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 automated teller 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.
"This institution failed today due to a liquidity crisis," OTS Director John Reich said.
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 between $4 billion and $8 billion.
Pasadena, Calif.-based IndyMac Bancorp Inc., the holding company for IndyMac Bank, has been struggling to raise capital as the housing slump deepens.
IndyMac had $32.01 billion 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 Sen. Charles Schumer, D-N.Y., 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, regulators said.
In a statement Friday, Schumer said IndyMac's failure was due to long-standing practices by the bank, not recent events.
"If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today," Schumer said. "Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs."
The FDIC planned to reopen the bank on Monday as IndyMac Federal Bank, FSB.
Deposits are insured up to $100,000 per depositor.
As of March 31, IndyMac had total deposits of $19.06 billion.
Some 10,000 depositors had funds in excess of the insured limit, for a total of $1 billion 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, FDIC Chairman Sheila C. Bair said the agency would cover all insured deposits and then try to recover its costs by selling IndyMac's assets.
"We anticipate trying to market the institution as a whole bank," Bair said. "How much money we derive from that will depend on who gets paid what."
Holders of unsecured IndyMac debt may not fully recover their investment, Bair said.
"Generally if a creditor is secured, they are at the top of the claims priority," she said. "If they are unsecured, they're pretty low on the claims priority and probably will take some type of haircut with this, but we have not had a chance to do a thorough analysis to know ... how extensive those losses will be."
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 3,800 jobs, or more than half of its work force -- the largest employee cuts in company history.
In the letter to shareholders, IndyMac Chairman and Chief Executive Michael W. Perry 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 $5 billion to $10 billion per year of new loans backed by government-sponsored mortgage companies, Perry said at the time.
But the run on its deposits ultimately short-circuited the strategy, prompting regulators action Friday.
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