Indy, Fannie and Freddie: what a trio!

Subcrime continues to hurt, while world recession would not need it to roll on, accelerate  and diffuse everywhere. The failure of Pasadena bank IndyMac, bailed out  by Fdic (Fed. Deposit Insurance Co.), that will reopen on Monday under its umbrella, is a 3×3 case:

a) the 3rd largest ever US bank going bankrupt, after far away episodes like 1984 Continental Illinois($ 40 billion in assets)  and 1988 American Savings & Loan. I.e. the largest one in 20 years.

b) The 3rd mortgage operators, just after Fannie and Freddie that are also bankrupt, precipitating at Wall ST., but the State keeps backing them, since they have or warrant 5 trillion $ of mortgages; as for no.1,  Countrywide Financial, it was absorbed before failure by BoA this year.

c) The 3rd bank to crack as a victim of the current financial meltdown, after UK Northern Rock and US Bear Stearns. In the meltdown, shadow finance disappeared, forcing official finance to lose more than $1 trillion, devalue for more than $0.4 trillions. Top 16 world banks capitalisation decreased $0.9 trillions, from 2.1 to 1.2 (Il Sole 24 Ore, 080713, p.2). In 1 year time, at Wall Street the S&P went down 83.8% in savings and mortgages, 68.9% in the building industry.

US newspapers, Subday the 13th in Slate’s summary:

The NYT and the Post both front continuing coverage of the mortgage finance debacle. Taking the forward view, the WP tells us that Freddie Mac is looking to sell off a few billion dollars worth of debt, with the government standing by in case private investors lack the confidence to do so. And looking back, theNYT pens an exegesis of how Fannie and Freddie got so bloated in the first place: Weak oversight, “artful” lobbying, and more than a little help from Wall Street friends made it a fat target for the slings and arrows of outrageous foreclosures.

US news on Saturday, always from Slate:

TODAY’S PAPERS
Bank Bummer

By Arthur Delaney 
Posted Saturday, July 12, 2008, at 6:02 AM ET

All the papers lead with the continued troubles of mortgage lenders. The New York Times and the Washington Post lead with The United States government deciding yesterday that Freddie Mac and Fannie Mae did not yet need to be bailed out. The Los Angeles Times focuses on the seizure by federal regulators of California-based IndyMac Bank, the largest bank to fail since the 1990s. TheWall Street Journal tops its worldwide news box with new Senate legislation to give tax relief to homeowners and overhaul regulation of Fannie Mae and Freddie Mac.

Early yesterday, Freddie Mac’s stock value was down 50 percent, with Fannie Mae not far behind, but by the end of the day government officials persuaded investors to relax about “Fannie and Freddie,” as the NYT calls them. Before the companies’ shares rebounded, the government drafted dramatic plans to save them, plans the WP calls similar to the government’s bailout of Bear Stearns in March. The Post reports that Fannie and Freddie in recent months took on larger roles in underpinning the housing industry as other companies have fled the credit markets. The two companies bought roughly two thirds of single-family-home mortgages from January to March this year.

WSJ front page: Crisis Deepens as Big Bank Fails

IndyMac Seized In Largest Bust In Two Decades
IndyMac’s arc — rapid growth, followed by an even more rapid descent — is a microcosm of the mortgage industry. It boomed in the first part of this decade, as investors were willing to fund loans on ever-looser terms, then hit hard times when the housing market began to turn down in late 2006.

WSJ editorial: Fannie Mae Ugly

Investors continued to flee Fannie Mae and Freddie Mac yesterday, almost as frantically as the political class tried to reassure everybody there was nothing to worry about. Allow us to sort the good (there isn’t much) from the ugly.

In the good category, Treasury Secretary Hank Paulson swatted back reports of a government “nationalization” of the companies – which would mean making explicit what has long been an implicit taxpayer guarantee of their liabilities. This would instantly add $5 trillion in liabilities to the federal balance sheet, doubling the U.S. public debt burden and putting America’s AAA credit rating at risk. This is the nightmare scenario for taxpayers. (…)

 

The most immediate danger is that investors will shrink from rolling over the debt of the two companies, leading to a run a la Bear Stearns. Mr. Paulson is trying to reassure people that the companies are sound, but after Bear everyone has the heebie-jeebies. With so much on the line, we’ve been suggesting that Treasury and Congress step up now with a public capital injection to help the companies ride out their losses.

Yes, this would mean putting some taxpayer cash up front, but in the cause of avoiding the far greater risk of a collapse or Bear-like run. If the capital injection was made in the form of a subordinated debt or preferred stock offer, taxpayers would get a stake in the companies and some return on their investment once the crisis passes.

We haven’t suddenly become socialists.

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Published in: on July 13, 2008 at 5:34 pm  Comments (1)  

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