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Freddie, Fannie, and IndyMac....Oh My!

Written By Brian Hicks

Posted July 14, 2008


no wheels


I’m back from vacation today and all I can say is that wheels came completely off the wagon while I was gone.

IndyMac slipped beneath the waves and Freddie and Fannie each teetered on the brink of an unthinkable abyss.  

Meanwhile, the markets have stayed in the red despite the latest “rescue plan” conjured up by Paulson, Bernanke, and friends late yesterday.

And despite the early hopes of a rally today, the fear has only grown as the markets have basically called BS.

In fact, shares of banking stocks have been routed today, led by a couple of biggies-National City Corp and Washington Mutual. Shares of each company plummeted today falling by over 25%. And needless to say they had plenty of company across the sector.

Nonetheless, you have guys out there today like Senate Banking Committee Chairman Chris Dodd saying he does not expect “many more” banks to fail. That kind of makes me kind of wonder exactly what he’s smoking these days.

That’s because to date just five banks have failed in what is easily a bigger crisis than the S&L disaster that cost “only” around $125 billion.

So the point here is that we are only just getting started. IndyMac is the tip of an iceberg.

After all, over 1000 banks went down during the S&L debacle. A mere eight or nine banks this time simply isn’t going to be the end of it no matter how hard Dodd tries to spin it. The losses to date are some $400 billion and counting.They could easily go well over $1 trillion before its over.

So how many banks will fail you ask?

Well let’s just say it is quite a bit more than Dodd thinks. In fact, there could be as many as 300 bank failures in the next three years according to some analysts.

Here by the way is the skinny on that score.

From Reuters entitled: More banks may fail after IndyMac: analysts

“More U.S. banks may fail after the collapse of mortgage lender IndyMac Bancorp Inc, straining a financial system seeking stability after years of lending excesses.

More than 300 banks could fail in the next three years, said RBC Capital Markets analyst Gerard Cassidy, who had in February estimated no more than 150.

Banks face pressure as credit losses once concentrated in subprime mortgages spread to other home loans and debt once-thought safe. This has also led to investor worries about the stability of mortgage finance companies Fannie Mae and Freddie Mac; IndyMac is not related to either.

While analysts decline to speculate about which banks might fail, several smaller lenders and even larger ones appear to have elevated levels of soured loans relative to their sizes.

“You have to look at companies with the greatest exposure to the highest-risk assets, which include construction loans and exotic mortgages,” Cassidy said. “The final nail in the coffin for any depository institution would be a funding crisis where it is unable to gather deposits at reasonable cost, or wholesale funding markets are cut off.”

The Federal Deposit Insurance Corp (FDIC) seized IndyMac on Friday after a bank run in which panicked customers withdrew more than $1.3 billion of deposits in 11 business days.

As of March 31, the FDIC had put 90 banking institutions with $26.3 billion of assets on its “problem list.” This excluded IndyMac, which alone had about $32 billion of assets, and close to $19 billion of deposits.

The FDIC has said it will reopen IndyMac on Monday as IndyMac Federal Bank, and then try to sell the company as a whole or in pieces. Regulators expect the takeover to cost the FDIC $4 billion to $8 billion. The agency insurance fund has about $52.8 billion.”


So IndyMac is a bank that is obviously going to have lots of company thanks to its own stupidity.

But it does make that $52 billion that the FDIC has set aside to cover losses begin look a little thin. Anybody with over 100K in a bank account  really needs to rethink that one.

The banks are on the brink.