Loan Crisis Sinks Us Bank

The Sunday Age

Sunday July 13, 2008

Peter Weekes, Business Editor with New York Times, Washington Post, Bloomberg

US MORTGAGE lender IndyMac Bancorp has become the largest retail bank to fall victim to the American mortgage crisis.

The Federal Deposit Insur ance Corporation, which regulates the sector, took control of the California-based bank after it was left short of cash by a run of depositors.

It is estimated IndyMac's failure after Wall Street closed on Friday will cost the insurance fund between $US4 billion ($A4.1 billion) and $US8 billion after the bank racked up almost $US900 million in losses due to America's worst housing crisis since the Great Depression.

"This is a flare-up in the financial forest fire that is far beyond anything we've seen before," said Christopher Low, chief economist at New York investment firm FTN Financial.

And it is triggering worries that would have been unthinkable even a year ago - including that the US Treasury's debt might lose its AAA credit grade because of heavy blows to the nation's financial health from the housing mess.

Four months ago, many on Wall Street believed they had seen the worst of the credit crisis rooted in the housing market's woes. The March collapse of brokerage Bear Stearns, a key player in the business of packaging dicey loans for sale to investors, was the kind of high-profile calamity that historically has marked the end of financial crises.

"It's all part of the whole unravelling of global credit markets," said Johnathan Pain of HFA Asset Management.

"What I am hearing is the FDIC is ringing up retired staff and asking them to come back to work because they are expecting a huge number of bank failures this year and there aren't enough regulators."

The collapse of IndyMac follows a recent warning by Jamie Dimon, chief executive of JP Morgan Chase, that credit markets could deteriorate further and even Wall Street investment banks should not be considered too big to fail.

Australian banks also face problems, with CBA and St George last week raising rates to cover the cost of funds and NAB saying further provisions may be needed on top of the $US1.1 billion it has already set aside for collateral debt obligations.

Since the subprime crisis emerged in the US late last year, about $US400 billion in loans have been written off globally, and leading market players are now predicting the final figure could pass $US1 trillion.

"The subprime virus has grown and mutated," Mr Pain said.

"It started in the US, then crossed the Atlantic and hit Ireland, hit the UK and hit Spain. It then travelled across the world and hit New Zealand. There is no way Australia is not going to get hit."

Before Wall Street closed on Friday night, panicked investors pushed US mortgage finance giants Fannie Mae and Freddie Mac to the brink as concerns emerged that rising defaults would drain their reserves and force a government takeover.

The two government-chartered, shareholder-owned giants underpin some $US5 trillion in home loans, or about one in every two US mortgages.

The Dow Jones fell sharply during Friday's session until Reuters reported (later withdrawn) that Freddie Mac would make use of the discount lending window that allowed many institutional banks to survive the first round of the credit crunch.

Charles Schwab & Co analyst Brad Sorenson said the companies "affect a much wider swathe of the economy than just a typical financial institution, such as Bear Stearns", and that any hint of failure would be "devastating to the US and indeed the global, financial markets".

Fears that either of the mortgage giants would require a government bailout crossed the Atlantic to help drive the British sharemarket into bear territory.

Declines in the value of Britain's top 100 companies reached more than 20% since their peak, heralding sustained selling not seen since the stockmarket collapse of 2003.

"The movement . . . was a clear indication that we haven't reached the bottom and the bears are still fully in control," said Angus Campbell, head of sales at British-based Capital Spreads.

AMP Capital Investors chief economist Shane Oliver said the Australian market was likely to open up to 100 points lower as news of IndyMac's collapse dragged down financial stocks. He also said resource stocks could eventually get hit as economic growth of the commodity-hungry developing world slowed, taking the shine off recent record coal and iron ore prices.

IndyMac, America's second-biggest independent mortgage bank, with $US32 billion of assets, is the second-biggest bank to go under, after Continental Illinois National Bank & Trust - with $US40 billion of assets - in 1984.

IndyMac is the fifth US bank to fail this year. -- With NEW YORK TIMES, WASHINGTON POST, BLOOMBERG

Another one bites the dust

? IndyMac was America's second-largest independent mortgage provider.

? It is the fifth US bank to fail this year.

? It will cost up to $US8 billion to revive the retail bank as a new government entity.

? It racked up almost $900 million in losses as house prices tumbled.

? Concerns about mortgage giants Fannie Mae and Freddie Mac weighed heavily on Wall Street during Friday trade and drove the FTSE into official bear territory.

? About $US400 billion in loans have been written off since the subprime crisis emerged in the US late last year. Some say the figure could hit $US1 trillion.

© 2008 The Sunday Age

Back to News Index | Back to Home