Thread: Many more US bank failures likely after IndyMac

Many more US bank failures likely after IndyMac

* Reuters
* , Sunday July 13 2008

By Jonathan Stempel
NEW YORK, July 13 (Reuters) - U.S. banks may fail in far greater numbers following the collapse of the big mortgage lender IndyMac Bancorp Inc, straining a financial system seeking stability after years of lending excesses.

More than 300 banks could fail in the next three years, said RBC Capital Markets analyst Gerard Cassidy, who had in February estimated no more than 150.

Banks face pressure as credit losses once concentrated in subprime mortgages spread to other home loans and debt once-thought safe. This has also led to investor worries about the stability of mortgage finance companies Fannie Mae and Freddie Mac; IndyMac is not related to either.
While analysts declined to say which banks will fail next, several smaller lenders and one large one, Washington Mutual Inc, appear already to have elevated levels of soured loans, relative to their sizes.

"You have to look at companies with the greatest exposure to the highest-risk assets, which include construction loans and exotic mortgages," Cassidy said. "The final nail in the coffin for any depository institution would be a funding crisis where it is unable to gather deposits at reasonable cost, or wholesale funding markets are cut off."

The Federal Deposit Insurance Corp seized IndyMac on Friday after a bank run in which panicked customers withdrew more than $1.3 billion of deposits in 11 business days.

This followed comments on June 26 by U.S. Sen. Charles Schumer questioning the Pasadena, California-based thrift's survival. Some withdrawals also followed IndyMac's July 7 decision to fire half its work force and halt most mortgage lending.

IndyMac once specialized in Alt-A mortgages, which didn't require borrowers to document income or assets. It was founded in 1985 by Angelo Mozilo and David Loeb, who also founded Countrywide Financial Corp, once the largest mortgage lender. Bank of America Corp bought Countrywide on July 1.

As of March 31, the FDIC had put 90 banking institutions with $26.3 billion of assets on its "problem list." This excluded IndyMac, which alone had about $32 billion of assets, and close to $19 billion of deposits.

Well over 2,000 banking companies failed in the 1980s and early 1990s. Cassidy said the government may need to set up a liquidator similar to Resolution Trust Corp, created for the earlier savings and loan crisis.
The largest U.S. bank failure is the May 1984 collapse of Chicago's Continental Illinois National Bank & Trust Co. IndyMac was roughly the same size as American Savings & Loan Association of Stockton, California, a September 1988 failure.

DANGER ZONE
Cassidy called the probability of failure "very high" in which a bank's nonperforming assets exceed the sum of tangible equity plus reserves for loan losses.

Richard Bove, a Ladenburg Thalmann & Co analyst, in a July 13 report titled "Who Is Next?" said a "danger zone" is where nonperforming assets, including loans at least 90 days past due, exceeded 40 percent of common equity plus reserves.

Citing FDIC data as of March 31, Bove said that IndyMac had been at the greatest risk among more than 100 of the largest U.S. lenders, with a 146.2 percent ratio.

Among the other banks high on the list include Newport Beach, California's Downey Financial Corp, with a 95.4 percent ratio; Fort Lauderdale, Florida's BFC Financial Corp, which invests in BankAtlantic Bancorp Inc; Coral Gables, Florida's BankUnited Financial Corp; Chicago's Corus Bankshares Inc; Los Angeles' FirstFed Financial Corp; Troy, Michigan's Flagstar Bancorp Inc, and Washington Mutual, at 40.6 percent.

The list also includes Puerto Rico's Doral Financial Corp, First BanCorp and Santander BanCorp.

"We're surprised to be near the top of that list," said Bert Lopez, BankUnited's chief financial officer, in an interview. "Our underwriting standards have been very conservative, we have insured a substantial portion of our loan portfolio, and our losses remain low on an overall basis."

He declined further comment, citing a pending $400 million stock offering. BankUnited shares closed Friday at 77 cents. Other banks did not immediately return requests for comment.

Bove wrote: "The system is not anywhere near the danger that existed in the late 1980s and early 1990s despite all of the whining by public officials. Perhaps, the second quarter numbers will prove them right."

BUYING THE REMNANTS

The FDIC will reopen IndyMac on Monday as IndyMac Federal Bank, and then try to sell the company as a whole or in pieces. Regulators expect the takeover to cost the FDIC $4 billion to $8 billion. The agency insurance fund has about $52.8 billion.

Among IndyMac's assets are its deposits, 33 southern California branches, its Financial Freedom reverse mortgage unit, and a fast-deteriorating loan book.

Cassidy said thrift deposits tend to be less valuable than deposits at commercial banks because they yield more, and customers might be quick to leave once those rates disappear.

"For the right price, those branches and deposits are valuable, probably to someone with a footprint in southern California," he said. "Would a Wells Fargo or a U.S. Bancorp, which are strong and healthy and would want to expand their franchise, look at it? I think so."

Neither bank immediately returned requests for comment.
Most IndyMac depositors will get their money back; the FDIC typically insures deposits up to $100,000, and up to $250,000 on some retirement accounts. The seizure came without warning.

"There are many regional banks that are under a great deal of pain," said Daniel Alpert, an investment banker at Westwood Capital in New York. "Some of them will probably have guys with yellow tape showing up soon." (Additional reporting by Dan Wilchins; Editing by Martin Golan)

http://www.guardian.co.uk/business/feedarticle/7649271

The Bank Panic of 2008: Run, don’t walk to get your money out!

Feds seize control of major bank before collapse

By Sinclere Lee

NEW YORK (BNW) — With the stock market in freefall, the economy in the dumps, and inflation at an all time high, no wonder the banks across this country are beginning to fail. If you have one penny in any bank in America, you better run, don’t walk to your bank Monday morning and withdraw it out before it’s too late. You may have to stand in line (sic) to get your money out!

In what appears to be the most expensive bank failure ever in this country, troubled mortgage lender IndyMac Bancorp Inc. was taken over by federal regulators on Friday and no one could get their money out — Panic! When the banks fail, where should you put your money? Hide it in your damn mattress, fool!

The operations of the Pasadena, Calif. — based thrift — once one of the nation's largest home lenders - were shut down at 3 p.m. PDT by the Office of Thrift Supervision and transferred to the Federal Deposit Insurance Corp.

It appears that about 95% of the $19 billion in deposits in the bank are insured, but that leaves $1 billion that was not covered by FDIC guarantees. According to the agency, 10,000 IndyMac customers could lose as much as half of that amount, or $500 million. The agency says the failure will cost the Deposit Insurance Fund between $4 billion and $8 billion, based on preliminary estimates.

"This will certainly be a costly failure. Whether it's the costliest, we just don't know at this point," FDIC Chairman Sheila Bair said on a conference call late Friday night. The failure could also affect premiums paid by all banks for deposit insurance, she added.

The closure of IndyMac capped a dramatic day that offered a stark reminder that the credit crisis is not abating. An investor panic sent shares of mortgage finance giants Fannie (FNM, Fortune 500) Mae and Freddie (FRE, Fortune 500) Mac on a wild ride and fueled speculation of a government rescue.

A bank run (also known as a run on the bank) is a type of financial crisis. It is a panic which occurs when a large number of customers of a bank withdraw their deposits because they fear it is, or might become, insolvent. This action can destabilize the bank to the point where it becomes insolvent. Banks retain only a fraction of their deposits as cash (see fractional-reserve banking): the remainder is invested in securities and loans. No bank has enough reserves on hand to cope with more than the fraction of deposits being taken out at once. As a result, the bank faces bankruptcy, and will 'call in' the loans it has offered. This can cause the bank's debtors to face bankruptcy themselves, if the loan is invested in a plant or other items that cannot easily be sold.

What happens when the blanks fail? People panic… a banking panic occurs if many banks suffer runs at the same time. The resulting chain of bankruptcies can cause a long economic recession.

As a bank run progresses, it generates its own momentum, in a kind of self-fulfilling prophecy. As more people withdraw their deposits, the likelihood of default increases, so other individuals have more incentive to withdraw their own deposits. A bank run is a kind of positive feedback loop, which has much in common with the reflexive processes described by economist George Soros, amongst others. Another example of a reflexive process is economic bubble.

The anxiety over Fannie Mae and Freddie Mac, crucial to a recovery of the battered housing market and the economy as a whole, reached a fever pitch on Friday and took shares of the companies and the broader markets on a wild ride.

The wild day capped a brutal week for the shares of the two companies, as investors fled the two giants on worries they would need a bailout that would wipeout the value of their stock.

IndyMac grew rapidly during the real estate and home building boom. Its specialty was so-called Alt-A loans, those for which home buyers were asked to produce little or no evidence of income or assets other than the house they were buying.

Fannie and Freddie: A wild ride… Panics, and Bank Distress during the Depression. Why?

Banks run by taking money from people and loaning it back out to others. Your money doesn't stay in the bank. The bank basically puts a Post-it note up, saying that you have given them some money. Meanwhile, they take your money and loan it out to people who then have to pay it back with interest. Interest is the bank's profit. In the Depression, everyone wanted to take their money out of the bank because they needed it and they were afraid the banks would fail. When the bank has no money to loan out, it has to close. Also, many people took out loans during the 1920s, but couldn't pay it back when the Depression hit. Banks lost money because people could pay them back. When a company has no money, it has to close.

An early selloff was fanned by speculation of a looming government bailout. The stocks recovered on assurances by a leading senator that no rescue is needed and a Reuters report that said the Federal Reserve is opening up its discount window to Fannie and Freddie.

But after the market closed, Federal Reserve spokeswoman Michelle Smith told CNN that no discussions with Fannie or Freddie about access to the discount window have taken place.

The discount window is a source of funds that traditionally was only available to commercial banks. But after the Fed engineered the purchase of Wall Street firm Bear Stearns in March, it opened the window to investment banks as well.

Smith added that "the Fed is following the situation with Fannie and Freddie closely" and that she was "not prepared to discuss the range of options and alternatives" available to the Fed regarding Fannie and Freddie.

Immediately after the markets opened Friday, shares of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) fell more than 47% from their already battered closing price the day before.

But the stocks made up much of their earlier losses. Fannie finished the day down 22% while Freddie's stock closed with a 3% loss.

Friday's selloff left both shares down just over 45% for the week and about 75% for so far this year.

Still, analysts say there is little doubt that the federal government would step in to rescue Fannie and Freddie should rising losses and plunging stock prices leave them without the capital they needed to continue to be the primary source of mortgage funding in the nation.

Fannie and Freddie hold or back $5 trillion between them, or about half the mortgage debt in the country.

They play a central role in the U.S. housing market, providing a crucial source of funding for banks and other home lenders, especially since a credit market crisis last summer left them the only major players in packaging pools of mortgage loans into securities for sale to investors.

If they were unable to do so, it would significantly raise the cost and restrict the availability of mortgage loans, causing significantly more problems for already battered housing prices and sales. That in turn would be another significant problem for the overall U.S. economy, as well as global credit markets.

The Fed is trying to restore a sense of calm

The problems for Freddie and Fannie weighed on broader markets, causing a sell-off in U.S. stocks, especially hitting major banks, Wall Street firms and home builders. At one point during the day the Dow fell below the 11,000 mark for the first time in nearly two years.

Fannie and Freddie both said in statements issued late Friday that they have the adequate capital they need to operate and to meet targets required by regulators.

"In fact, we have more core capital, and a higher surplus over our regulatory requirement, than at any time in this company's history," said Fannie's statement.

Freddie's statement said speculation in media reports about a government takeover of the firms through a process known as conservatorship was not accurate.

"Freddie Mac is not on the threshold of conservatorship because we are adequately capitalized," said the statement. "The preliminary indications of our expected financial performance for the second quarter, while reflecting the challenges that face the industry, do not point to an immediate need to raise additional capital."

Others also tried to reassure Wall Street that Fannie and Freddie were not in immediate danger of collapse.

In fact, shares of both companies started their modest rebound shortly after 2 p.m. when Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee, defended the strength of both firms.

Dodd said his discussions with Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, the regulators who oversee the firms and the two companies' CEOs convinced him they have more than adequate capital and that there was no need to even discuss failure or a bailout.

He also vowed quick passage of a long-debated housing bill to give greater oversight of the two companies. The bill passed the Senate Friday night and is expected to be taken up by the house next week.

"There is a sort of a panic going on," he said. "The facts don't warrant that reaction in my view. Fannie Mae and Freddie Mac were never bottom feeders in the residential mortgage markets. People ought to feel confident about them."

The New York Times reported Friday that senior Bush administration officials are considering a plan to have the government take over one or both of the companies if their problems worsen.

But Paulson said Friday that the government's primary focus is making sure that Fannie and Freddie remain "in their current form."

Even before the latest report on a possible rescue plan, investors fled the two stocks this week due to speculation about their future. The drop in their shares raised questions about how difficult and expensive it will be for them to raise needed capital in the future, which fueled further losses in their stock prices.

"Fannie Mae and Freddie Mac have lost investor confidence evidenced by the rapid brutal sell-off in their stocks, which could dramatically hinder their ability to raise any additional capital going forward," wrote Richard Hofmann of research firm CreditSights in a note Friday.

Hoffmann added that the firms' ability to function normally "remain at the core of government efforts to stabilize the mortgage markets."

A number of scenarios were being discussed by bankers and analysts about what the government may do to deal with the crisis of confidence facing the firms.

Jaret Seiberg, a financial services analyst for the Stanford Group, a Washington research firm, said Thursday that the Federal Reserve could purchase some of Freddie's and Fannie's debt or mortgage-backed securities. He also said the Treasury Department could make billions of dollars in loans to the companies or even buy the firm's stock.

"Government officials are always planning for worst-case scenarios and our note is intended to highlight some options that may be available to policymakers," he wrote. "We suspect hybrid versions of these plans also are possible."

Under current law, the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of Fannie and Freddie, could take control of the firms if their capital falls too far below required levels. It is unclear how the firms would operate in that situation, known as a conservatorship.

OFHEO Director James Lockhart issued a statement late Thursday saying that his agency was closely monitoring the firms' credit and capital positions. But he pointed out that they had already raised $20 billion in capital and that they adequately capitalized, holding funds well in excess of his agency's requirements.
Investor panic

Still, investors were worried that continued problems in the housing market would cause more than the $12.7 billion losses the two firms have lost between them since last July. The decline in their stock value makes raising additional capital to cover those future losses that much more expensive and difficult.

"Our primary concern about Freddie and Fannie is that credit losses are likely to be worse than the management's current judgment, which will further pressure the capital base, and we remain cautious until we are better able to quantify these risks," wrote UBS analyst Eric Wasserstrom in a note Thursday.

Those concerns prompted him to raise his estimated loss for Freddie and to cut his price target for the stock, although, he retained his neutral rating on both firms, rather than urging clients to sell their holdings.

But the biggest worry Fannie and Freddie shareholders faced Friday was what would happen if the government did have to step into rescue them. Certainly, the big selloff earlier in the day reflected some investors' fears that shares of Fannie and Freddie could become worthless in a bailout scenario.

While home prices climbed, Alt-A loans posed few problems for IndyMac. If a buyer wasn't able to afford his payments, the bank got title to a home worth more than the amount owed. The bank was also able to find investors eager to buy pools of those mortgages that had been pulled together into securities backed by the future payments.

But when the housing bubble burst and prices began to fall, losses at IndyMac began to rise. Investors ran away from the mortgage-backed securities, leaving the bank to suffer the loan losses itself and without the funding it needed to make new, safer loans.

Most of IndyMac's employees and executives will be asked to stay on, although the problems at IndyMac had caused it to cut 3,800 jobs, or more than half of its work force, earlier in the week in an attempt to stay in business.

One executive who will not stay is CEO Michael Perry, who was replaced on an interim basis by a top official of the FDIC.

IndyMac, with assets of $32 billion and deposits of $19 billion, is the fifth bank to fail this year. Between 2005 and 2007, only three banks failed. And in the past 15 years, the FDIC has taken over 127 banks with combined assets of $22 billion, according to FDIC records.

"There will be increased failures, but it will be within range of what we can handle," Bair said. "People should not worry."

IndyMac marks the largest collapse of an FDIC-insured institution since 1984, when Continental Illinois, which had $40 billion in assets, failed, according to FDIC records. The two most expensive banking failures were in 1988, during the nation's savings and loan crisis: American Savings and Loan Association in California ($5.4 billion) and First Republic Bank in Texas ($4 billion).

The IndyMac failure brought finger pointing along with the federal action.

The OTS, which oversaw IndyMac, criticized Sen. Charles Schumer, D-N.Y. The OTS claimed that a June 26 letter Schumer wrote to regulators questioning IndyMac's viability prompted a run on the bank in which customers withdrew more than $1.3 billion prompting a liquidity crisis.

"Although this institution was already in distress, I am troubled by any interference in the regulatory process," said OTS Director John Reich in a statement Friday.

Schumer shot back. He said that lax enforcement by OTS was a primary cause of the problems at IndyMac, as well as those of the nation's housing market and economy.

"IndyMac's troubles ... were caused by practices that began and persisted over the last several years, not by anything that happened in the last few days," Schumer said. "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. Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs."

What now for IndyMac customers?

Bair said that the FDIC will try to sell IndyMac as a complete entity within 90 days.

When a bank shuts down, traditional bank accounts are insured to at least $100,000. Some accounts such as annuities and mutual funds are not insured at all. Individual Retirement Account funds are insured to $250,000.

IndyMac customers with uninsured deposits will get at least half that money back, and they could get more back, depending on what the FDIC gets when it sells the bank, said Bair.

Customers' funds will be transferred to a new entity - IndyMac Federal FSB - controlled by the FDIC. They will have uninterrupted customer service and access to their funds by ATM, debit cards and checks.

However, customers will have no access to online and phone banking services this weekend, according to the FDIC. Service will resume on Monday. Loan customers were advised to continue making loan payments as usual.

For additional information, the FDIC has established a toll-free number for customers of IndyMac Federal Bank. The number is 1-866-806-5919 and will operate daily from 8 a.m. to 8 p.m. PDT, except Sunday, July 13, when the hours will be 8 a.m. to 6: p.m. Customers can also turn to the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/IndyMac.html for further information.

How it got to this poin?t

IndyMac's problems came into sharp focus earlier in the week.

The bank, which lost $184.2 million in the first quarter, announced on Monday that it was expecting a wider loss for the second quarter. It lost $614 million last year stemming from its focus on the Alt-A mortgage sector.

Then on Tuesday, IndyMac disclosed that regulators no longer considered it "well capitalized." As a result, the bank was unable to accept brokered deposits, or short-term investments in large dollar amounts from brokers seeking the highest return on certificates of deposit.

Over the past two years, IndyMac dropped over 95% in stock price, or about $3.5 billion in market capitalization. By Friday, shares were down to 28 cents.

Ousted CEO Perry had long argued that it was being unfairly punished given its relatively paltry exposure to sub-prime mortgages.

But rising Alt-A and prime mortgage delinquencies likely were enough indication for investors that the housing crisis had moved beyond the weakest borrowers.

Even worse, with the securitization markets in collapse, IndyMac had no way to get new loans off its books. What loans the bank had made recently were to borrowers with well-documented assets and income, but those are sharply less profitable with respect to fees and interest income.

IndyMac on Monday said it would focus on its reverse mortgage business, retail branch network and mortgage servicing operations. But the growth restrictions placed on IndyMac by regulators and the banks and brokerages it did business with, as well as the sharply higher borrowing costs, placed the profitability of even its non-mortgage-related banking efforts in doubt.

http://www.blacknewsweekly.com/news485.html

Earnings in spotlight amid fears on economy
By Natsuko Waki Reuters
Published: July 13, 2008


LONDON: With the Goldilocks economy long gone, investors this week will wrestle again with the three bears of financial markets - banking woes, slow-to-stagnant economic growth and rising inflation.

On the blocks are the latest readings on inflation from the United States, Britain and the euro zone, while banks including Merrill Lynch and JPMorgan as well as other major businesses like Philips Electronics in Europe will release second-quarter earnings.

Oil prices will be closely watched following U.S. crude's record highs above $147 a barrel last week after Iran test-fired missiles and tensions escalated in Nigeria.

But the credit crunch and the havoc it has wreaked on banks may remain uppermost in investors' minds after U.S. bank regulators stepped in late on Friday to prop up IndyMac Bancorp after withdrawals by panicked depositors led to one of the largest banking failures in U.S. history.

IndyMac, which became the fifth U.S. bank to fail this year, was to reopen Monday as IndyMac Federal Bank under the supervision of the Federal Deposit Insurance Corp.

The FDIC is hiring more staff in preparation for further failures and has upped its list of troubled banks to 90.

Over the past weeks, MSCI's main world equity index and U.S. indexes have joined European and Japanese counterparts in bear market territory, falling at least 20 percent from recent cycle peaks as investors fret about the drag on growth from escalating oil prices and the abrupt withdrawal of credit from indebted consumers.

U.S. banks were at the center of the credit and housing bubbles that burst last year, combining with an increase in commodity prices to end the long run of not-too-hot inflation and not-too-cold growth that was dubbed the Goldilocks economy.

As more news of mortgage defaults came in last week, those bank shares sank to record lows, according to the S&P bank index, and they could slide further if the banks unveil more bad news in their earnings reports this week.

Steven Pearson, chief strategist at Bank of Scotland Treasury, said: "The high level of leverage extended to both consumers and investors against a now depreciating asset alongside lax lending standards make a rise in default rates beyond all previous experience likely in most major Anglo-Saxon economies. The epicenter of the crisis therefore shifts from investment to commercial bank balance sheets."

U.S. banks reporting their results this week include Bank of New York Mellon, Wells Fargo and Washington Mutual.

Data from Thomson Reuters show that during the second quarter of 2008, analysts have reduced estimates for the financials sector in the Dow Jones Stoxx 600 by 3.7 percent, after cutting them by 15.5 percent in the first quarter.

The fate of Fannie Mae and Freddie Mac is also nagging investors. Share prices in the U.S. mortgage giants sank to record lows last week and bonds plunged on concerns that they would need to raise capital to survive, raising speculation that the government might bail them out.

Fannie Mae and Freddie Mac said Friday that their finances were sufficiently sound to withstand the housing crisis as government officials scrambled to restore confidence in the top mortgage finance agencies in the United States.

Other key corporate earnings results this week, including Johnson & Johnson, Google, Honeywell and Electrolux, could reinforce negative investor sentiment.

The reports will give clues on how companies are starting to feel the chill from an economic slowdown - now reaching European shores.

Recent data have reinforced the view that the global economy is slowing down at the same time that high energy costs are pushing inflation higher - a stagflationary environment that ties the hands of monetary policy makers.

Central banks in Japan and Canada will face this dilemma when they announce their monetary policy decisions this week.

"We're just between the ice of recession and the fire of inflation," said Dominique Strauss-Kahn, managing director of the International Monetary Fund, adding that the economic consequences of the financial crisis were yet to come.

Analysis by Goldman Sachs shows that since 1990 a one percentage point increase in consensus inflation views has corresponded with a decline in the S&P 500 index of 2 percent below its historic trend.

U.K. equity markets are more sensitive, with a one percentage point rise in inflation estimates corresponding to declines of 2.8 percent for the FTSE.

"With oil at record levels and the U.S. housing market showing little signs of recovery, the possibility of a double- dip recession continues to loom large," Goldman said in a note.

When the Bank of Japan meets Monday and Tuesday, it is expected to keep interest rates on hold and warn that growth in Japan will likely be slower than it anticipated a few months ago because of the increase in oil and raw materials prices.

The Bank of Canada appears set to hold interest rates steady on Tuesday, giving itself more time to see how the U.S. economic saga unfolds while trying to prevent high inflation from taking hold in the country.

http://www.iht.com/articles/2008/07/13/ ... kets14.php

Run on banks spells big trouble for US Treasury
* Tom Petruno
* July 14, 2008
* Page 1 of 2

IN A modern financial system nothing is more frightening than a run on the bank. The US has now suffered a series of them, and they are escalating in size and scope, posing a serious threat to an already reeling economy.

Rumours swamped financial markets on Friday that the US Government would be forced to step in to aid the mortgage finance giants Fannie Mae and Freddie Mac, which together own or guarantee $US5 trillion ($5.16 trillion) in US home loans.

In Wall Street's version of a run on the bank, investors drove Fannie Mae and Freddie Mac shares to 17-year lows, signalling a gnawing lack of faith in the companies' ability to survive rising mortgage defaults without the Government's help.

Later on Friday regulators took over IndyMac Bank of Pasadena, saying the $US32 billion lender had collapsed under the weight of bad home loans and withdrawals by spooked depositors. It was the second-largest bank to fail in US history.

Friday's events were felt around the world, knocking the battered US dollar lower and driving up interest rates.

"This is a flare-up in the financial forest fire that is far beyond anything we've seen before," said Christopher Low, chief economist at the investment firm FTN Financial in New York.

It is triggering worries that would have been unthinkable even a year ago, including that the US Treasury's debt might lose its AAA credit grade because of heavy blows to the nation's fiscal health from the housing mess.

Four months ago many on Wall Street believed they had seen the worst of the credit crisis rooted in the housing market's woes. The collapse in March of the brokerage Bear Stearns, a central player in the business of packaging dicey mortgages for sale to investors, was the kind of prominent calamity that has historically marked the end of financial crises.

The Federal Reserve reacted quickly, making cheap loans available to loss-ridden banks and, for the first time, to securities firms. The moves helped restore calm to markets by April.

However, by May the focus of investors had returned to the slumping housing market and the likelihood that banks and brokerages would face more losses on mortgage-related debt. Confidence fell again.

Worse, in April the price of oil began a stunning climb that still has not relented. Record energy costs, coupled with surging food prices, raise the risk that more consumers could fall behind on their mortgage payments. The stockmarket's decline has continued apace since and Wall Street is officially in a bear market - meaning a drop of at least 20 per cent in key stock indices - for the first time since the plunge of 2000-02.

There are parallels between that period and the present one that hint at worse to come. The stockmarket crash in 2000 began with the bust in dotcom stocks. This time, the decline began with the drop in home prices and its disastrous effects on every industry tied to housing.

In 2002 weary investors were hit by a wave of corporate accounting scandals. They simply felt they could not trust what many companies were telling them about their sales or earnings. Share prices dived further.

This time the crisis of confidence is in the US banking system. Fearing more severe losses than they have already suffered, investors in recent weeks have fled stocks of some of the US's biggest financial institutions at a pace that has stunned Wall Street. Last week they turned with a vengeance on Fannie Mae and Freddie Mac.

Despite the companies' assurances that they had adequate capital cushions against surging defaults on the mortgages they own or guarantee, the market does not believe them.

For the Government that poses a quandary. Because of their size and importance to the mortgage market, it is inconceivable that Fannie Mae and Freddie Mac would be allowed to fail. But an outright takeover of the companies by the Government, as some experts have suggested, could frighten foreign investors - who are big lenders to the Treasury - by in effect adding the companies' $US5 trillion debt load to the Treasury's already substantial debt.

Nationalising the companies "would put the full faith and credit of the Treasury at risk", said Allen Sinai at Decision Economics in New York.

"It would make foreign investors think hard about buying US Treasury debt."

The way you stop a bank run is to restore confidence. For the US, the challenge is not just to restore confidence among Americans, but to make sure it does not evaporate among foreign creditors.

Los Angeles Times

http://business.smh.com.au/run-on-banks ... -3eiv.html

US spells out Fannie-Freddie backstop plan

By JEANNINE AVERSA, AP Economics Writer 24 minutes ago

WASHINGTON - The Federal Reserve and the Treasury announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival.
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The steps are also intended to send a signal to nervous investors worldwide that the government is prepared to take all necessary steps to prevent the credit market troubles that started last year from engulfing financial markets and further weakening the economy and housing markets.

The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies "should such lending prove necessary." They would pay 2.25 percent for any borrowed funds — the same rate given to commercial banks and big Wall Street firms.

The Fed said this should help the companies' ability to "promote the availability of home mortgage credit during a period of stress in financial markets."

Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current $2.25 billion line of credit to each company should they need to tap it and to make an equity investment in the companies — if needed.

"Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies," Paulson said Sunday. "Their support for the housing market is particularly important as we work through the current housing correction."

The Treasury's plan also seeks a "consultative role" for the Fed in any new regulatory framework eventually decided by Congress for Fannie and Freddie. The Fed's role would be to weigh in on setting capital requirements for the companies.

The White House, in a statement, said President Bush directed Paulson to "immediately work with Congress" to get the plan enacted. It also said it believed the plan outlined by Paulson "will help add stability during this period."

Investors may not be as sanguine, however, according to Chris Johnson, an investment manager and president of Johnson Research Group in Cleveland. Stocks of financial institutions "are going to get clobbered," he predicted. "It is a situation where regulators and the government are trying to play catch up, and that means everything is not discounted in the stock prices yet."

The Dow Jones industrials on Friday briefly fell below 11,000 for the first time in two years and Johnson expects shares of investment banks and regional banks could fall even lower as investors react to this weekend's developments.

Fannie Mae and Freddie Mac either hold or back $5.3 trillion of mortgage debt. That's about half the outstanding mortgages in the United States.

The announcement marked the latest move by the government to bolster confidence in the mortgage companies. A critical test of confidence will come Monday morning, when Freddie Mac is slated to auction a combined $3 billion in three- and six-month securities.

Fannie was created by the government in 1938 to provide more Americans the chance to own a home by giving financial institutions an outlet to sell mortgage loans they originated, freeing more cash to make more home loans. It moved from government to public ownership in 1968 and Freddie was started two years later.

Sunday's announcements are likely to raise anew criticism that the government should have moved sooner to rein in the two companies, especially since investors widely assumed they would be bailed out if they got into trouble.

The government denied it, but what was seen by investors as an implicit guarantee of support allowed Fannie and Freddie to borrow at rates only slightly higher than the Treasury — and lower than what their banking competitors had to pay.

"This really blows away the notion of an implicit guarantee," independent banking consultant Bert Ely said of the Treasury's plan to ask Congress to allow it to make equity investments in Fannie Mae and Freddie Mac. "It suggests a greater concern about how these companies are doing. It says the problems are deeper. It gets to the solvency of the companies, not just the liquidity."

Paulson's goal is to get his plan attached to a sweeping housing-rescue package. The Senate and House have each passed bills and a final package has to be hammered out. The centerpiece of the legislation is to help strapped homeowners avoid foreclosure legislation but it also contains provisions to revamp oversight of Fannie Mae and Freddie Mac.

Senate Majority Leader Harry Reid, D-Nev., said "Senate Democrats stand ready to work with the administration to quickly and effectively address the situation currently facing these institution."

Democratic presidential contender Barack Obama, speaking with reporters before the plan was announced, said he favored congressional action to shore up the housing market, as well as legislative consultation about any taxpayer dollars used to support the mortgage companies.

Republican rival John McCain believes the measures announced Sunday "are consistent with the goal of providing support for a path through the current duress toward steps that include regulatory reform, market discipline and mission focus," said Douglas Holtz-Eakin, senior policy adviser.

House GOP leader John Boehner, R-Ohio, and Republican Whip Roy Blunt, R-Mo., said they "stand ready to work with Secretary Paulson and congressional Democrats to take appropriate steps to ensure the soundness of our mortgage markets."

Officials from Treasury, the Fed and other regulators worked in close consultation throughout the weekend after growing investor fears about the companies' finances sent their shares and the overall market plummeting last week.

Shares of Fannie Mae plunged 45 percent last week and are down 74 percent since the beginning of the year. Freddie Mac shares fell 47 percent last week, and have fallen 77 percent so far this year.

A senior Treasury official said any increase in the line of credit — now at $2.25 billion for each company_ would be at the Treasury secretary's discretion. The same would apply to any equity investment made by the government.

The official, who spoke on condition of anonymity, also sought to send a calming message about Fannie's and Freddie's financial shape, saying: "There's been no deterioration of the situation since Friday."

The Fed's offer of funds is viewed as a temporary backstop until Treasury can get its plan in place. The collateral they would have to pledge — Treasury securities and federal agency securities — is more narrow than the collateral commercial banks and Wall Street firms must pledge for emergency lending privileges.

Freddie Mac Chairman Richard Syron said Sunday that preliminary second-quarter results show that his company had "a substantial capital cushion" above the 20 percent minimum surplus it is required to maintain.

Fannie Mae President and CEO Daniel Mudd said he believes the steps could send a calming message. "Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market. We will continue to do our part to provide liquidity, stability and affordability to the housing market now and in the future."

Last week Fed Chairman Ben Bernanke and Paulson, appearing before the House Financial Services Committee, made a point of saying that the regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, has found both companies adequately capitalized.

_____

AP Business Writers Stephen Bernard and Joe Bel Bruno in New York contributed to this report.

http://news.yahoo.com/s/ap/20080714/ap_ ... nts_crisis

How long will it be before the banking industry is completely nationalized? Congress wants to nationalize oil and health care...can the banks be far behind??? Uncle Sam wants YOU...and your assets!

JP, glad to see you posted all of this. Payday is coming for this household and we have had an account with WaMu (which we have regretted from day one). They are slowly going down too from what I understand and this is my fear:

Most IndyMac depositors will get their money back

I fear this same statement could be made in the near future about WaMu and it will affect us.

I have advised our teen son, who is working full-time this summer and has a WaMu Savings for his paychecks, to just cash his check and put his $$ in his locked safe. My husband and I have discussed the same for ourselves as we live paycheck to paycheck and if our money was locked up for some time by the feds (in order to verify it before releasing it to us), we would go hungry, and maybe without power. Both we cannot be without.

I am not paranoid, I believe there are plenty of banks, mostly good local banks/credit unions, who are going to be ok, and we hope to open an account with one that is stable and makes no high risk loans.

Good Lord though, with rising oil prices, rising food prices, and now this, I have to say, what my father told me years ago (he is gone now) is coming true. He felt we were going to go through another depression with the way our nation had gone, with the feds taking over so much of our lives and making so many rules about everything, and then failing to watch over the banking system (i.e., the savings and loan troubles) was just a recipe for financial disaster (according to him, and he predicted true, and he could never have imagined the gas prices as they are now).