The mortgage lending meltdown incinerated another bank victim last week, the $32 billion "IndyMac" of Pasadena. Federal regulators seized the institution and turned its operation over to the FDIC. The bank was brought down by a run on deposits reaching $100 million a day. The collapse was expected by analysts, but regulators pointed to Senator Chuck Schumer (D-NY) as having influenced the run by his written inquiries about the bank's loan holdings. Schumer responded to the finger pointing, saying that the bank was brought down by "shoddy lending practices". The bank had problems dealing with defaulting mortgage loans and their derivatives, and its stock price fell to $1. It was the second largest bank failure in US history after the collapse of Continental Illinois in 1984. The subsequent bailout is expected to cost the FDIC $4 to $8 billion. If this failure is not enough to strain the government's financial safety net, the two major federally chartered, home mortgage lending institutions, Freddie Mac and Freddie Mae, are also on the edge of collapse. Under fair accounting principles, Freddie Mac is already insolvent. The fair value of Fannie Mae's assets have dropped 66%. Between the two they guarantee or own half of all mortgage debt created in America. A massive rescue operation has been proposed for the ailing institutions that allows them to borrow directly from the Federal Reserve for the first time. The plan also would allow the US Treasury to buy the stock of these private companies if they cannot raise capital privately. Part of the problem at both institutions is their thin capitalization. Again the taxpayer is stuck bailing out stockholder owned companies that because of their privileged status as federally chartered, are 'too big to fail'. Financial experts think that as many as 300 banks could fail in the next three years. Wackydoodle sez: Uncle Trotsky, can you spare a job?Update: Nobody is really paying attention to the current occupant of the bunker, now. His reassurances about the fiscal soundness of the banking system are falling on deaf ears. FDIC
(Federal Deposit Insurance Corp.) which insures depositors bank accounts up to $100,000, has limits to its resources. The IndyMac collapse will cost the guarantor around $8 billion. The NY Times says that analysts expect another 150 banks will go under within a year to 18 months. The S &L debacle about fifteen years ago cost taxpayers $125 billion to bail out a thousand savings and loans in trouble because of commercial real estate speculation. FDIC currently has about $53 billion available to pay depositors. The large problem facing regulators is compounded by a weak dollar and credit paralysis innocuously referred to as a "lack of liquidity". Short sellers are already piling on bank stocks considered to be at risk. Respected financial analyst Bridgewater Associates estimates that there are losses lurking in the prime and Alt-A loan portfolios that could be much bigger than the subprime problems, as those loans are more than six times the size of the subprime. Bridgewater says, "The US commercial banks are in a position to suffer the greatest losses, because the core of their portfolio is risky US debt assets. If we use this current market pricing as a guide, there is a long way to go, as these institutions have only acknowledged about 1/6 of the expected losses that they will incur as a result of the credit crisis." Citigroup in New York raised billions in capital from Sovereign Wealth Funds in Saudi Arabia and elsewhere to stay in business. That company has $2.2 billion in liabilities on on its books, but another $1.1 trillion in "off book" debt that includes some of the most risky real estate deals in the era of debt securitization.[1] Undoubtedly, taxpayers will be asked to pay for the excesses and mismanagement of finance capitalists on a scale never before seen.[1] F. William Engdahl, The Market Oracle, July 15, 2008
[image credit: F. William Engdahl]