wave of bank failures since 1992. IndyMac, which had $32 billion in assets when it went into receivership, is the most expensive bank failure the FDIC has ever covered. And that record may not stand for long. By the end of 2009, about 100 U.S. banks with collective assets of more than $800 billion will fail, predicts Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California-based firm that sells its analysis of FDIC data to investors. ``It's not going to be Armageddon,'' says Mark Vaughan, an economist and assistant vice president for banking supervision and regulation at the Federal Reserve Bank of Richmond, Virginia. ``But it's going to be bad.'' FDIC's Secret List The FDIC knows which banks are at risk; it has a watch list with 117 institutions. The agency won't disclose their names because doing so could cause depositors to panic and pull out all of their funds. It won't take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue. Regardless of who wins control of the White House and Congress in November, no politician is likely to vote in favor of leaving federally insured depositors out in the cold. A taxpayer bailout of the FDIC would come on the heels of intervention by the U.S. Treasury Department and Federal Reserve to save investment bank Bear Stearns Cos., mortgage giants Fannie Mae and Freddie Mac and the world's largest insurer, American International Group Inc. Uninsured Deposits Emergency federal funding of the FDIC could swell the cost of government rescues of failed financial institutions to more than $400 billion -- not including the $700 billion general Wall Street bailout now under discussion in Congress. That number would be even higher if the government were on the hook for uninsured deposits -- which amount to $2.6 trillion, 37 percent of the total of $7 trillion held in the U.S. branches of all FDIC member banks. The subprime crisis -- which started in the suburbs of California and Florida and migrated through the alchemy of securitization to Wall Street investment banks -- has come almost full circle, spreading its toxins to the very lenders who first extended those teaser-rate, no-document mortgages to homeowners. In 2006, IndyMac was the largest provider of mortgages that didn't require borrowers to provide proof of their incomes. And as of mid-September, investors were worried that Washington Mutual Inc., the biggest thrift in the U.S., would be the next bank to go belly up. A federal takeover of Washington Mutual, which has assets of $310 billion, could cost taxpayers $24 billion more, according to Richard Bove, an analyst at Miami-based Ladenburg Thalmann & Co. Slower To Hit The reckoning that has run through Wall Street, claiming investment banks Lehman Brothers Holdings Inc. and Bear Stearns among its victims, has been slower to hit Main Street. In mid- 2007, Wall Street firms began disclosing losses on their packages of securitized home loans. From August 2007 to September 2008, banks worldwide wrote down more than $500 billion. Regional banks, by contrast, have waited to write off their bad mortgages, hoping the housing market would improve and defaults would level off. Instead, they've risen. FDIC-insured banks charged off $26.4 billion of bad loans in the second quarter of 2008, the most since 1991. U.S. lenders, in their embrace of subprime lending, committed the same analytical fallacy as their Wall Street counterparts. When it came to assessing risk, they relied on the recent past to predict the near future. Living in the Past They were blinded by years of rising home prices and low mortgage default rates. The FDIC fell into the same trap. As recently as March, an internal FDIC memo estimated the cost to cover bank collapses in 2008 would be just $1 billion, dropping to $450 million in 2009. It wasn't even close. The IndyMac failure alone, which happened four months after that memo was circulated, will cost the FDIC $8.9 billion -- and the bill for all 12 collapses will be about $11 billion, the FDIC says. FDIC Chairman Sheila Bair says the agency's forecast was based on models using data from the past 20 years, which included long periods with few bank failures. ``Given the change in economic conditions, we need to weight the more recent data more heavily,'' Bair says. ``You also need a good dose of common sense.'' Bair says depositors shouldn't fret about their banks. ``We do have a handful with some significant challenges,'' she says. ``Overall, banks are quite safe and sound.'' Bair is duty bound to say that, says Joseph Mason, an economist who worked for the Treasury from 1995 to 1998. Part of the FDIC's job is to reassure the public and prevent runs on banks. Mason says Bair's rhetoric masks the agency's inability to grasp the scope of the coming crisis. `Ignoring the Problem' ``The FDIC and the banking regulators are ignoring the problems, hoping they'll go away,'' he says. ``They won't.'' The quake that shook markets in September may make the FDIC's task more complicated and expensive. With investment banks in eclipse, deposit-taking institutions will now play a larger role in financing the economy. Earlier this month, Bank of America Corp. agreed to buy Merrill Lynch & Co. for $50 billion, and Wachovia Corp. and Morgan Stanley were in talks about a potential merger. 'Would Be Miraculous' From 2002 to 2007, U.S. lenders made a total of $2.5 trillion in subprime mortgages, according to the newsletter Inside Mortgage Finance. ``Given the magnitude of the bad loans still on bank balance sheets, it would be miraculous for the FDIC to squeak by with losses of less than $200 billion,'' Whalen says. On Sept. 18, in yet another stunning turn of events, Paulson proposed a plan that would cost the government, if not necessarily the FDIC, hundreds of billions of dollars more. The Treasury secretary says the government will purchase toxic mortgage debt from banks in an effort to cleanse the financial system. In an unprecedented move, the Treasury also pledged $50 billion to insure nonbank money market funds. Bair says Paulson's plan won't reduce the number of banks on the FDIC's watch list. One reason the rolling financial crisis is hitting regional banks later than it walloped Wall Street is because the very system that is meant to protect depositors -- federal insurance -- has also served to prop up weak lenders. So has the ready supply of credit extended to banks by another government- chartered group, the Federal Home Loan Banks. Because all deposits up to $100,000 are insured, most savers can be agnostic about where they put their money. They don't have to know -- or care -- whether a bank is making sound or foolish loans. Unlike buyers of stocks or bonds, people who put their money in banks rarely do research about the soundness of the institution. That makes it easy for banks -- both prudent and reckless ones -- to raise cash. Brokered Deposits Loophole Banks have taken the FDIC's protection and run with it, thanks to the phenomenon of brokered deposits -- and a giant loophole in federal regulations. As of June 30, Whalen says banks held $644 billion from brokers who offer customers a way to gain FDIC insurance for multiple accounts. Promontory Interfinancial Network LLC, an Arlington, Virginia-based company founded in 2002 by former federal officials --including some from the FDIC itself -- has figured out how to help wealthy clients insure as much as $50 million each by putting their money into separate accounts at 500 different banks. While the law does limit insurance to $100,000 per account, it places no ceiling on the number of different banks where an individual can hold accounts -- a loophole Congress failed to close even after the savings and loan debacle of 1984- 1992. Missing Discipline Bair says brokered deposits can provide quick cash but also create potential danger. ``It is quite easy to get brokered deposits, and there's not a lot of market discipline with the brokered deposits,'' she says. ``When there's excessive reliance on them, particularly to fuel rapid growth on the balance sheet, that's definitely a high-risk factor.'' The other big source of money for banks is the FHLB, an under-the-radar network of 12 regional banks created by Congress in 1932 to help lenders finance mortgages. Lenders had borrowed a total of $840.6 billion from the FHLB system as of June 30, up 38 percent from $608 billion in the same period a year earlier. Treasury Secretary Henry Paulson, in a little-noticed action on Sept. 7, the day after he announced the bailout of Fannie and Freddie, extended a secured credit line to the FHLB to provide an emergency source of funding if needed. FHLB Advances Vaughan says credit from the FHLB is keeping some sick banks afloat and postponing the inevitable. `What's going to happen,'' he says, ``is that weak banks will use FHLB advances to avoid discipline from funding markets. In some cases, that will keep their doors open longer than they otherwise would, all-the-while offloading more and more potential losses onto the FDIC and taxpayers.'' Normally, the FDIC is no more than four initials customers see when they walk into their banks. In recent years, the agency hasn't had to close many banks, as it collected small amounts of insurance premium payments. President Franklin D. Roosevelt signed the law creating the FDIC in the middle of the Depression. As part of the New Deal, Congress created a system of federal insurance to end bank runs by reassuring the public that depositing money in banks was safe. All banks paid the same rate for insurance. Wave of Failures The FDIC shares regulatory authority with other agencies. The Office of Thrift Supervision oversees federally chartered savings and loans, the Comptroller of the Currency monitors national banks, and state banking regulators review state- chartered banks. The FDIC is the only one of these agencies that insures deposits. By and large, the government's insurance system worked until the 1980s, when thrifts went on a commercial real estate lending binge, triggering a wave of failures and consolidation that lasted from 1984 to 1992. In 1991, Congress changed the way FDIC premiums were assessed, requiring banks to pay rates based on how well capitalized they were for the risks they faced. As bank failures subsided to less than a dozen a year by 1995, the FDIC's reserves began to swell. As a result, the agency cut to zero the premiums it charged to the 90 percent of the banks deemed safest. That free ride continued for 10 years. `No Good Way' In 2006, Congress increased insurance payments for most banks, averaging $5-$7 per $10,000 of deposits. The insurance premiums imposed by the FDIC on the riskiest banks -- running as high as $43 per $10,000 -- are still far below the rates private insurers would charge, says Sherrill Shaffer, former chief economist of the Federal Reserve Bank of New York. At the same time, charging struggling banks a fair price for insurance premiums may drive them into insolvency, he says. ``That can be destabilizing,'' says Shaffer, who's now a professor of banking at the University of Wyoming in Laramie. ``There's really no good way around that. It's an issue that policy makers and analysts have wrestled with for decades.'' Bair says the FDIC is gearing up for the coming wave of bank failures. She says she's developing a plan to raise insurance premiums. The agency's Division of Resolutions and Receiverships has boosted authorized staffing levels by 48 percent, to 331, this year. It has hired 178 new financial specialists and called up 65 retirees for temporary service under a special program. Bair vs. Enron Bair, 54, an attorney who graduated from the University of Kansas School of Law, has challenged financial institutions as a regulator for more than a decade. President George W. Bush nominated her as chairman, and she was sworn in on June 26, 2006. She replaced Donald Powell, a former Texas banker. In 1992, as a member of the Commodity Futures Trading Commission, Bair cast the lone vote against Enron Corp.'s effort to exempt certain energy contracts from the agency's anti-fraud and anti- market manipulation enforcement powers. Nine years later, Enron blew up in one of the biggest financial scandals in U.S. history. As assistant secretary of the Treasury for financial institutions in 2002, Bair criticized abusive subprime mortgage brokers. ``Lenders have made loans with little or no regard for a borrower's ability to repay and have engaged in multiple refinance transactions that result in little or no benefit to a borrower,'' she told the Pittsburgh Community Reinvestment Group on March 18, 2002. `Rock and Brock' Bair has published two children's books. One of them, ``Rock, Brock, and the Savings Shock'' (Albert Whitman, 2006) is a tale of two twins -- Rock the Saver and Brock the Spender -- that encourages thrift and explains the benefits of compound interest to elementary school readers. Some of those lessons seem to have been lost on America's bankers and lawmakers, starting with the dangers of brokered deposits. During the S&L crisis, banks financed their lending spree by raising billions of dollars by selling FDIC-insured CDs, often at high interest rates, through brokers. When banks rely on brokers to garner as much as 15 percent of their deposits, it's a red flag calling for closer examination by regulators, Yeager says. 'I Was Death' William Isaac, who chaired the FDIC from 1981 to '85, tried to ban brokered deposits. ``I was death on brokered deposits,'' says Isaac, 64, now chairman of Vienna, Virginia-based Secura Group of LECG LCC, a bank consulting firm. ``I waged a major war against them. I lost that battle with courts and the Congress.'' In 1991, Congress passed a law banning banks that weren't classified as ``well capitalized'' by the FDIC from using brokered deposits. The law left open a loophole, and the FDIC made it wider. Banks that are just ``adequately capitalized'' are allowed to petition the agency for exemptions from the law. From 2005 to 2007, 88 banks asked the FDIC for waivers, according to agency records. The FDIC granted approval to all of them. ``There are always financial incentives for banks in the U.S. to use brokered deposits to take on excessive risk without having to pay for it,'' Shaffer says. ``It allows them to bring in large chunks of money relatively quickly.'' In 1980, following lobbying from the S&L industry, Congress raised the ceiling on accounts that qualified for FDIC insurance to $100,000 from $40,000. That ceiling has holes in it. $2 Million FDIC-Insured A family of two adults and two children can get up to $2 million of FDIC insurance at just one bank. Here's how: Each person opens an individual account, insuring a total of $400,000. They can hold four more insured joint accounts, each in the names of two family members, protecting another $400,000. The family can protect $600,000 more if each spouse opens an account that's payable upon death to family members. Each adult can also insure $250,000 for individual retirement holdings in the same bank. And a family-owned incorporated business qualifies for another $100,000 of insurance. Banks don't always explain these rules to customers. They might not even know about them. ``They're very complex for depositors to understand,'' says Alan Blinder, 62, a former vice chairman of the Federal Reserve. ``My mother every once in a while asks me a question, and I don't always get it right. I have to scurry back to the rule book. It is complicated.'' Biggest Loophole Blinder is now vice chairman of Promontory Interfinancial, the deposit broker that exploits the biggest FDIC loophole of all -- the one that allows individuals to have insured accounts at an unlimited number of banks. Isaac serves as an adviser to Promontory. Along with the flood of brokered deposits that flows into their coffers, banks can also tap another source of money: loans from the Federal Home Loan Banks. They lend money to banks at low interest rates, accepting mostly real estate debt worth as much as twice the value of the bank loans as collateral. In 1989, until which FHLBs lent just to savings banks, Congress expanded the charter to allow most commercial banks to tap into the inexpensive source of loans. New York-based Citigroup Inc., the largest U.S. bank by assets, was the largest borrower this year, with $84.5 billion from the FHLBs as of June 30. Lacks Staff Former Fed economist Tim Yeager says FHLB offices lack the staff to keep up with financial conditions of their thousands of member banks. ``The Federal Home Loan Banks cannot effectively control or monitor the risks that are in these institutions,'' says Yeager, now a finance professor at the University of Arkansas at Fayetteville. ``As long as they have collateral, they're just going to lend.'' Behind the scenes, the surge of FHLB lending has created a clash of federal authorities. Bair says the ability of struggling banks to borrow billions from FHLB branches is likely to lead to large losses for her agency. The FDIC can't start recovering assets from a failed bank until after the FHLB collects 100 percent of its loans. ``We really get a double whammy,'' says Bair, who has short dark hair and is dressed in a well-tailored gray suit, with a pearl necklace, as she speaks in San Francisco before participating in a panel discussion on financial education. `I Have a Beef' ``The Federal Home Loan Bank has priority over us in the claims queue if we have to close the bank,'' she says. ``I have a beef with excessive reliance on Federal Home Loan Bank advances.'' John von Seggern, president of the Council of Federal Home Loan Banks, a nonprofit trade association that lobbies Congress on behalf of the 12 independently operated regional offices, says the FHLB provides an essential service, quickly dispatching low-interest loans to member banks. ``We are not the regulator,'' he says. ``Our role is to be the liquidity provider.'' He says the FHLBs would halt lending to a weak bank if a bank regulator asked; he doesn't remember that ever happening. ``If we turn off the tap, that bank would positively fail,'' he says. ``Even healthy banks would fail.'' Von Seggern opposes Bair's efforts to increase insurance premiums for FDIC member banks that rely on FHLB advances for a large share of their funding. `Making Good Loans?' ``The question should be, `Are you making good loans?' as opposed to `Where did you get the money to fund those loans?''' von Seggern says. ``This is a tough issue. We are very interested in working with the FDIC in coming to an agreement that works for both of us.'' Vaughan of the Richmond Fed says the FHLBs will be stretched with more banks on the cusp of failing. ``U.S. bank supervisors barely have the staff to handle routine bank exams,'' he says. ``Now, when a bank falls into problem status, there's a lot of stuff you got to do,'' he says. ``You've got to monitor the condition of that institution continuously, put all kinds of enforcement on them and stay in contact with the bank to make sure they're doing what they need to do. Dealing with a long list of problem banks takes resources, and there aren't a lot of bodies to spare.'' As FDIC examiners find the truth about a bank's deteriorating condition, the agency faces a conundrum. It knows which banks are on the verge of failure, but in order to avoid customer panic, it doesn't make its watch list public. No Warning The FDIC gave no warning to the public or depositors that IndyMac was nearing collapse. The agency knew that IndyMac was at risk a month earlier when it placed it on the watch list, the FDIC says. Still, as recently as May 12 -- two months before it failed -- IndyMac declared it was ``well capitalized'' by FDIC standards as of March 31. When IndyMac collapsed, $10 billion, or a third of the bank's assets, were funded by FHLB advances. Another $5.5 billion came from brokered deposits. Indymac specialized in so-called Alt-A loans, also known as liar loans because they didn't require borrowers to provide documentation of their income. The bank accepted whatever borrowers said they had in annual wages. Bundled Loans From 2003 to 2007, the bank had bundled many of its loans into securities and sold them to Wall Street firms. As the credit crisis took hold on Wall Street, the bank could no longer offload its mortgages. It had $2.7 billion in bad loan reserves on its books on June 30, up from $813 million a year earlier. Over its final nine months, the bank reported losses totaling $896 million. The agency almost always closes banks on Friday afternoons, after the close of the U.S. stock market. That timing allows FDIC examiners a weekend to prepare the bank to reopen the next business day. Customers generally have uninterrupted access to their insured funds over the weekend through the use of debit cards and checks. No Buyers The FDIC shut down IndyMac at 6 p.m. New York time on Friday, July 11. The FDIC tried to find a buyer for IndyMac, as it had for every other bank that failed this year. That usually is the least-expensive solution. No bank was willing to purchase IndyMac for a fair price, the FDIC says. So the FDIC took over bank management itself -- just the 13th time in the agency's 74-year history that it has taken control of a bank, spokesman Andrew Gray says. The agency is now working to sell IndyMac's assets. One of its goals is to recoup customer losses of uninsured deposits from remaining bank holdings, Bair says. The FDIC told 10,000 customers that it wasn't certain it could repay their $1 billion in deposits in excess of the $100,000 insurance limit. The agency told these depositors it would pay them 50 percent of their uninsured money in so-called dividends. Further recovery of those uninsured assets will depend on the salvage value of the bank's holdings. `A Big Mistake' One IndyMac customer who had uninsured funds is Jeff Capistran, an architect undergoing chemotherapy for colon cancer. Capistran, 46, had planned to close his $127,000 account at the bank a few days before it was shut down, but he was unable to because of his medical treatment. ``I'm somewhat worried,'' he says. ``I made a big mistake.'' Still, the FDIC has told him he'll get half of his deposit above $100,000. ``I have faith they will come through with the rest,'' he says. ``This is an election year.'' On Monday, July 14, three days after the FDIC closed IndyMac, the bank reopened under FDIC supervision. More than a hundred depositors lined up to pull their money from the bank's Manhattan Beach branch. Horn, the single mother who had shown up the previous Friday to find the branch shuttered, transferred all of her funds to a new account at Wells Fargo & Co. She says her new bank allowed her to withdraw just $5,000 and held the balance, $27,000, for two weeks. ``The mere fact that it was from IndyMac, they put a hold on it,'' she says. Wells Fargo spokeswoman Julia Bernard says her bank wouldn't have placed a hold on an IndyMac check unless it was unable to verify it. `What's Going On?' Which will be the next bank to fail? Depositors like Capistran and Horn have no way of knowing. Even the experts can be stumped. ``How are people supposed to know what's going on in the depths of the bank's balance sheets when the regulators, as we've learned in this crisis, don't even know?'' Blinder asks. One warning sign may be the size of a bank's brokered deposits, Shaffer says. ``Banks that are in distress, facing a reluctance by the general public to place money in these banks, may be forced to turn to brokered deposits,'' he says. Six of the 12 banks across the U.S. that failed this year relied on brokered deposits for more than 15 percent of their customer holdings. The average rate among all U.S. banks is 7.5 percent. ANB Financial NA of Bentonville, Arkansas, had received 87 percent of its deposits from brokers; Columbian Bank & Trust Co. of Topeka, Kansas, had received 44 percent; and Silver State Bank of Henderson, Nevada, had received 41 percent. Bite the Dust In mid-September, investors were signaling that Seattle- based Washington Mutual, the nation's largest thrift, would be the next big lender to bite the dust. It had reported losses totaling $6.3 billion during the previous three quarters. WaMu, which has 2,300 branches, has a 98 percent chance of defaulting on its debt over the next five years, according to credit-default-swap traders, as of yesterday. On Sept. 8, Washington Mutual fired CEO Kerry Killinger and disclosed that the Office of Thrift Supervision had heightened scrutiny of the bank. Five percent of WaMu's $182 billion of residential mortgage holdings were in default on June 30, according to Moody's. On Sept. 11, Moody's reduced WaMu's senior unsecured debt rating to Ba2 from Baa3. Since November 2007, Moody's has slashed that rating by six grades, to Ba2 from A2. Tripled FHLB Loans WaMu owns $53 billion of option-adjustable-rate mortgages, according to Moody's. Because these mortgages allow the homeowner to skip payments by adding them to their existing loans, WaMu failed to receive about $2.5 billion of interest payments in 2006 and 2007. As of June 30, WaMu had gathered $34 billion through deposit brokers, which amounted to 18 percent of all its deposits, according to the FDIC. As bad loans grew, the bank raised cash by tripling its borrowing from the FHLBs during a 12-month period to $58.4 billion. Advances as of June 30 represent 19 percent of WaMu's assets, up from 7 percent a year earlier. About $45 billion of the deposits at WaMu aren't insured by the FDIC. Across the U.S., still-standing banks large and small have similarities to the 11 that have failed. Florida's Largest Bank BankUnited Financial Corp., based in Coral Gables, Florida, is the state's largest bank. Hard hit by the collapse of the state's real estate market, BankUnited for the first time began using brokered deposits in the quarter ended on June 30. It raised $268 million through such long-distance deposits in three months, according to its SEC filings, which showed $7.6 billion of total deposits on June 30. It brought in another $506 million the same way during the next six weeks. BankUnited has borrowed $5.1 billion from the FHLB of Atlanta, amounting to 36 percent of its $14 billion in assets. The bank reported delinquent payments on $982 million, or 8 percent, of its loans as of June 30. Fifty-eight percent of the bank's loans are option- adjustable-rate mortgages. Customers took advantage of that deferral option in 92 percent of those loans, filings show. BankUnited reported losses of $117.7 million in the quarter ended in June. On Sept. 5, the OTS reclassified the bank to ``adequately capitalized'' from ``well capitalized.'' Without a waiver, the bank will be banned from receiving brokered deposits. `Prospects Fraying' The bank's stock has lost more than half of its value since it began trying unsuccessfully in June to raise $400 million in a stock sale. ``We see the prospects for viability increasingly fraying,'' says analyst David Bishop, who follows the bank at Stifel Nicolaus & Co. in Baltimore. BankUnited spokeswoman Melissa Gracey didn't return calls and e-mails requesting comment. Investors may or may not be right about which banks will fail next. Only the regulators know, and even they may not be sure. What's in little doubt, though, is that more collapses are on the way. Banks still hold too much toxic debt, says Kenneth Rogoff, chief economist of the International Monetary Fund from 2001 to 2003. ``Like any shrinking industry, we're going to see the upset of some major players,'' says Rogoff, who's now a finance professor at Harvard University in Cambridge, Massachusetts. `Doesn't Make Sense' ``The only way to put discipline into the system is to allow some companies to go bust,'' he says. ``You can't just have an industry where they make giant profits or they get bailed out. That doesn't make any sense.'' Horn, the IndyMac depositor, has already experienced the fear of being separated from her life savings and watching hundreds of anxious fellow customers lined up outside her branch -- like a scene from a 1930s newsreel. Even with FDIC insurance, she no longer takes it for granted that making a bank deposit is risk free. ``I just don't know if any investment -- even a bank deposit -- is safe anymore,'' she says.