As expected, there goes indymac

[peternap]

The federal government took control of Pasadena-based IndyMac Bank on Friday in what regulators called the second-largest bank failure in U.S. history.

Citing a massive run on deposits, regulators shut its main branch three hours early, leaving customers stunned and upset. One woman leaned on the locked doors, pleading with an employee inside: "Please, please, I want to take out a portion." All she could do was read a two-page notice taped to the door.

The bank's 33 branches will be closed over the weekend, but the Federal Deposit Insurance Corp. will reopen the bank on Monday as IndyMac Federal Bank, said the Office of Thrift Supervision in Washington. Customers will not be able to bank by phone or Internet over the weekend, regulators said, but can continue to use ATMs, debit cards and checks. Normal branch hours, online banking and phone banking services are to resume Monday.

Federal authorities estimated that the takeover of IndyMac, which had $32 billion in assets, would cost the FDIC $4 billion to $8 billion. Regulators said deposits of up to $100,000 were safe and insured by the FDIC. The agency's insurance fund has assets of about $52 billion.

IndyMac's failure had been widely expected in recent days. As the bank was shuttering offices and laying off employees to cope with huge losses from defaulted mortgages made at the height of the housing boom, nervous depositors were pulling out $100 million a day. The bank's stock price had plummeted to less than $1 as analysts predicted the company's imminent demise.

The takeover of IndyMac came amid rampant speculation that the federal government would also have to take over lenders Fannie Mae and Freddie Mac, which together stand behind almost half of the nation's mortgage debt.

Shares of the two mortgage giants have nose-dived this week and fell again Friday, helping to drag down the Dow Jones industrial average 128.48 points, or 1.1%, to close at 11,100.54. Investors and analysts are concerned that the two government-chartered companies need to raise billions of dollars to offset expected losses stemming from mortgage defaults, but will be unable to do so in the private market. Officials in Washington spent most of Friday trying to knock down rumors of a government bailout.

IndyMac, which once employed 10,000, fell prey to a classic run on the bank, and regulators singled out Sen. Charles E. Schumer (D-N.Y.) as having helped to fuel massive withdrawals. On June 26, Schumer said in letters to the FDIC, the OTS and two other federal agencies that IndyMac might have "serious problems" with its loan holdings.

"I am concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers," he wrote. The bank "could face a failure if prescriptive measures are not taken quickly."

[peternap]

That public warning prompted depositors to pull $1.3 billion out of accounts between June 27 and Thursday.

"This institution failed today due to a liquidity crisis," John M. Reich, director of the OTS, said at a news conference Friday afternoon. "Although this institution was already in distress, the deposit run pushed IndyMac over the edge."

Schumer said in a statement that the cause of IndyMac's failure was "poor and loose lending practices" that should have been prevented by more active regulation. Later, a Schumer spokesman said: "Mr. Reich, a political appointee, should be spending less time playing politics and more time doing his job."

IndyMac is the second-largest financial institution failure in U.S. history, following only Continental Illinois Bank, which had assets of about $40 billion before it was shuttered in 1984. It is the fifth FDIC-insured failure of the year. Reich emphasized that though other financial institutions remained on the agency's danger list, he believed most of them would be able to work their way back to solvency.

"The IndyMac situation is unique. It does not signal a direction for the industry as a whole," he said.

IndyMac's board boasts a number of California luminaries. Among the directors, according to a proxy statement the company filed in March, is Pat Haden, 55, a former star quarterback for USC and the Los Angeles Rams, who has been a partner of Riordan, Lewis & Haden, the investment firm founded by former Los Angeles Mayor Richard Riordan, since 1987.

Other directors include Lyle E. Gramley, 81, a former governor of the Federal Reserve; Bruce G. Willison, 59, former dean of the Anderson Graduate School of Management at UCLA; and Lydia H. Kennard, 53, former executive director of Los Angeles World Airports, which operates Los Angeles International.

IndyMac had been operating under close regulatory scrutiny since January, when the OTS determined that the company was in ill health. The bank lost $614.8 million in 2007 and $184.2 million during the first quarter of this year, largely as the result of souring home loans.

IndyMac, which posted $342.9 million in profit in 2006, had been a leader in so-called alt-A mortgages, which were made to borrowers with decent credit who often weren't required to verify their income to get the loan. That year, the company's stock price peaked at $50 a share, valuing IndyMac at a tidy $3.5 billion.

However, as the real estate market slowed, the company's loan losses ballooned. In its March report to regulators, the company said that 8.86% of its loans were delinquent, up from 1.51% the year before. By the end of 2007, the company's shares were selling for $6. They closed at 28 cents Friday.

IndyMac, which has been selling and closing offices, revamped its business to focus solely on so-called conforming loans, which are relatively small-balance mortgages made to people with good credit and that can be immediately resold on the secondary market. Reich said it was unclear whether the moves would have proved sufficient to save the troubled thrift.

[glenn kangiser]

They set it up - now will benefit from having the interest and taxpayer bailout.

I don't have faith in any of them and we pulled our account out of Citibank several months ago on the news of their major problems.

[ScottA]

They won't be the last. I expect the fed to get control of alot of banks before this is over.

[MountainDon]

Okay. It does appear the bank was in shaky shape; brought on by those shaky/shady loans to people who couldn't afford them. It is a bad situation no doubt.

But would you rather not have the Feds step in and let the depositors take the loss and say "too bad to you"? It could be you or your mother in that boat some day.

Traditionally banks and bankers were very conservative, the most conservative of businesses. That has been lost and we all pay for it. We need a return to conservative fiscal policy, private and governmental. Period.

[muldoon]

Okay. It does appear the bank was in shaky shape; brought on by those shaky/shady loans to people who couldn't afford them. It is a bad situation no doubt.

The problem is not soo much people not paying their loans.  It is that this bank, along with every other bank changed the way mortgages were done about a decade ago.  Instead of holding the risk and making prudent loan decisions loans were sold as soon as they were made.  Thus making IndyMac not responsible for those loans anymore.  They were sold as bonds to other investment banks, foreign nations (mostly China Singapore and Saudi Arabia).  Now that a percentage of those bonds are coming up less than expected, everyone tried to sell them at the same time and there were no longer any buyers.  What is the price of anything?  Well, it's what the market will bear.  If there are zero bids, then the price is zero.  Thats the problem.  They are now getting 20 cents on the dollar for those bonds, with most of them performing at 90% money good for now.  As a companies assets shrink (and if you have to assess a value of assets, and the value declines), their available credit lines shrink.  This in turn causes nasty messes like this. 

But would you rather not have the Feds step in and let the depositors take the loss and say "too bad to you"? It could be you or your mother in that boat some day.

I would not let my mother get in that situation.  But to address if the FDIC should step in, yes.  However if you look at the FDIC balance sheet from 2007 you see they had roughly 51 billion.  This year they have taken liabilities of 34 billion already (including the 8bill from IMB.  Simple math says theres still a lot of banks in trouble - and theres not enough money to float further losses.   

There were enough smart people to get $1.3 Billion out of IndyMac in two days. If more people get smart, they will run on every single bank in the country.  A good percentage of which don't have the money to cover their deposits! All the deposits are BORROWED FROM THE FED.

Might I remind you of: http://research.stlouisfed.org/fred2/series/BOGNONBR

People's deposits are actually GONE, insured or not.

Traditionally banks and bankers were very conservative, the most conservative of businesses. That has been lost and we all pay for it. We need a return to conservative fiscal policy, private and governmental. Period.

This is true, and it will happen at a personal level, local government level, and federal level soon.  It is no longer an option to continue.  The changes will be painful for many but good for the longer term of the country.   Flat out, the debt model is broken and it cannot be restored.  In my opinion, we crashed last August most people just don't know it yet because the effects are still not visible in many peoples daily lives.  Thats changing monthly though. 

[MountainDon]

and there's not enough money to float further losses. 

Are you meaning the total obligations of the banks or just that amount on deposit, up to $100K that is covered under FDIC?

[muldoon]

and there's not enough money to float further losses. 

Are you meaning the total obligations of the banks or just that amount on deposit, up to $100K that is covered under FDIC?

FDIC was born with the Banking Act of 1935.  The FDIC gets its' money from member banks that insure their deposits.  Member banks pay one twelfth of one percent of all deposits held into the FDIC fund yearly.  The other money the fdic holds is from interests on the us treasuries it currently holds.  It does not have a bottomless pit of money from the government.  It is self funded.  In 1947, the Federal Deposit Insurance Corporation Act allowed the FDIC to borrow up to 3 billion from the US treasury at it's discretion.  This was not a one time thing, the offer still stands as I understand the law.

This means that there is a finite amount of money the FDIC can work with.  Yes, they step in and try to auction off the failed bank usually.  In IMB's case there were no takers, it will reopen Monday morning as IndyMAC Federal effectively with a new charter.  The 8 billion unfunded liabilities will go to FDIC, eating away at the amount of capitol they already have. 

What I was saying in that statement is that if you look at the Federal Reserve numbers for US Banking Institutions reserve status you can see that they do not have enough funds to meet reserve requirements without borrowing from the Federal Reserve.  Banks dont keep all your money available, they loan out 90% of it and are required to keep the rest in reserves.  If they are borrowing 110 billion to meet reserve requirements then that means the 1 trillion+ in actual deposits are not there.  It's tied up in debt that is not trading.  The value of any item is what it can be sold for, right now the losses are staggering. 

The FDIC is not able to cover that kind of loss, no one is.  As long as the decline is managed slow and steady we can keep going on our existing track in a muddle through fashion not unlike what Japan did in the 1990s.  If panic sets in it's game over for our currency. 

[glenn kangiser]

Seems the banks worked out a way to where they didn't even have to hold that 10% and were actually down to 1% or so weren't they?

Then there is the debt is considered and asset thing -- they are owed the money so they loan against it? 

Not sure about this stuff here -- just going from memory so set me straight if you know.

[ScottA]

The real issue here that no one is talking about is the fact that most of these debit backed securities are still performing at a high level. Not everyone defaulted on their loans, only a small percentage. Who ever ends up with all this dirt cheap paper is going to make a royal killing in the long run. The houses and homeowners making the payments on these debits are real assets that currently can't be sold but they are still earning intrest and priciple payments daily. Someone decided to crash the value of this paper so they could pick up bargins. The banks where greedy and stupid to leverage so much against what little cash they had. But everyone was doing it and getting rich so they all joined the party. Looks like we'll be paying the liquor bills though.

[desdawg]

So I guess the question is this: Is there a safe bank anywhere if they are all that leveraged?

[peternap]

In my opinion Des, No!
To be honest, it's worse than where to park cash. Dig a hole and it;s safe but if all these low pressure points do come together and form the perfect storm, that cash is worthless anyway. The people that have Gold, Silver and platinum, in hand will have something. Fpr everyone else, root hog or die.

[glenn kangiser]

I agree- we moved our account to a smaller bank after leaving Citibank, but thier stock is worthless now too as FIL had some.  I don't count on my money being worth anything in the near future but at least everyone will be in the same boat.

[muldoon]

Seems the banks worked out a way to where they didn't even have to hold that 10% and were actually down to 1% or so weren't they?

Yes, back in late 2007, there were the 23A exemption letter that went out to 6 major banks, Bank of America, JPM, Wachoiva and others exempting them from the great depression era laws that should keep them out of grave danger.  Google 23A letters for more.  

Then there is the debt is considered and asset thing -- they are owed the money so they loan against it? 

Not sure about this stuff here -- just going from memory so set me straight if you know.

Well, your memory isn't so bad, yes a debt is considered an asset and can be used to shore up balance sheets for additional leverage.  If you want to get some finer points, A decent youtube video is "money as Debt" http://www.youtube.com/watch?v=vVkFb26u9g8  ..  There is 5 parts, worth the watch.  I know "The Creature from Jeckyl Island" has been mentioned on this forum before, its a good read as well.

The real issue here that no one is talking about is the fact that most of these debit backed securities are still performing at a high level. Not everyone defaulted on their loans, only a small percentage. Who ever ends up with all this dirt cheap paper is going to make a royal killing in the long run. The houses and homeowners making the payments on these debits are real assets that currently can't be sold but they are still earning interest and principle payments daily. Someone decided to crash the value of this paper so they could pick up bargains. The banks where greedy and stupid to leverage so much against what little cash they had. But everyone was doing it and getting rich so they all joined the party. Looks like we'll be paying the liquor bills though.

So yes, your not the only person to make this statement.  I personally am not so sure about it right now.  You claim "whoever ends up with this paper", and to that I say it's no mystery.  It is the federal reserve bank.  One year ago they had 800 billion in treasuries on their balance sheet.  Today they have 25 billion.  They have provided loans to banks and taken this bad paper as you called it as collateral.  Likely it will turn out as a buy when the debt originator defaults.  but then what?  They have these loans, but how profitable is it?  Consider the news out on Thursday and Friday, that Fanny May and Freddy Mac are insolvent, that lending is in a decline.  Carry that forward to the eventuality that in the future there might not be any mortgage loans.  Whats the value of real estate when there are no loans?  Lets look at where that has already occurred, go look at Atlanta where 1 year ago a hose was appraised at 110,000 and now it sells for 4,000.  Go to realtor.com and look at Detroit where loans have dried up and there are thousands of houses under 5k.  What good does it do the fed to have bonds on 400k houses if they can only be sold for 40k, or less.  This is the reasons I have a problem with this conspiracy theory.  I may be wrong, time will tell.  From where I am standing, it screams deflationary collapse, and no one wants a declining asset in that situation.  Not even the fed.  

[muldoon]

So I guess the question is this: Is there a safe bank anywhere if they are all that leveraged?

Well, I would start with bankrates bank evaluation page  http://www.bankrate.com/brm/safesound/ss_home.asp

They rate banks abased on exposure, liabilities and assets.  If you have something that looks decent in your area, I would use them.  However, keep mindful of FDIC limits.  Given I indicated FDIC may be over their head it wouldnt hurt to keep your funds somewhat liquid.

I DO NOT give financial advice because I dont want someone elses problems on my hands, however I dumped everything in the stock market last year and bough land for what its worth.  I keep money in the bank for convenience and bill paying.  My "money" is in tangible property that I own and cannot be defaulted or devalued.  Good fences, cows and good water supply are solid places to keep money in my opinion. 

In my opinion Des, No!
To be honest, it's worse than where to park cash. Dig a hole and it;s safe but if all these low pressure points do come together and form the perfect storm, that cash is worthless anyway. The people that have Gold, Silver and platinum, in hand will have something. Fpr everyone else, root hog or die

maybe so.  I have some silver, no gold or platinum.   I'll be honest, to only reason to buy these is that your betting on the fall of the US currency.  If your hedging against hyperinflation, LEAP Calls on QQQQ is a better bet.  (look at the Zimbabwe stock market) I don't think we have hyperinflation at all, I think we have deflation as the core problem.  (hello, houses for 2,000 dollars is the epitamy of delfation).  Buying gold is betting on the fall of the US Government and waiting for the metal to be revalued in the new standard.  It's drastic, gold is way overpriced right now in my opinion.   Maybe this is the play for the century, maybe not.   I think TLT puts may be worth their weight in gold. 

I dont have the answers, but I watch the situation daily and will react as needed. 

[peternap]

I dont have the answers, but I watch the situation daily and will react as needed. 

Amen!

[desdawg]

I have been doing some rearranging of things lately. I have too many hard assets that aren't liquid. Makes it hard to buy a loaf of bread if you don't have some cash. Then cometh property tax season where the government will try to own it all anyway. I suspect the govnment will still take cash since they or their bigger brother printed it.

[glenn kangiser]

Nice to have your insight even if there are no guarantees, muldoon.

Sassy read the creature from Jekyll Island.