Sunday, July 13, 2008

"Small" California bank (Indymac) falls to subprime crisis, jeopardizing "careless" depositors


The media widely reported yesterday the failure of IndyMac Bank in Pasadena CA and the operation by the FDIC, whose statement on the matter ("Failed Bank Information") is here. According to widespread reports, there were a significant number of depositors who had more than $100000 in one account at the bank. These depositors will be guaranteed (by the FDIC) only 50% of deposit amounts over $100000 in any one account. In time, more money for them may be recovered.

In 2006 IndyMac had employed 10000 people. After the latest round of layoffs, employment would have been about 3400.

The sale of a bank or its seizure by the FDIC does not affect the obligations of borrowers for mortgages held by the bank, which are simply sold to other companies.

This was the fifth FDIC bank rescue this year, as some smaller banks that had specialized in risky subprime mortgages to unqualified applicants fail and foreclosures mount.

As recently as July 1, IndyMac had denied that it was in danger of collapse, as in a Los Angeles Times story by E. Scott Reckard and Angela Chang, after its share price had lost 90% of its value. However, this week depositors started making a run on the bank.

This is said to be the second largest bank failure in US history. The largest occurred in 1984 with the Continental Illinois Bank.

In the late 1980s, many banks in Texas failed during the savings and loan crisis. Most were sold to other banks. Republic Bank was eventually sold to North Carolina NCNB to become NationsBank and would eventually take over the Bank of America and use the larger bank’s name. In Washington DC Riggs would be absorbed by Pittsburgh-based PNC.

The media is reporting that Freddie Mac and sister Fannie Mae are "too big to fail" but apparently Freddie Mac will try to sell $3 billion of its securities on Monday. Sunday afternoon, Treasury Secretary Henry Paulson made a statement reassuring investors that bonds for Freddie and Fannie are good, and that the Federal Reserve has taken steps to guarantee them capital. Marketwatch link is here. This whole discussion calls to mind (in "stream of consciousness") Ingmar Bergman's film "Fannie and Alexander."

On Monday, July 14, Sebastian Mallaby, on p A13 of The Washington Post, proposed "Nationalization: A Solution for Housing" with respect to Fannie and Freddie, and suggested that without it they would become subject to "equity runs." Link.

Picture 1: SE Texas

Picture 2: FDIC, Arlington VA. It's busy today!

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