NightBlogger

Is the U.S. Banking System Safe?
Our economy and banking system is so complex and intertwined that no one knows where the next shoe will drop. Politicians and government bureaucrats are lying to the public when they say that everything is alright. They do not know. Therefore, it is in our best interest to cut through all the crap and examine the facts with a skeptical eye. Last week, bank stocks, which had been falling faster than President Bush’s approval rating, soared higher based on earnings reports that were horrific, but not catastrophic. Again, the talking heads, like Larry Kudlow, were calling a bottom in the financial crisis. The bank with the largest increase in share price was Wells Fargo. Their earnings exceeded analyst expectations and the stock went up 22% in one day. Wells Fargo (WFC) has $84 billion of home equity loans, with half of those in California and Florida.

Coincidently, Wells Fargo decided to extend its charge-off policy in the 2nd quarter from 120 days to 180 days, in an effort to give troubled borrowers more time to reach a loan workout. A skeptical person might think that they did not change this policy out of the goodness of their hearts. Maybe, just maybe, they changed this policy to reduce their write-offs for the 2nd quarter, to beat analyst expectations. There are many stories of people who are still living in houses, twelve months after making their last mortgage payment. Their banks have not started foreclosure proceedings. Is this due to incompetence by the banks, or is this a way to avoid writing off the loss? The FASB has joined the cover-up gang by delaying the implementation of new rules that would have made banks stop hiding toxic waste off-balance sheet. The new rule would have made banks put these questionable assets on their balance sheet and would have required a bigger capital cushion

What a surprise that bank regulators, the Treasury and Federal Reserve urged a delay in implementation. Manipulate the facts because the average American doesn’t understand or care. Sounds like Enron accounting standards to me. During the S&L crisis in the early 1990s, 1,500 banks failed. So far, seven banks have failed in 2008, the largest being IndyMac. The FDIC has about $53 billion in funds to handle future bank failures. The IndyMac failure is expected to use $4 to $8 billion of those funds. Average Americans will lose $500 million in uninsured deposits in this failure. The FDIC says that they have 90 banks on their “watch list”. They do not reveal the banks on the list, so little old ladies with their life savings in the local bank will be surprised when they go belly up. Based on the fact that IndyMac was not on their “watch list”, I wouldn’t put too much faith in their analysis.

There are 8,500 banks in the U.S. Based on an independent analysis by Chris Whalen from Institutional Risk Analytics, they have identified 8% of all banks, or around 700 banks as troubled. This is quite a divergence from the FDIC estimate. Should you believe a governmental agency that wants the public to remain in the dark to avoid bank runs, or an independent analysis based upon balance sheet analysis? The implications of 700 institutions failing are huge. There is roughly $6.84 trillion in bank deposits. It is almost beyond belief that $2.6 trillion of these deposits are uninsured. There is only $274 billion of the $6.84 trillion as cash on hand at banks. This means that $6.5 trillion has been loaned to consumers, businesses, developers, etc. The FDIC has $53 billion to cover $6.84 trillion of deposits. Does that give you a warm feeling? More

TheGlobeAndMail.com
North America is the midst of a “systemic financial meltdown,” Eric Sprott warned yesterday as his company turned a quarterly profit of more than $11-million. “I’m not trying to be shocking to anyone, but let’s face it,” said Mr. Sprott, chief executive officer of Sprott Inc. “When Bear Stearns goes down, Freddie and Fannie go down, and IndyMac goes broke, we have major issues out there.” Toronto-based Sprott runs mutual, hedge and offshore funds. Mr. Sprott said assets under management increased to $7.7-billion in the second quarter, up from $6.8-billion at the end of March, despite operating in what he called a bear market.

Profit was $11.4-million, or 8 cents a share, compared to a year-earlier loss of $7.7-million. Revenue - management fees, crystallized performance fees, gains or losses from proprietary investments, interest and other income - was $39.5-million. While the company charges performance fees, they are not calculated until the end of the year and are distributed as a special dividend. The firm, which went public in April with a $200-million offering on the Toronto Stock Exchange, will load its funds with gold and energy stocks in the months ahead while selling the financial industry short. “We’re trying to position our funds to survive the difficulties,” he said. “We’ve gone into gold on the long side because it will survive as a replacement to fiat currency and into energy stocks because of our belief in the peak oil thesis.”

IndyMac Bancorp, the third-largest banking failure in United States history, said Friday that it had filed for bankruptcy protection, less than three weeks after being seized by federal regulators following a bank run by depositors. The company, based in Pasadena, Calif., filed for Chapter 7 protection on Thursday with the federal bankruptcy court in Los Angeles, indicating it plans to liquidate. IndyMac said it expected the court will appoint a bankruptcy trustee promptly. The filing was widely expected. It does not include IndyMac Federal Bank, which is now run by the Federal Deposit Insurance Corp and is the successor to IndyMac’s former banking unit. Most deposits in IndyMac Federal are insured up to $100,000. More

Kevin Depew
Chaos and fear doesn’t sleep. This morning the first news story I read was a piece from the Los Angeles Daily News about police threatening to beat down and arrest any “disorderlies” trying to get their money out of a failed IndyMac bank branch in Pasadena, CA. Apparently, after being turned away Monday, customers began lining up at 1:30 a.m. the next morning to take out any cash they had in excess of the $100,000 maximum insured by the Federal Deposit Insurance Corporation. The scene was reportedly emotional and tense. At another IndyMac branch in Encino, the police were called in after line jumpers threatened to turn an ordinary bank run into a full-on riot.

Yes, it’s here. Welcome to the Depression. No, don’t drop whatever it is you’re doing. Don’t get up. It’s not going anywhere. It will wait. It’s just going to sit over here in the corner and read a magazine while you do whatever it is you need to do. A Depression doesn’t run hot and fierce like some crazed meth burner. A Depression is methodical, purposeful, patient. It will build a shelter out of tree branches and newspaper, light a small, well-contained campfire and wait you out, brother. While you feed on the empty calories of denial and popcorn, it will quietly gather shards of broken dreams and fashion them into a terrible weapon of blunt force reality.

It’s a hell of a thing to call this day and age the next Depression. It’s dangerous tinfoil hat territory inhabited mostly by screeching lunatics and volatile nutjobs. But by the time they get squeezed out by reputable folks the whole gig will be up, the circus will have left town. But how can this be? To understand the mechanics of this, the nature of it, let’s look back at the last Great Depression.

Despite the seeming enormity of it in retrospect, the stock market crash of 1929 barely even registered for most Americans. The day before the crash, Time Magazine’s Oct. 28, 1929 issue was business as usual, national stories, Washington stories, a review of the newest plays opening in Manhattan, a piece on a cat washing contest in Kingston, NC. A week later, in the wake of the stock plunge, the cover story was as far from a piece on crashing share prices as you could 2get - a profile of a man named Samuel Insull, the “financial father of the Chicago opera.” The crash did make the magazine, of course, second billing in the Business section in a piece titled, “Bankers v. Panic.” The next piece, however, was about a $2.5 million investment by a Wall Street investment bank in orchids. “Last week, however, to the orchid industry went 2,500,000 Wall Street dollars, not squandered, but carefully invested.”

Heh. Yes, the dream dies hard, doesn’t it? More

Judged by the standards of Northern Rock, a British mortgage lender where the death throes lasted for months, the failure of IndyMac has been orderly. Its consequences were anything but. Worried IndyMac customers queued in the sweltering Californian sun to retrieve their money, despite FDIC guarantees on deposits of up to $100,000 (of the bank’s $19 billion of deposits, $1 billion is uninsured). Investors in other banks showed far less decorum. On July 14th the S&P500 banks’ index suffered its worst daily fall since its creation in 1989. Regional banks took the brunt of the punishment. Washington Mutual in Seattle and National City in Cleveland were both moved to issue statements reassuring panicking investors that they were well capitalised and had access to short-term funding. Such tactics can easily backfire. Wachovia, the country’s fourth-biggest lender, also sought to soothe markets about its finances on July 15th, and watched its shares sink further. Wachovia, which has achieved infamy for an ill-advised acquisition that swamped it with adjustable-rate mortgages in California, has lost more than 75% of its value since the start of the year. More

WASHINGTON — Failed lender IndyMac Bank is among nearly two dozen banks under scrutiny by the Federal Bureau of Investigation for possible mortgage fraud, U.S. officials said. The big Pasadena, Calif., bank was seized by regulators last week, the third-largest bank failure in U.S. history. It specialized in home loans to borrowers who lacked full documentation for their income or assets and have a higher default rate than other loans. The IndyMac investigation began shortly before the bank was seized last week, a law-enforcement official said. In a statement Wednesday, the FBI said the number of banks under investigation for mortgage fraud is now 21.

“We receive information from a variety of sources on a daily basis, and we have an obligation to review each allegation on its merits,” the bureau said. “Given the volatility of today’s subprime market, we have seen an increase in subprime-related complaints.” Few major lenders under investigation have been identified. One of them is Countrywide Financial, once IndyMac’s parent company, which has since been acquired by Bank of America Corp. Countrywide has said it isn’t aware of an investigation. More

RHINEBECK, NY 14 July 2008 — The “Panic of ‘08″ that we had predicted is “ON.” Only the blind can’t see it, the deaf don’t hear it and those in denial won’t admit it. America’s economy has taken a direct hit. The nation’s financial superstructure is collapsing. Those waiting for the “official word” and hesitating to take survival measures will go down with the sinking ship of state.

The Economic 9/11 that we had warned would “topple corporate giants” and “crush the man on the street” hit on Friday. (See “Economic 9/11,” Trend Alert, 12 November 2007; “Economic 9/11″ Top Trends 2008, Trends Journal, Winter 2008.) While an economic terror strike was long in the making and the devastation long predicted, the financial markets melted down and panic hit the Street on the news that the nation’s two largest mortgage finance companies, Freddie Mac and Fannie Mae, were on the brink of failing.

The dollar resumed its downward slide, gold sharply reversed its three month slump and oil rose to record highs on the threatening economic news and word that Israel was practicing bombing runs over Iraq in preparation to attack Iran. The Dow - before paring some of its losses on a late in the trading day rumor that the Fed would open its discount window to keep feeding Mac and Mae with needed cash to stay afloat - had fallen to a two year low on Friday.

Hours after the markets closed on the East Coast, and with the nation gearing up for another summer weekend, most people were tuned out when IndyMac Bancorp officially went belly up at 3 PM PST. Had the news hit while Wall Street was in session that the second biggest bank failure in US history was under way, calamity would have ensued. Instead, the out-of-touch missed the news and the ever-hopeful believed Uncle Sam would save the day. More

NEW YORK (Reuters) - Shares in major U.S. banks plunged on Monday amid fears about the sector’s stability following Friday’s seizure by regulators of IndyMac Bancorp Inc., once one of the nation’s largest mortgage lenders. Shares of Washington Mutual Inc and National City Corp, which have significant exposure to mortgages, plummeted, leading both to issue statements intended to reassure investors and depositors. Also hurting Washington Mutual shares, Lehman Brothers Inc analyst Bruce Harting wrote that the largest U.S. savings and loan could face $26 billion in losses, with $21 billion from mortgages. More

Wall Street Journal
IndyMac Bank, a prolific mortgage specialist that helped fuel the housing boom, was seized Friday by federal regulators, in the third-largest bank failure in U.S. history. IndyMac is the biggest mortgage lender to go under since a fall in housing prices and surge in defaults began rippling through the economy last year — and it likely won’t be the last. Banking regulators are bracing for a slew of failures over the next year as analysts say housing prices have yet to bottom out.

The collapse is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC’s $53 billion deposit-insurance fund. The Pasadena, Calif., thrift was one of the largest savings and loans in the country, with about $32 billion in assets. It now joins an infamous list of collapsed banks, topped by Continental Illinois National Bank & Trust Co., which failed in 1984 with $40 billion of assets. The second-largest failure was American Savings & Loan Association of Stockton, Calif., in 1988. More

Option Armageddon
First reported on the Implode-o-Meter yesterday, IndyMac bank’s $32 billion in assets have been taken over by the FDIC. This is the largest bailout since the $40 billion bailout of Continental Illinois in 1984. Federal authorities estimate the bailout will cost taxpayers $4-$8 billion. (And that may prove a drop in the bucket as I noted earlier this week). It had to happen, of course. Having lost the ability to accept brokered deposits earlier this week, the bank desperately needed other sources of funding to keep its operations going. It had nothing to lose by offering the best rates on taxpayer-insured deposits.

There is a lesson here, dating back to 1982, when Reagan’s Garn-St. Germain Act was signed into law. That act “took all restrictions off the interest rates S&Ls could offer for insured deposits and most restrictions off what they could do with the money” according to Martin Mayer’s definitive book on the S&L crisis. He continues:

Prior to 1983, when the act took effect, a bank or S&L that was in trouble would shrink, as depositors…withdrew money. There would be no way for such a bank or S&L to lure new money, because the government put a ceiling on interest rates. Once that ceiling was gone, a failing institution, desperate for funds and willing to take any gamble that promised a hope of recovery, would simply offer more interest than could be paid by any bank or S&L that had to earn what it paid its depositors by making normal loans and investments. The lesson is that federal insurance of ANY kind severely distorts economic incentives. Let me explain…..

Fannie and Freddie provide the perfect example of investment incentives distorted by government. Their very existence, or, rather, the existence of an implicit government guarantee backing the majority of American home borrowers, has encouraged trillions of excess dollars to flow into housing finance. The fact that the government backstops all this debt encourages creditors to be lazy and, more importantly, to demand lower interest rates than they otherwise would. Artificially low interest rates encourage artificially high credit creation. Put simply: a credit bubble. More

IndyMac Bank on Friday night became the biggest savings – or thrift – bank to fail in US history and the latest victim of the credit crisis as regulators closed down the troubled mortgage lender. The closure came after it was no longer able to meet continued demands by customers for their deposits. Regulators said the bank was in an “unsafe and unsound condition”. Regulators said the California-based bank, with assets of $32bn, is the second largest US financial institution to be closed down, ranking only behind the $40bn Continental Illinois National Bank & Trust Company, which closed in 1984.

The Office of Thrift Supervision (OTS), the bank’s main regulator, said ”the immediate cause” of the closing was the deposit run that began and continued following the release of a letter from Charles Schumer, the New York senator, expressing concerns about the bank’s viability. According to data from the FDIC, resolution of IndyMac is expected to be among the most expensive rescues of its insured institutions, costing an estimated $4bn-$8bn. More

NEW YORK (Reuters) - Mortgage lender IndyMac Bancorp Inc was taken over by the Federal Deposit Insurance Corp on Friday, becoming the second-largest financial institution to be closed in U.S. history. Banks are not able to file for bankruptcy protection as other corporations may choose to do if they became insolvent. Rather, the FDIC has special powers to oversee the liquidation of assets from failed banks and thrifts and/or search for a buyer for that bank. Congress first gave the FDIC receivership power in the 1930s, after thousands of bank failures in the Great Depression highlighted the difficulty in efficiently liquidating the assets of a failed bank and returning deposits to customers. The following explains how the receivership process works today: More

Source: (MarketWatch) — U.S. banking regulators said Friday they have closed IndyMac Banorp Inc., the biggest retail bank to succumb to the ongoing U.S. subprime mortgage crisis. The Federal Deposit Insurance Corp. said in a statement it will take over operations of IndyMac which had total assets of $33.01 billion and total deposits of $19.06 billion as of March 31.

Time is running out for IndyMac Bancorp, one of the faded darlings of the subprime era. On Tuesday, IndyMac, one of the nation’s largest independent mortgage lenders, faced what amounted to a run on the bank. As depositors rushed to withdraw money, IndyMac’s share price, already in a free fall, spiraled even lower. The stock, which fetched $50 in 2006, at the height of the housing boom, plunged 38 percent to 44 cents. In two years, more than $3 billion of shareholder value has been wiped out. A once high-flying offshoot of Countrywide Financial, IndyMac confronts an uncertain future. In a regulatory filing on Tuesday, IndyMac, which is based in Pasadena, Calif., said it had largely stopped making loans and would shut its retail and wholesale lending businesses. In all likelihood, IndyMac will undergo an orderly bankruptcy or be sold, analysts said. More

(Bloomberg) — IndyMac Bancorp Inc., battered by the mortgage crisis, will cut more than half its workforce and said it’s been unable to raise new capital as losses mount. IndyMac will slash its workforce by 53 percent to 3,400 employees and curtail lending, the Pasadena, California-based company said on its Web site. Regulators have advised IndyMac that it’s no longer “well capitalized” and the bank said that it will report a wider loss in the second quarter than in the previous period. We don’t expect to be able to raise capital until there is more stability and less uncertainty in the housing and mortgage markets,” Chief Executive Officer Michael Perry said in the statement. IndyMac, which was the second-biggest independent U.S. mortgage lender last year behind Countrywide Financial Corp., has lost almost $900 million in the prior three quarters amid tumbling home prices and record foreclosures. The company is focusing on mortgages that can be sold to government-sponsored Fannie Mae and Freddie Mac. More

In an attempt to reassure depositors that the company is not near collapse, officials with the parent company of Indymac Bank on Monday issued a response to letters Sen. Charles Schumer, D-N.Y., sent to federal bank regulators last week. In the letters, Schumer voiced concern that “Indymac’s financial deterioration poses significant risks to both taxpayers and borrowers.” Indymac said Schumer’s letters to the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Federal Home Loan Bank of San Francisco “leave the wrong impression” about the bank’s past and present practices. The letters prompted depositors to withdraw about $100 million on Friday and Saturday, Indymac officials said, “despite the fact that over 96 percent of our … $19 billion in deposits are fully insured” by the FDIC. More