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Week of July 14, 2008

Thursday, July 17, 2008, 2:38 PM

July 14

IndyMac bank crisis signals new takeover era (SAN FRANCISCO)

A new era for the U.S. government's takeover of
failed banks is about to begin. IndyMac Bancorp became the biggest
casualty of the subprime mortgage crisis over the weekend, as federal
regulators shut down the troubled Pasadena, Calif.-based savings bank
in one of the largest U.S. bank failures ever.

The Federal
Deposit Insurance Corp. (FDIC) said in a statement that it will take
over operations of IndyMac, which will open for business today as
IndyMac Federal Bank. The thrift — the fifth U.S. bank to fail so far
this year — had total assets of $32 billion as of March 31.

The
failure of IndyMac is going to blow a big hole in the FDIC's cash
reserves, costing between $4 billion and $8 billion — or potentially
more than a tenth of its deposit-insurance fund.


As predicted here, IndyMac has failed and was taken over during this past weekend.

My only surprise was that the takeover occurred last weekend and not the one before.

This
is the third largest bank failure and will cost the FDIC somewhere in
the vicinity of 10% of its total insurance assets. One bank, 10%. This
is why I regularly tell you to keep an extremely close eye on your
bank’s stock price and to extract your money as soon as you see serious
weakness there.

As you’ll read in the next article, there may be as many as 300 bank failures over the coming years.
Does the FDIC have the appropriate money and manpower reserves to handle such an onslaught?
In a word, no.

Will the FDIC be able to borrow sufficient funds from the government to mitigate any shortfalls?
In a word, maybe.

I’m
just not sure that the government’s borrowing capacity is large enough
to handle two wars and a failing financial system simultaneously.

The
truly unfortunate part of the IndyMac story is that somewhere around
$1,000,000,000 of deposits were over the $100k and therefore probably
lost.

It’s very important that you pay attention to what is transpiring.


Many more bank failures likely after IndyMac (NEW YORK - Reuters)

U.S. banks may fail in far greater numbers
following the collapse of the big mortgage lender IndyMac Bancorp Inc
(IMB.N: Quote, Profile, Research, Stock Buzz), 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.

While analysts declined to say which banks will fail
next, several smaller lenders and one large one, Washington Mutual Inc
(WM.N: Quote, Profile, Research, Stock Buzz), appear already 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."


If you are in a smaller bank that is
well-capitalized,and that has not made significant loans to
either/both commercial or residential real estate, your accounts should
be safe.

The wild card here is if there’s some sort of a generalized banking meltdown or systemic crisis.

Then
all bets are off. Further, I don’t just track banks, but also other
companies that are largely financial in nature such as GM and GE.

If
you want to know which financial companies I consider to be most
exposed to failure, just read the most recent Martenson Report.

At
this stage I am quite concerned by Bank of America and Citibank, due to
their financial condition, stock price performance, and size. A wipeout
by either or both of these banks could completely consume the FDIC
kitty, leaving none for other failures.


Treasury Acts to Shore Up Fannie Mae and Freddie Mac

Alarmed by the sharply eroding confidence in the
nation’s two largest mortgage finance companies, the Bush
administration on Sunday asked Congress to approve a sweeping rescue
package that would give officials the power to inject billions of
federal dollars into the beleaguered companies through investments and
loans.

In a separate announcement, the Federal Reserve said it
would make one of its short-term lending programs available to the two
companies, Fannie Mae and Freddie Mac. The Fed said that it had made
its decision “to promote the availability of home mortgage credit
during a period of stress in financial markets.”


Okay, folks, this is big, big news (obviously).

While
we always knew that a taxpayer bailout was the most probable outcome
for this particular period of financial excess and recklessness, the
speed with which this rescue has been cobbled together is breathtaking.

This almost certainly means that the problem is a lot more serious and urgent than the press releases would have you believe.

Because
the US government is going to be taking an equity position in FNM and
FRE (free markets, anyone?) we can effectively say that parts of these
companies are going to be nationalized, which I’d be willing to bet
becomes “all the way” over the next 12 months.

Further, the fact
that the Federal Reserve is going to be extending its balance sheet to
the GSEs means that we are now one more giant step closer to direct monetization
of bad debts. As you long-time readers know, this is one of the four
signs that I have been watching for as a signal that the ultimate
destruction of the dollar has begun.

The financial system is well
and truly wrecked, and I would implore you to have a good portion of
your assets out of the banking system.

Further, you might consider
accelerating any purchases that you’ve been considering, under the
theory that if the dollar suddenly collapses, certain goods are going to
become vastly more expensive, if not entirely unavailable.

So why not buy them now (assuming you were going to buy them anyway)?


Fed's war against shady home loans (NEW YORK - CNNMoney.com)

The Federal Reserve unanimously approved new
mortgage lending rules Monday in a crackdown on shady practices -
particularly subprime loans made to borrowers with weak credit.


Okay, I assume this is humor? Now, of
all times, the Fed finally decides mortgage practices were/are perhaps,
maybe, just a bit too loose?

I hate to say it, but those cows have
been gone from the barn for so long that we’d have to perform genetic
testing on their offspring to be sure we got the right ones back.

As a side note, any rule changes that force lending to match incomes will destroy house prices in many locales.

The entire bubble was predicated on the practice of lending well beyond people’s actual income levels.

I’m not arguing against tightening up the lending standards, only noting that this will have an impact.



July 16

I am simply stunned by
the level of insight and awareness that is displayed by Senator Bunning
in the remarks he delivered to Chairman Bernanke. These views mirror my
own. I can only ask where the good Senator was during the past few
years, and even decades, while all this Federal Reserve malfeasance was
ongoing?


Senator Bunning's Remarks

As Prepared For Delivery:
Thank you, Mr.
Chairman. I know we have a lot of ground to cover today, but I want to
say a few things on the topic of this hearing and of the next.

First,
on monetary policy, I am deeply concerned about what the Fed has done
in the last year and in the last decade. Chairman Greenspan’s easy
money the late nineties and then following the tech bust inflated the
housing bubble and created the mess we are in today. Chairman
Bernanke’s easy money in the last year has undermined the dollar and
sent oil to new record highs every few days, and almost doubling since
the rate cuts started. Inflation is here and it is hurting average
Americans.

Second, the Fed is asking for more power. But the
Fed has proven they can not be trusted with the power they have. They
get it wrong, do not use it, or stretch it further than it was ever
supposed to go. As I said a moment ago, their monetary policy is a
leading cause of the mess we are in. As regulators, it took them until
yesterday to use power we gave them in 1994 to regulate all mortgage
lenders. And they stretched their authority to buy 29 billion dollars
of Bear Stearns assets so J.P. Morgan could buy Bear at a steep
discount.

Now the Fed wants to be the systemic risk regulator.
But the Fed is the systemic risk. Giving the Fed more power is like
giving the neighborhood kid who broke your window playing baseball in
the street a bigger bat and thinking that will fix the problem. I am
not going to go along with that and will use all my powers as a Senator
to stop any new powers going to the Fed. Instead, we should give them
less to do so they can do it right, either by taking away their
monetary policy responsibility or by requiring them to focus only on
inflation.

Third and finally, since I expect we will try to
get right to questions in the next hearing, let me say a few words
about the G.S.E. bailout plan. When I picked up my newspaper yesterday,
I thought I woke up in France. But no, it turns out socialism is alive
and well in America. The Treasury Secretary is asking for a blank check
to buy as much Fannie and Freddie debt or equity as he wants. The Fed’s
purchase of Bear Stearns’ assets was amateur socialism compared to
this.

And for this unprecedented intervention in the markets
what assurances do we get that it will not happen again? None. We are
in the process of passing a stronger regulator for the G.S.E.s, and
that is important, but it allows them to continue in the current form.
If they really do fail, should we let them go back to what they were
doing before? I will close with this question Mr. Chairman. Given what
the Fed and Treasury did with Bear Stearns, and given what we are
talking about here today, I have to wonder what the next government
intervention in private enterprise will be. More importantly, where
does it stop?


Consumer Prices Jump (July 16 – MarketWatch WASHINGTON)

Double-digit increases in gasoline prices helped
push the nation's consumer price index higher by 1.1% in June, the
biggest increase since Hurricane Katrina nearly three years ago, the
Labor Department reported Wednesday.

With prices rising so
fast, inflation-adjusted or real weekly earnings fell 0.9% last month.
Real earnings are down 2.4% in the past year, a vivid illustration of
how the average worker is falling behind as prices rise and the weekly
workweek contracts. Energy prices were up 6.6% in June, after seasonal
adjustments, and are up 24.7% in the past year.

This is an awful
report. Even after significant massaging, the best report that could be
mangled out of the data still revealed inflation to be rising at the
fastest rate in 26 years.

One wonders what the
true rate of inflation actually is. For a clue, we can look at the
government’s claim that energy prices are up 24% in the last year.
Here’s what we find in the commodity price charts for the past year:

• Wholesale electricity is up 54%
• Heating oil up 85%
• Natural Gas up 83%
• Propane up 67%
• Gasoline up 52%

Somehow, your
ever-helpful government averages all these prices together and comes up
with a 24% yr/yr increase. Don’t believe it. Real world inflation is
running at least twice as high, and possibly as much as three to four
times as high as the official claim.



July 17

Spread Your Money Among Several Banks To Stay Fully Protected (July 15 - MarketWatch)

When regulators stepped in last Friday, IndyMac
customers experienced a brief disruption in the ability to get their
money. While automated teller machines were working, they also capped
the amount that a shareholder could withdraw electronically, limiting
it to a few hundred bucks.

That's why customers had to wait
around for Monday morning's opening to rush the bank and ask for their
cash back. By then, of course, they had full access to their money, up
to the protection limits. If they had balances above the insured level,
they could only access up to $100,000, with the rest being frozen until
regulators sell IndyMac and see what's left. While the best-case
scenario is full restitution and the worst case is a total loss, the
truth is likely somewhere in the middle. That means months of foregone
interest and lost opportunity, but not necessarily a big loss in
principal.

"People rush to the banks out of an irrational
fear," says Greg McBride, senior financial analyst at BankRate.com.
"Only depositors who had an exposure more than the $100,000 limit
really have to worry, because they are going to be standing in line
waiting for a payout." That's important to remember, in light of
reports suggesting that the Federal Reserve has almost 100 banks on a
"watch list" of potential candidates for the next bank
failure/takeover. The list hasn't been released -- because it would
spur a run on those institutions -- but analysts are quick to say they
do not believe IndyMac was an isolated failure. Things will get worse
before they are cleared up.


One role of the media, at times, is to soothe fears and allay concerns as a means of social control.
In a Ponzi economy this is an important role. So my attention here is caught by the quote that

“People rush to the banks out of irrational fear”.

Ir-ra’tion-al adj. Contrary to reason or absurd.

Something that is absurd is opposed to manifest truth or utterly preposterous.

Bank failures
that cost people a significant portion of their savings are a regular
feature of history, so they are neither false nor preposterous to
contemplate.

Since this is
the case, what is actually being said is that it is irrational to fear
that the FDIC will not make good on the covered deposits. But this, too.
flies in the face of history.

Governments change the rules when it suits them, all the time.

It happened most recently,
in Argentina, during their banking crisis of 2001, when people’s bank
accounts were raided to the tune of 60% of their value, and in our own
country in 1933, when Roosevelt seized all the citizens' money, which
was gold, replaced it with paper money, and then devalued the whole lot
by more than 60%.

And this is why I advocate getting your money out of a troubled bank before it goes into receivership.
There
may well come a time when the FDIC cannot immediately pay out all
claims and the government will simply step in and change the rules to
your great detriment.

This is not
irrational; it is entirely rational and supported by history. All that
said, I fully expect Congress to fully fund the FDIC to assure that
every bank failure is fully covered.

What most people
will miss is that doing this will devalue the dollar tremendously and
thereby create losses on the returned dollars by the more subtle form
of theft known as inflation.

But then the article goes on to make this very important point, with which I fully agree:

As a result, McBride
noted that anyone with accounts that top the deposit insurance limits
need to remedy that situation now, either re-titling accounts or moving
money to stay safe. At a time when some of the biggest financial
institutions are in trouble, it may be better to diversify your safe
havens -- spreading money into several banks or thrifts -- rather than
letting it build in one place, even if it's earning a higher rate of
return. "It's like driving without a seat belt," McBride says. "You
have this tool to protect you -- FDIC coverage -- but you drive around
without using that protection, figuring it will be all right. And it
is, right up to the point where there's an accident. ... Right now,
there are a lot of accidents waiting to happen. It's easy to buckle up,
and people ought to be doing it."


Single-family home starts drop to 17-year low (July 17 – MarketWatch WASHINGTON)

New construction of single-family homes fell 5.3%
to a fresh 17-year low in June, while a change in building permit rules
for multifamily units in New York City pushed up total starts by 9.1%,
the Commerce Department reported Thursday.

A flood of
multifamily building permits was filed in New York ahead of the new
rules, skewing the overall data for last month for both building
permits and housing starts.

Excluding multifamily starts in
the Northeast, housing starts fell 4%, the government said. The new
construction code affected only multifamily construction in New York
City.


This is not
a surprising result. The only thing that will be surprising is how the
Bureau of Labor (BLS) statistics will continue to show modeled gains in
construction jobs.

By my count, and
leaving productivity gains aside, if housing starts are at a 17-year
low, then the number of people employed in residential housing
construction ought to be nearing a 17-year low as well.

But that’s simply not the case, at least according to the BLS.

At any rate, and
by my reckoning, the housing crisis will not be over until housing
starts falls to somewhere below 400,000 units per year, which is
another 50% decline from here.


Conditions are growing for dollar intervention (July 17 – IHT LONDON)

The time may have come for sustained coordinated intervention by governments to support the wilting dollar.

Intervention
by the Federal Reserve, undertaken in concert with the European Central
Bank and other global economic powers, could be an inflexion point for
the dollar after its six-year fall. A pattern of intervention comments
from both sides of the Atlantic is probably a precondition for actual
intervention. Talking the Europeans into it would not prove too hard.
The European economy is suffering under the burden of a strong
currency, with industrial output falling by the most in 16 years in May.


I am sure that officials on both side of the Atlantic, and probably Pacific, would love to intervene to stabilize the dollar.

However, this article (and others like it) have it exactly backwards.

It is not
possible to make the dollar stronger, except by reducing US deficit
expenditures (both budgetary and trade) and increasing US interest
rates. Neither of those things are being discussed here, so what is
really being discussed is reducing the value of other currencies
relative to the dollar.

This is not a
case of “making the dollar stronger,” as claimed, but instead an
example of “making other currencies weaker.” In other words, they are
openly discussing the prospect of initiating a round of competitive
currency devaluations.

Attempting to manage currency values in this manner is sure to lead to worse outcomes than letting nature run its course.

In times past, a
weakening currency was a signal that the country in question had to
change its ways. Here they are discussing letting the US completely off
the hook, which will only serve to create even larger imbalances in the
future, possibly fatally large imbalances.

If the
imbalances are creating pressure on the dollar, we should be seeking
ways to reduce those imbalances, not enhancing them.

It is exactly
because of these sorts of policy initiatives that I am very much in
favor of eschewing all paper currencies of any countries that see
currency manipulation as any sort of a cure for their ailments. You
should treat coordinated currency intervention as a sign that it is
time to reduce your holdings of paper money.

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