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Saturday, July 19, 2008

Indymac, The Tip of the Iceberg

It is being called the second biggest bank failure in our nation’s history. It is very reminiscent of the S & L debacle of the 80’s. This could very well be just the tip of the iceberg.

The facts and implications of this failure may well translate to other financial institutions and indeed in some way affect all of them. We may well be seeing the end of large national banks and a return to smaller regional banks working within their communities and on behalf of their communities.

Indymac was created in 1985 by none other then Countrywide,
“…whose own recent failure was masked by its acquisition by Bank of America,…”, says James Turk, the publisher of Gold Money in a recent article, America's Second Biggest Bank Failure.

Mr. Turk writes,

“After liquidating $32 billion in assets, the FDIC still has to add some $4 billion to $8 billion more to make sure $18 billion of deposits are made whole. So in the worst case scenario, the liquidation value of IndyMac's $32 billion of assets is $10 billion, or in other words, the true market value of IndyMac's assets is only 31% of their stated book value. In the FDIC's best case scenario, the liquidation value of IndyMac's $32 billion of assets is $14 billion, which is still only 44% of their stated book value".
"So here is the all-important question. Can we infer from this liquidation analysis of IndyMac that the true value of sub-prime and Alt-A mortgage debt still in the banking system is something less than 50% of stated book value”?
In other words, is the entire banking system worth almost half of what they claim to be worth and if so the pending “disaster” has yet to unfold. Saying this is limited to sub prime and Alt-A is also misleading as Indymac was a conforming lender as well selling loans to Fannie and Freddie who themselves are in deep financial crisis.

Turk responds to the question as follows,

I don't have the answer to that question. If anybody does, it is the bankers themselves, and they aren't talking. They do not want to disclose how bad off they remain, even after already writing off more than $300 billion of assets globally (as reported by London's Financial Times). They no doubt must be panicked about what's yet to come”.

The bankers aren’t talking, in fact, they are covering their true positions. If we were to know the true extent of the liquidity problems in our financial institutions – there would be a run on the banks – much like there was on Indymac. The FDIC is hard pressed to cover Indymac’s deposits let alone having to cover the deposits of every bank in the country. This, of course, would create a true panic and perhaps a total economic collapse worldwide. China and India could emerge from this economic disaster as masters of the “New World Order” economy.

Indymac’s failure can be attributed to their issuance of sub prime and Alt-A (Alt-A loans were considered not to be as risky as sub prime) loans, their improper underwriting and other improprieties ie., inflated appraisals.

However, the true problem was not one of their creation. They were merely participants in a larger scheme that enveloped the entire world – securitization.

What we have here is a chicken and egg story. Were it not for securitizing loan pools and selling these pools of securities to investors worldwide, much of this implosion could not have been possible. Were it not for the rating agencies such as Moody’s, Standard and Poor’s and Fitch, rubber stamping these pools of securities with AAA ratings, the sophisticated investment community would not have purchased them. Had investors not purchased the securities, the money would not have been re-circulated and made available to lend over and over and over again.

These securities, many of which are held by our financial institutions as off sheet- not reported on balance sheet – assets are being downgraded and devalued daily.

In a report by Bloomberg,
Paulson & Co. Says Writedowns May Reach $1.3 Trillion (Update4),
John Paulson, founder of the hedge fund company Paulson & Co., said,
"global writedowns and losses from the credit crisis may reach $1.3 trillion, exceeding the International Monetary Fund's $945 billion estimate".

"We're only about a third of the way through the writedowns,'' Paulson, 52, told the GAIM International hedge fund conference in Monaco today. ``There are a lot of problems out there and it will continue to be felt through the year. We don't see any signs of stabilizing.''

Authors note: John Paulson earned an estimated 2.8 Billion Dollars on selling short in 2007.

“We're only about a third of the way through the writedowns,'', what a frightening thought. It has been rumored that J. P. Morgan was in severe financial crisis and was saved by the $55 Billion given to them for the bailout of Bear Stearns. Again, a rumor which cannot be substantiated but one that makes sense knowing many of the facts that has surrounded the failures of Bear Stearns and Indymac.

With FDIC in financial crisis along with
Fannie Mae and Freddie Mac the question remains can the Fed continue to print money to rescue the economy? Is creating more debt to pay debt a viable and realistic solution? After all, debt, financing debt which financed more debt created this problem.

Fannie Mae and Freddie Mac are in similar positions to Indymac and an even larger bailout by virtue of a government takeover is pending. In a recent Reuters report,
Fannie, Freddie bailout would imperil budget, dollar, released July, 11th,
"A perception that the U.S. is no longer a safe haven for capital could produce tremendous strain on the dollar, as would fears of ballooning Treasury commitments associated with a bailout," said James Hamilton, economics professor at the University of California, San Diego".
"Together, Fannie and Freddie control nearly half the U.S. mortgage market. The slide in the companies' publicly traded shares has been staggering".
"Fannie Mae's stock has lost most of its value, swooning from peaks around $70 in August of last year to their current $9".
"Freddie has fared even worse. Its shares fell Friday morning to the price of a gallon of gasoline”.

If Fannie and Freddie are in dire straights, it becomes evident that Indymac was not a victim solely due to sub prime and Alt-A. It is obvious that our conforming markets are suffering the same fate as well.

There seems to be no real money around anywhere. Foreclosures are increasing at unprecedented rates due not to fraudulent loans but in large part to the ever increasing unemployment rate and the “real” rate of inflation that could be estimated at over 10% (you must include the costs of food and fuel). In short, the average American cannot sustain their needs, the financial institutions are bleeding and don’t have the liquidity to keep the credit cycle going without which the “circle of life” in our economy cannot continue.

We tend to focus our attention on mortgage fraud, lax if not non existent underwriting guidelines, errors in judgment of those high paid executives running our major financial institutions (who are never implicated, just paid to go away), mortgage brokers selling programs made available to them, realtors inflating values, appraisers substantiating these values, title companies and others when the real focus should be on the system created to make the Indymac’s and Countrywide’s viable – SECURITIZATION.

This is the tip of a very large iceberg. Fasten your seat belts, the ride is going to get rougher.

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